Canola oil may head south for biodiesel

A potential change in the U.S. biodiesel tax credit could create a new market for Canadian canola oil, say analysts.

The U.S. biodiesel industry has lobbied Congress for years to change the $1 per gallon tax incentive to a producer’s credit from a blender’s credit.

“What that would do is that would incentivize U.S. production,” said Jessica Robinson, spokesperson for the National Biodiesel Board.

Dan Basse, president of Ag-Resource Co., believes this could be the year the biodiesel industry gets its wish with U.S. President Donald Trump in office.

The incentive that expired Dec. 31, 2016, was a blender’s credit that applies to imported biodiesel as well as domestically produced fuel.

That has led to an explosion of imports. More than one-third of the 2.9 billion gallons of biodiesel sold in the United States last year was imported, a 64 percent in-crease over the previous year.

“This administration has got this view of making America great again, so paying a $1 per gallon subsidy to two million tonnes of Argentinian biodiesel doesn’t seem to make sense,” he said.

Basse believes the Trump administration will renew the expired credit and switch it to a producer’s credit as part of a broader tax reform bill that is the current policy priority for the U.S. president.

That would curtail imports and boost U.S. biodiesel production because the credit would apply only to U.S. produced bio-diesel.

“It probably means 600 to 800 million pounds of additional soybean oil demand,” he said.

Basse said U.S. soybean oil is already spoken for, so that additional demand would have to be met through imported vegetable oil. He believes the logical choice would be Canadian canola oil.

He estimates 200 to 400 million pounds of Canadian canola oil could be imported to meet the demand, which is 2.3 to 4.6 percent of total annual production by Canadian crushers.

Arlan Suderman, chief commodities economist for INTL FCStone, also believes the U.S. will change the incentive to a producer’s credit this year.

“It’s certainly better than 50 percent odds that it would happen,” he said.

He agreed with Basse that historical data shows any increase in vegetable oil demand from the biodiesel sector is always met by imported oil.

“Would it have any net effect on soybean prices here in the United States? Our data would say probably not significantly,” said Suderman.

“It would probably be positive for Canada because it might mean shipping more south into the United States.”

The incentive has been in place since 2005.

Meanwhile, the National Biodiesel Board has filed an anti-dumping and countervailing duty petition alleging that biodiesel companies in Argentina and Indonesia are violating trade laws by flooding the U.S. market with subsidized product.

Imports from those two countries have surged 464 percent between 2014 and 2016. The association contends biodiesel from Argentina is being dumped at prices 23 percent below market value, while Indonesian biodiesel is selling for a 34 percent discount.

The association is seeking punitive duties that would bring prices back to fair market value. The European Union and Peru have already imposed antidumping and countervailing duties on biodiesel from Argentina and Indonesia.

The investigation by the U.S. Department of Commerce and the U.S. International Trade Commission is expected to take about one year.

Basse said another positive for Canadian canola is the dramatic slowdown in the auctioning off of Chinese rapeseed oil reserves.

“Quietly, I can tell you, that the Chinese have been securing or asking for more offers for Canadian canola,” he said.

He believes the spread between canola and soybean oil will reach record levels in 2017-18 because of increased demand from China and the U.S. biodiesel industry.

However, Basse is still not bullish about canola because of the anticipated huge supply.

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