Biodiesel sector benefits as U.S. ethanol hits blend wall

VANCOUVER — Ethanol’s blend wall is creating unexpected demand for biodiesel and the vegetable oil from which it is made.

The United States has reached the point where the federal mandate for ethanol is exceeding the amount of the fuel that can be used in vehicles given the current infrastructure.

U.S. gasoline consumption is expected to be 134 billion gallons in 2012-13, according to the Food and Agricultural Policy Research Institute.

Most fuel retailers sell ethanol at a 10 percent (E10) blend level, which would result in 13.4 billion gallons of ethanol demand.

The U.S. Renewable Fuel Standard calls for 13.8 billion gallons of ethanol use in 2013, 14.4 billion gallons in 2014 and 15 billion gallons in 2015.

Blenders can make up for the shortfall by using renewable identification number (RIN) credits, which they earned in the past for blending more ethanol than they were obliged to under the U.S. federal mandate.

The demand for ethanol RINs has greatly increased as the industry approaches the blend wall, driving up the value of the credits tenfold since January.

The other option for blenders is to use biodiesel RINs because biodiesel is approved for all categories of biofuel in the Renewable Fuel Standard (RFS).

“Biodiesel, having been an expensive biofuel for meeting mandates, has suddenly become a competitive biofuel for meeting mandates,” James Fry, chair of LMC International, an economic consultant for the global agribusiness sector, told delegates attending the Canola Council of Canada’s annual convention.

Biodiesel RINs were once more expensive than ethanol RINs, but prices of the two credits have converged. That favours biodiesel, which has 1.5 times the energy value of ethanol.

Biodiesel is also replacing Brazilian sugar cane ethanol in the RFS’s advanced biofuel category, partially because of the blend wall issue but also because of problems in the Brazilian ethanol industry, which has been slowing down due to competition from gasoline.

Fry said the unexpected demand for biodiesel will last for one or two years until the United States moves to E15 ethanol blends. That will boost demand for soybean and canola oil, the two main vegetable oils that produce biodiesel eligible to meet the U.S. mandate.

The U.S. Congress has also reinstated the $1 per gallon biodiesel blending tax credit until the end of 2013. It is a significant subsidy amounting to $300 per tonne of product.

Fry said palm biodiesel isn’t eligible for the mandate, but it is eligible for the tax credit and is being imported for use in the U.S. heating oil industry.

“Ships are sailing as I speak from Indonesia to the west coast of the U.S. full of palm biodiesel,” he said.

That is helping mop up the glut of palm oil weighing down vegetable oil markets.

The palm industry planted a lot of trees in 2007-08 that just started yielding one to two years ago.

“There is just a wave of palm oil coming on the market,” Fry said.

“It’s going to go on happening for four or five years. Palm is having to buy its way into new markets, which it does through price.”

Palm oil can’t be stored. Instead, it has to be processed within one day of being harvested.

“They have these tanks that every day are overflowing, pretty much, so they have to sell it at whatever price they can get,” he said.

Cheap palm oil combined with the $1 per gallon biodiesel tax credit has made palm biodiesel a competitive biofuel in the U.S. market.

Fry said the increased use of soy and canola biodiesel to meet the U.S. ethanol and advanced biofuel mandates and palm biodiesel for use in the heating oil market should tighten the vegetable oil complex and support prices for oil producing crops.

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