Increasing biodiesel production impacting soybean markets

CHAMPAIGN, Ill. — There is a boom occurring for renewable diesel with several plants under construction in the United States.

“The scale of the renewable diesel boom is really something to behold,” said Scott Irwin, professor and Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois.

“Up to 2020, U.S. renewable diesel production was very small, under 1 billion gallons per year,” said Irwin during a presentation at the Farm Assets Conference, hosted by U of I Extension and the farmdoc team.

“We’re building renewable diesel plants at an impressive pace with the total number of plants at about two dozen,” he said. “It’s a huge increase going from 1 billion gallons of capacity annually to potentially, after 2025, 7.4 billion gallons.”

In 2023, Irwin said, renewable fuel production capacity is scheduled to increase by 1.5 billion gallons and another 1.4 gallons of capacity is scheduled to come online in 2024.

“That includes one of the world’s largest renewable refineries in California that will have 680 million gallons of renewable diesel production capacity,” he said.

Renewable diesel is made from waste fats and vegetable oil by crude oil refineries.

“It is goes through the same production process as petroleum diesel,” Irwin said. “It is chemically indistinguishable and a 100% substitute for petroleum diesel.”

This compares to FAME biodiesel, a mixture of different fatty acid methyl esters, that is also made from waste fats and vegetable oil.

“But the production and what comes out are entirely different,” the U of I professor said. “Chemically it is not the same as petroleum diesel or renewable diesel so it has to be blended with petroleum diesel.”

Historically, soybean oil has represented about one-third of the value of the soybeans in the crush and soybean meal about two-thirds, Irwin said.

However, since renewable diesel production has been increasing, soybean oil prices have exploded.

“About half of the value of soybean is coming from the oil,” the professor said. “That’s a big impact of renewable diesel and a huge change in the pricing dynamics.”

Although not all of the increase in the price of soybeans has been due to renewable diesel, Irwin said, it has been part of the “wind behind the sails since 2021.”

“Because all of the renewable diesel plants need feedstock and one of the biggest ones is soybean oil, we’re in the process of seeing a substantial increase in soybean crushing capacity in the U.S. if all the plants get built in the next four years,” he said.

Therefore, there will also be a need for an increase in acres of soybeans produced by U.S. farmers.

“It could be as many as 18 million acres of additional soybeans to provide that soybean oil,” the agricultural economist said.

Irwin explained that the renewable diesel boom is not driven by the market.

“This chart shows the price of biodiesel back to 2007 and it is more expensive than diesel prices,” he said. “There’s a gap between biodiesel and energy that averages $1.50 to $2 higher.”

Since the renewable diesel boom, Irwin said, that gap has been as large as $5 per gallon.

“This stuff is expensive to make,” he said. “And as you try to make more and bid up the cost of the feedstocks, it gets even more expensive to make.”

The growth of the renewable diesel fuel market is a result of policy.

“It’s a policy market because without policy incentives, none of this sells,” Irwin said.

“The renewable fuels standard which provides minimum mandates for biofuel use has been around for a long time,” he said. “It is still the most important foundation of the policy stack for renewable diesel.”

The U.S. blender’s tax credit gives $1 per gallon credit for each gallon of renewable diesel and FAME diesel blended with diesel.

“We have very high import tariffs to provide duties on the biggest U.S. import competitors for FAME biodiesel,” Irwin said.

There are also state FAME biodiesel blend mandates in a variety of forms.

“State vehicles in Illinois are mandated to use biodiesel blends,” Irwin said.

“The real wild card is the low carbon fuel standard that started in California,” he said. “It offers credits for supplying low carbon fuel into a state’s fuel market.”

Oregon and Washington also have a LCFS, Irwin said.

“And there’s a significant effort to get one added in Illinois,” he said.

“Our capacity to produce biodiesel is currently far outweighing the demand ceiling established by the RFS, so something has to give,” the economist said.

“Some of these renewable diesel plants are not going to come online or they’re going to operate below capacity,” he said.

“Or, FAME biodiesel plants will be driven out of business or produce at rate below capacity and, in my opinion, in the next two years there is a major reckoning that has to happen.”

Sustainable aviation fuel is another market that may develop for biofuels.

“The current U.S. jet fuel market is 24 to 25 billion gallons, so it’s a big market potential for replacement by biofuels in the sky,” Irwin said.

“This is the future direction policy should go because it is a solid, long-term market for biofuels,” he said. “But we have hardly gotten to the starting line, so it’s not going to have a large impact on our ag markets for five years and it may take 10 years.”