The balance between supply and demand of oil and fat commodities in the world remains tight, and the rate of inventory reconstruction is less than expected. On the supply side, the US soybean pool consumption ratio has rebounded to a limited extent due to poor yields, Canadian rapeseed has suffered a severe drought and sharply reduced production, superimposed palm oil production has been affected by factors such as the epidemic in the place of origin, and oil and fat production has not recovered significantly as seasonally expected. Consumption, it is expected that edible consumption to maintain low growth growth, consumer growth rate more dependent on industrial consumption, especially the steady growth of biodiesel consumption, the current global 9 kinds of vegetable oil industrial consumption accounted for more than 25% of the current year's output, of which biodiesel raw material consumption accounted for more than 20% of the total global vegetable oil production, and biodiesel consumption in the recovery of production less than expected has become an important marginal variable affecting the change of oil and fat inventories.
This also explains why the U.S. "allows applications and receipts of small refinery SRE" in late June and "EPA's proposal for a mandatory doping requirement for biofuels to the White House" in late August have both caused short-term sharp fluctuations in the price of oil and fat commodities. This article aims to sort out the possible impact of the U.S. biodiesel policy swing on U.S. soybean oil consumption in the future.
U.S. renewable fuels points sorted out
Since 2005, the U.S. government has jointly implemented the Renewable Fuel Standards (RFS) program by the U.S. Environmental Protection Agency EPA, the U.S. Department of Agriculture USDA, and the U.S. Department of Energy DOE, which has carefully classified renewable energy in the United States and set annual targets for annual use. The plan divides renewable fuels into four categories (D3-D6), with cellulosic biofuel D3 parallel to biomass diesel D4, advanced biofuel D5 containing D3 and D4, and renewable fuel D6 containing D5. Among them, the main raw material for the production of D4 is soybean oil and other biomass oils.
D4 fuel currently mainly contains biodiesel and renewable diesel, which we abbreviate as BD and RD respectively. Both BD and RD can be produced from soybean oil, palm oil, animal oil, etc., but the maximum blending ratio of BD and diesel is 20%, while RD can be used 100% independently, and RD also has the advantage of being compatible with diesel equipment during transportation and storage. Among them, BD is what we often call "raw firewood", because the proportion of BD in D4 fuel in the past is 90% to 100%, so the market often refers to the demand for soybean oil for the manufacture of renewable fuels, USDA and EPA have only provided relevant data on BD in the past, and since 2018, the proportion of RD in D4 fuel has gradually increased to the current 20%, EPA has stopped updating the past monthly BD production and raw material consumption data since the beginning of January 2021. Instead, the soybean oil consumption data of biofuels was updated to include both BD and RD.
The RFS stipulates that the EPA should give the target amount of D4 for the second and third years by the end of November of each year at the latest, while D3, D5, and D6 only give the amount for the second year. Target usage, also known as standard volume voltage standard, means the next year's national target for blending and using renewable fuel volumes, based on gallons. Due to the pandemic in 2020, the EPA did not submit a new target usage, and the target use of D4 fuel in 21 years was the amount specified by the EPA at the end of 2019. The 2022 target may be set by the end of November this year.
2. Regulatory mechanism for biodiesel to fulfill obligations - RIN
RfS also sets up a market regulation mechanism with RIN as the carrier to promote the use of targets. RIN is a unique code belonging to renewable fuels, RIN is in gallons, is rfS different types of renewable energy according to the energy equivalent conversion into ethanol volume, that is, in ethanol as a unit to measure the amount of various renewable energy sources. If the energy of 1 gallon of BD is equivalent to 1.5 gallons of ethanol, then the RIN that produces one gallon of BD is 1.5 gallons. Then the RIN can be understood as a special by-product of BD production, and the obligated party can fulfill the obligation by producing BD independently or purchasing RIN.
First, producers and importers of renewable fuels can apply for registration of RIN codes for each gallon of renewable fuel, which are bound to their corresponding renewable fuels, which is the process of RIN generation. After that, the producers and importers of renewable fuels sell renewable fuels to blenders, who mix them with diesel, etc., in the process RIN is separated from the renewable fuel to which it is bound and can be traded separately, this process is RIN separation. At the same time, the RFS stipulates that non-renewable energy producers and importers are obligors, and the EPA determines its obligation amount to the obligor every year according to various factors such as target usage, renewable volume obligation (RVO), and the obligated party needs to submit the target number of RIN to complete the compliance operation, which is RIN retire.
3. Biodiesel blended tax credit subsidy policy
Blending Tax Credit (BTC) has been introduced since the U.S. Employment Act of 2004, which provides blenders with a $1 tax credit for every gallon of renewable fuel blended. For example, if an adulterer mixes 20 gallons of raw wood with 80 gallons of diesel, the blender will receive a subsidy of $20 instead of $100.
The current years in which the subsidy policy has been implemented are 2004-2009, 2011, 2013, 2016, 2020 and 2021, and it is uncertain whether it will be implemented in 2022. In addition, each time the policy is implemented, the year that was not implemented in the previous years will be retrospectively reviewed.
4. California Low Carbon Fuel Standard
The California government sets a carbon intensity for each fuel based on carbon emissions and sets a baseline value. Carbon credits are awarded below the baseline value, and carbon deficit deficits are obtained above the benchmark value, and enterprises with carbon deficits can smooth out the deficit by purchasing carbon credits. Therefore, it is generally the producers of renewable energy who sell carbon credits, and the importers of traditional energy producers who buy carbon credits.
It is worth noting that even if they are all 1 gallon of raw wood, different carbon credits will be generated due to their different raw materials, and the order of the number of carbon credits generated is: waste oil as raw material >; animal oil as raw material >; soybean rape oil as raw material, and the carbon integral generated by RD is >; and the carbon integral generated by BD is.
A brief description of the influencing factors of D4 fuel production
1. Main influencing factors
The EPA-set target usage Volume standard will anchor D4 fuel production and consumption in a broad range, which is the core influencing factor driving biodiesel consumption, we counted the vs gallons of VS over the past 10 years and the domestic RIN generated gallons in the United States, and found that they are roughly consistent with each other. Fluctuations in D4 fuel production and consumption around VS are the result of a variety of other factors (secondary contradictions).
2. Secondary influencing factors
The combined price of raw firewood is the price of raw firewood minus the RIN price at the time and the subsidy of the $1 policy. Diesel price ratio to raw wood comprehensive price diesel/raw wood comprehensive price comparison, is what we believe is a secondary factor affecting the production of D4 fuel, which affects the enthusiasm of production by affecting the enthusiasm of biofuel consumption, which is embodied in the difference between the current year's production and the target use of the current year VS.
In addition, due to California's low-carbon fuel standard policy, the production of renewable fuels in California can be profited from both the sale of RIN and carbon credits, which has begun to attract obligor companies such as Marathon Petroleum Crop to invest in new renewable energy production plants in California. And because the carbon credit system of renewable fuels produced from soybean oil as raw materials obtains a lower carbon score than waste oils and animal fats, california renewable fuel raw materials as little as possible using soybean oil, this factor may cause a longer period of time as California biomass fuel production increases in the proportion of the country and soybean oil consumption growth slowly, but not as the current main influencing factor.
Assessment of the impact of soybean oil consumption in the United States
1. Estimation of D4 fuel RIN generation
At present, the target usage in 2021 is the same as that in 2020, and has a subsidy policy of $1, the comprehensive price comparison is more favorable, and it is expected that the production and blending target set by the EPA will still be reached in 2021. At present, the specific requirements of the 2022 EPA biofuel mandatory blending requirements proposal are still uncertain, so the enthusiasm for over-production reserve RIN in advance in 2021 is not expected to be high, and the expected overall completion volume fluctuates slightly around the current 2.43 billion gallon requirement. In addition, from the perspective of production capacity, even if the future input capacity is not statistical, the current production capacity is enough to meet the mandatory blending standards stipulated by the EPA.
2． Impact assessment of soybean oil consumption
In summary, we will assess for the time being that the biodiesel mandatory blending plan given by the EPA in 2022 will not have a significant decline. As the biodiesel mandatory blending plan given by the 2019 EPA is still continuing, because we estimate the average of 2020 and 2021 as the base for soybean oil raw wood consumption, if 2022 VS returns to the 2019 level, soybean oil raw wood consumption will decrease by about 700,000-800,000 tons month-on-month, and if 2022 VS returns to the 2018 level, soybean oil raw wood consumption will be reduced by about 650,000-750,000 tons month-on-month. If 2022 VS returns to 2017 levels, soybean oil and raw wood consumption will decrease by about 1.3 million tons month-on-month, but we tend to prefer that 2022 VS will not be lower than the 2018-2019 level.
This article originated from Wing On Futures