Oct 07, 2021
By Scott Gerlt • ASA Economist & Alan Weber • M4 Consulting and Senior Advisor to NBB
Soybean prices have seen a remarkable recovery the past year after an extended period of depression. While multiple factors have contributed, including China’s renewed demand for feed after its swine herd largely recovered from African Swine Fever, a component is additional demand from renewable diesel. This biofuel is different from biodiesel and is a rising source of soybean demand.
While most people have probably heard of biodiesel, renewable diesel is a separate fuel with a different production process. Chemically speaking, biodiesel is a mono alkyl ester of long chain fatty acids. In simple terms, a fat or oil (e.g., soybean oil) is reacted with an alcohol like methanol in the presence of a catalyst. This process yields biodiesel and a primary co-product, crude glycerin. The latter has thousands of uses, including as an energy source for livestock. Although any fat or oil can be utilized as a feedstock, vegetable oils are ideal inputs for the production process. Biodiesel is typically used in blends of up to 20% (i.e., B20) with petroleum diesel fuel.
Like biodiesel, renewable diesel reacts a fat or an oil with a catalyst to produce a fuel and co-products. Unlike biodiesel, renewable diesel is a hydrocarbon, which is the same chemical as petroleum-based fuels. Renewable diesel is generally produced through hydro-treating, a high temperature and high pressure process like a traditional refinery operation. Hydrogen is reacted with feedstock in the presence of a catalyst to yield renewable diesel and co-products such as propane and naphtha. Renewable diesel falls under the ASTM (1) standard for diesel fuel, D975, and is used in diesel engines at blends up to 100%.
Sustainable (synthetic) aviation fuels (SAF) are the most recent addition to the biofuels discussion. Although large-scale, commercial development of SAF has not begun, it is worth mentioning. There are multiple pathways that have an approved fuel standard, however only one of those currently approved pathways utilizes fats and oils. That pathway is similar to the renewable diesel process and will use the same feedstocks such as soybean oil, canola oil, animal fats, distillers corn oil, and used cooking oil. The process is more severe to produce SAF that meets the extreme cold flow requirements of jet fuel of around -40F, which also tends to produce more co-products.
When comparing these biofuels, a few things are noteworthy. Generally speaking, a production facility to produce SAF as the primary product would have higher capital expenditures for plant construction relative to renewable diesel plants, and renewable diesel plants involve more capital than biodiesel plants. Plants designed to produce SAF also have increased operating expenditures relative to biodiesel and renewable diesel facilities due to energy requirements. In addition, renewable diesel plants can be modified to produce a percentage of SAF. However, biodiesel plants cannot.
Another interesting aspect is the amount of feedstock required to produce a gallon of fuel. More pounds of feedstock are required per gallon of finished SAF compared to biodiesel or renewable diesel. The renewable diesel production process tends to be more feedstock agnostic compared to biodiesel plants, meaning most processes can handle feedstocks such as used cooking oil or distillers corn oil without issue. Pre-treatment is critical in renewable diesel plants due to concern over catalyst poisoning. In fact, several renewable diesel plants operate on RBD (refined, bleached and deodorized) soybean oil to prevent this problem.
Biodiesel, renewable diesel and SAF qualify for several state and federal programs. The federal Renewable Fuel Standard (RFS) requires a portion of fuel in the U.S. contain renewable fuel that meets emission reduction thresholds. When eligible renewable fuel is blended with petroleum fuel, a credit is generated that can be used to meet the RFS obligation for the refinery. Alternatively, this credit can be sold to another refinery to meet their obligation, thereby creating a price for the credit. The second program is California’s Low Carbon Fuel Standard (LCFS). This program requires a reduction in the overall carbon intensity of fuel consumed in the state over time. Like the RFS, credits can be generated from exceeding the requirement and traded. Several other states are adopting LCFS programs, but they are not at the scale of California’s at this time. Last of all, the biofuels are eligible for a blenders tax credit of $1.00 per gallon. This tax credit is currently set to expire at the end of 2022.
While many different feedstocks can be used to produce the biofuels, they do not always receive equal treatment under the different programs. For example, renewable diesel made from canola oil is not currently eligible for the RFS (biodiesel is eligible). Under the RFS, a biofuel’s credit value is not dependent upon the feedstock used as long as it is an eligible feedstock. The same is not true in California’s LCFS program. For example, used cooking oil is scored to have a lower carbon intensity in California (relative to vegetable oils such as soybean oil) as it is viewed as a waste product. It subsequently generates a larger credit. This provides a strong incentive for biofuel producers to purchase used cooking oil as a feedstock. However, the available supply is finite, and biofuel producers are planning expansion principally around soybean oil to meet the volumes needed to increase production.
Figure 1 shows where current biodiesel plants exist and where the current and proposed renewable diesel plants are located, as well as their relative sizes. Biodiesel plants tend to be located in the Midwest near soybean production. Biodiesel from soybean oil has not historically been used in California. Even though renewable diesel generates a credit very similar to biodiesel when using soybean oil as the feedstock, the aforementioned properties of renewable diesel allow it to receive a significant price premium in California’s market. As a result, renewable diesel is being sent to the state. The renewable diesel plants tend to be located closer to this market. They are also located with existing oil refineries to take advantage of infrastructure and excess hydrogen production. The other apparent difference is the size of the plants. The size of the average biodiesel plant is about 29 million gallons per year compared to about 224 million gallons per year for renewable diesel.
Figure 2 shows the current biomass-based diesel capacities along with the announced capacities. There is currently about 2.5 billion gallons of annual biodiesel capacity and just under 1.1 billion gallons of renewable diesel capacity by the end of 2021. The current announcements would create approximate capacity parity next year. However, total renewable diesel announcements would put total capacity at about 7.0 billion gallons. This number is unlikely to be achieved given the lack of suitable feedstock and the size of California’s carbon market, and industry estimates are often at 3.0 billion gallons or less of capacity.
The rising demand from renewable diesel has been a factor changing the recent relationship between soybean oil and soybean meal prices. The extra demand for the oil has strengthened the soybean crush margin which has increased the volume crush and supported soybean price. Soybean oil constitutes about 20% of the soybean with soybean meal composing the other 80%. The evolving demand has resulted in soybean oil now representing about 50% of the value of a soybean compared to around 30 to 35% historically. This new source of demand is helping to draw additional investment into soybean crushing and soybean oil refining which will help support soybean prices into the future.
(1) ASTM International is an international standards organization that develops and publishes voluntary consensus technical standards for a wide range of materials, products, and services.