The 2016 US outlook for ethanol and biodiesel

richmanINFORMA’s Scott Richman looked at the EPA’s RFS rulemaking, and the volumes, issues and opportunities for ethanol and biodiesel in 2016. The Digest was there.

“In the old days, ethanol was a political commodity,” Informa Economics Senior VP Scott Richman told the crowd assembled at the Canadian Bioeconomy Conference in Vancouver this week, organized by the Canadian Renewable Fuels Association.

“Now, it’s a commodity with a political element but not purely a political commodity,” he said. “It has a market for those looking not only for low-cost octane boosts, but in many cases it works financially for the energy value.”

Evidence for that? “We’ve seen good results despite the RFS2 uncertainty, and despite lower gasoline prices, world markets have been favorable for export, and moderate corn prices helped industry maintain decent margins.”

Trends in the market? Richman referred to what he called a “recency bias”, asking the delegates “what sells when fuel prices are low Big SUVs and pick-ups. Recency bias tells us humans that when gasoline prices are low they’ll always be low; when they’re high, they’ll always be high. So right now we are trading in the Prius for pickups and SUVs. And at some stage, that’ll reverse. But for now, light duty truck sales are more than half the market.”

Overall, said Richman, low gasoline prices have meant more gasoline sales, and that’s expanded the ethanol market. Low interest rates have helped. Put together the low fuel prices and the SUVs and F150s, and “ you can see for the first time in several years, gasoline sales have picked up. This year we’re up 2.5 percent, and in a market this large, that’s a of fuel. We’re clocking for 140 billion gallons consumption and that’s pushing out the blend wall.”

At the same, Richman warned against seeing the blend wall pushing back much more, with only limited gasoline market growth projected by the Energy Information Administration, Richman commented that “gasoline containing ethanol as a percentage, has been since 2013 bumping right up against the 100% figure. There are good ethanol export markets, with Canada is the stable partner and Brazil a swing buyer along with EU-28, with some from Emirates and a little from Philippines. So, export are at a high level but not at a record level. Still, ethanol is generally cheaper than gasoline, but not enough at the moment to encourage E85 – the economics are not great for that.”

On RFS2

“The US Policy appears to be to offer specifics on RFS requirements, but no clear way forward, Richman argued. “It appears that EPA not a huge fan of corn-based ethanol, and has dragged its feet. But now its clear with the RFS2 final rule that EPA is making cuts for the first time to standards other than cellulosic which has been waived down several times. It’s likely to result in lawsuits, due to controversy over EPA’s use of its waiver authority.”

“What the EPA essentially has done is to bring volumes down to actual for 2014 and 2015, and threw a bone to the industry by ratcheting up biomass based diesel and getting close to 10% on ethanol.”

The Hidden Good News

Richman paused to look at waiver authority. Though only policy or legal wonks might know it, the original legislation expanded EPA’s waiver authority — including the option of taking distribution into account, should the volumes be waived down by 20% for 2 consecutive years. Under the original EPA proposals for 2014-2016, the waive-down would have triggered that provision.

But it didn’t happen. In the final rule, the waive down is under 20% for all three years. Meaning that the EPA’s authority could only be expanded no earlier than 2019 — and only if 2017 or 2018 both are waived down by 20%. The EPA also can have expanded waiver authority if the overall volume is waived down by more than 50% in any given year, but with current volumes that seems completely out of the picture.

Over in the biodiesel market

Richman pointed to the factor which is affecting biodiesel — that’s the uncertainty over the biobased diesel tax credit. “Biodiesel is far more expensive than petroleum, and the RIN made up about half,” Richman observed. “So, biodiesel is unlike ethanol, they really need the RFS to work for them. And EPA has helped them. The minimum was 1 billion gallons, but EPA has set a standard rising to 2 billion in 2017.

Overall

“2016 will look a lot like 2015,” Richman said. “we’d been running at around 12.9 billion gallons of ethanol in the US market for some time, but we gained almost 500 million in the past year; with exports looking steady we see supply rising to 15.772 billion gallons in 2016, with domestic production at 14.768 billion gallons.”

Biodiesel, Richman said, is more of a price puzzle because Argentine exports are coming; they have qualified for D4 biomass-based diesel RINs and domestic producers are going to have to match them on price.

And, The Digest might add, with recent elections in Argentina brining in a new president pledged to normalize the highly protectionist economy, we may see a substantial devaluation in the peso which may make Argentine exports very inexpensive.

Plus, Richman added, we face uncertainty over tax credit extension, and whether that credit will be a blenders or producers credit. “It probably will be extended,” Richman predicted, ”and probably will remain a blenders credit.” Overall, Richman projected 1.323 billion gallons in domestic biodiesel production.

Takeaways?

Richman noted 4 points:

1. Biofuel prices will remain under pressure from low petroleum prices

2. Ethanol margins will be moderated by moderate corn prices

3. Watch biodiesel pressured by Argentine exports

4. Watch out for RFS2 lawsuits and the biodiesel tax credit debate

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