Soy oil prices dipped last week after the U.S. government an- nounced it is considering dropping biodiesel mandates in 2018 and 2019.
“It’s certainly getting the trade’s attention here, especially after the market had been feeling that we’d be doing nothing but increasing (mandate) amounts in the coming years,” said Rich Nelson, chief strategist with Allendale Inc.
The U.S. Environmental Protection Agency has the authority to reduce biofuel mandates if there are market conditions that will make the price of the fuel increase significantly.
It believes that is the case with biodiesel for two reasons.
First, the US$1 per gallon bio-diesel tax credit expired at the end of 2016 and has not been renewed. That is leading to a significant increase in the price of biodiesel to blenders, who were the ones who received the credit.
The second reason involves action the U.S. government is taking against what it feels is heavily subsidized imported bio-diesel.
“We also expect the price of biodiesel used in the U.S. could increase further following a recent preliminary determination by the Department of Commerce that it would be appropriate to place countervailing duties of 41 percent to 68 percent on imports of bio-diesel from Argentina and Indonesia,” the EPA said in a notice regarding the potential mandate reductions.
If the EPA decides to go ahead and reduce the 2018 and 2019 man-dates, it could drop them as low as 1.79 billion gallons per year, down from the current requirement of 2.1 billion gallons.
That potential 315 million gallon reduction would result in reduced demand for soybean oil, which is the primary feedstock for the industry.
The U.S. biodiesel sector is expected to consume seven billion pounds of soy oil in 2017-18, or 31 percent of total production. Reducing the mandate by the full amount allowable would eliminate about one billion lb. of that demand.
That could put downward pressure on soy oil prices and potentially canola prices because the two commodities are closely linked.
Nelson said the entire vegetable oil complex has been slumping since 2014 with the downturn in commodity and energy prices.
Soy oil received a bit of a boost recently with the preliminary determination by the U.S. Department of Commerce that it was slapping countervailing duties on imported biodiesel from Argentina and Indonesia.
The trade thought that would create more demand for U.S. soy oil, but that little price fire was quickly stamped out by the EPA’s announcement.
Jeff Coglianese, senior broker with Daniels Trading, said if the EPA cuts the mandate it would definitely result in less biodiesel use in the United States.
“Biodiesel is not economically feasible on its own,” he said.
However, he doesn’t think that would have too much of an impact on soy oil and soybean prices because it would mean losing one billion lb. of demand from a 123 billion lb. global market for the product.
“I don’t know if it’s going to have a huge impact on soybean prices. All you need is a little bit of demand from China and you kind of eat that up pretty quick,” he said. “It could have some effect, but I don’t think it will be a major impact.”
Nelson feels good about the two to three year outlook for the entire vegetable oil complex.
He sees continued strong demand for vegetable oils because of the growing middle class in developing countries.
And while biodiesel mandates may be contracting in the U.S., they are expanding elsewhere in the world. India is poised to announce a new policy the government says will create a biofuel economy worth $15.6 billion over the next two years.
“That’s two very good pieces of long-term demand for us right now,” said Nelson.