Renewable diesel margins shrinking on rapidly changing market dynamics

The effect of weather, growth in demand and current geopolitical turmoil on price trends

Feedstock prices are trading at all-time highs, led by soybean oil which is trading over 75 cents per pound today on the May futures contract.

Dry weather in key growing regions of South America slashed supply expectations on a balance sheet that was already tight due to rapid growth in the renewable fuel sector.

In the US market alone, renewable diesel capacity is forecast by Fastmarkets The Jacobsen to grow from 834 million gallons per year in September of 2021 to 2.6 billion gallons per year by the end of 2022.

Additionally, the number of plants operating is projected to increase from 10 to 21. In September of 2021 five plants had an annual capacity of over 50 million gallons per year, by the end of 2022, 13 plants are projected to have an annual capacity of over 50 million gallons.

More buyers looking for additional feedstocks in combination with tight supplies of soybean oil and relatively steady supplies of low carbon intensity feedstocks, i.e., rendered animal fats, used cooking oil and distiller’s corn oil, has also driven prices to new highs.

Many renewable diesel producers prefer the low carbon intensity feedstocks because it maximizes their credit generation in the LCFS program and those feedstocks are trading at a premium to soybean oil, more so than ever in history.

A rough gross processing margin which takes into consideration LCFS credits, RIN values at 1.5 to account for ethanol equivalent value, and heating oil as a measure of revenue and subtracting feedstock costs, in this example, yellow grease delivered to the US Gulf, the margin averaged 56 percent lower in February compared to October of last year.

The gross processing margin uses nearby CME ULSD, Fastmarkets The Jacobsen D4 current year RIN prices, Fastmarkets The Jacobsen Gulf yellow grease delivered (forward) and Fastmarkets The Jacobsen LCFS Credit prices for the calculation.

Margins are still positive, but a trend of tighter margins is developing as buyers pay higher prices in order to secure feedstocks. This trend is likely to continue through the year as more plants start-up and buyers are forced to pay higher prices to remain competitive in the market.

What to read next
Vegoils futures traded broadly in positive territory on Wednesday July 1. In Asia, crude palm oil (CPO) futures rose steadily on higher related vegoils, while soyoil futures rallied on the Chicago Mercantile Exchange amid a drop in US stocks and as US biofuels developments were in focus.
This is a sample of Fastmarkets’ weekly recap of the main movements in global cash markets.
The Brazilian National Energy Policy Council (CNPE) will increase the country's biodiesel mandate to 15% starting on August 1, from the current blend of 14%, the council announced on Wednesday June 25. It will also increased the percentage of anhydrous ethanol in gasoline from 27% to 30%, also starting from August 1.
Discover the key insights, forecasts, and industry dynamics shaping the future of aviation fuel and learn how these mandates will impact the global landscape.
The Netherlands has released an update to its current biofuels mandate ahead of the full implementation of the third iteration of the EU Renewable Energy Directive (RED III) in the form of a draft proposal submitted to the Dutch Government on Friday June 20.
Used Cooking Oil (UCO) has become a vital feedstock for biofuels, particularly Sustainable Aviation Fuel (SAF), but surging demand, globalized supply chains, and geopolitical risks highlight the need for strategic planning to address supply gaps and sustain production.