The Digest’s 2018 Visual Guide to the economics, politics of renewable fuels

If you’ve wondered why we don’t see more biodiesel capacity construction around the world given that the industry is nowhere near a blending saturation point, this slide may help you. Again, this is historic price and cost data compiled and expressed by the wunderkind at the Center for Agricultural & Rural Development at Iowa State.

As with ethanol, you see that the overwhelming amount of the revenue generated by biodiesel goes back into the feedstock supply chain. These can be soy farmers (or growers of other oilseeds), or ethanol operators selling corn oil, or suppliers of waste fats and greases from rendering operations or recycling. You’ll never see the nation’s leading rendering business, Darling, marching against the RFS even though they manage a very profitable JV (Diamond Green Diesel) with one of the RFS’s most ardent critics, Valero. Why’s that? Follow the money.

There’s not been much biodiesel construction in recent years and that black line tells you why. The cost of establishing an operation is low, but the returns are low and the working capital requirements can be huge given the costs of all that feedstock. What we’ve seen in recent years in terms of adding capacity has been going above nameplate capacity at existing plants, and re-starting some older plants that were idled in lower-demand times.

One thing you’ll note about biodiesel is that it has an incredibly spotty record in terms of generating high returns for investors, and that’s one reason you’ll find so much focus in the biodiesel business on trade and protectionism (protected markets generate higher prices, and returns), and on tax credit issues. In many ways, the entire biodiesel business can be seen as a tremendous support for soybean prices (as a large market for soybean oil, which always struggles to find enough uses to match the enormous demand for soy meal), and as a vehicle to earn a $1.01 per gallon tax credit. With more protection from what the US Commerce Department has determined is “foreign dumping”, America’s favorite advanced biofuel might become Wall Street’s favorite advanced biofuel as well.

Other options for biodiesel producers to change their circumstances and unlock value? New technology that handles high free fatty acid feedstocks that come at lower costs, for one. And, higher blending mandates offer opportunities for greater economies of scale. California’s Low Carbon Fuel Standard helps a lot — and a national LCFS or more states adopting them would be a boom for biodiesel.