Biodiesel Industry Faces Profit Swings Refinery Challenges

Have you ever wondered where the diesel fuel for our vehicles comes from beyond traditional petroleum refining? The answer might surprise you: soybeans. Yes, the same soybeans used to produce cooking oil can be transformed into biodiesel. Let's examine the dramatic price fluctuations and profit margins that have characterized the soybean-based biodiesel market in recent years.

Understanding biodiesel prices can feel like solving a complex riddle. Three major organizations provide price assessments: AMS (USDA's Agricultural Marketing Service), OPIS (Oil Price Information Service), and Fastmarkets. These entities function as price referees, each with slightly different methodologies.

• AMS: The USDA's AMS publishes weekly biodiesel price information in its National Agricultural Energy Review. However, this data only extends through December 8, 2023, and primarily reflects FOB (Free On Board) prices from Iowa ethanol plants before expanding to include Minnesota facilities.
• OPIS: Provides wholesale FOB price assessments for Chicago biodiesel transactions.
• Fastmarkets: (formerly Jacobsens) tracks FOB prices at biodiesel plants across eight Midwestern states, with nearly half of FAME (Fatty Acid Methyl Ester) biodiesel production concentrated in Iowa.

From 2007 through 2020, these three price assessments moved in near-perfect alignment. However, post-2020, AMS prices diverged significantly, particularly in 2023 when the gap widened dramatically. This discrepancy raises questions about potential methodological changes in AMS's reporting.

With AMS prices showing inconsistency, focus shifts to comparing OPIS and Fastmarkets assessments—the two primary biodiesel price benchmarks.

Between 2007 and March 2024, the price differential between these two fluctuated widely but averaged near zero before 2020. During the renewable diesel boom (2021-2024), the gap expanded to an average of $0.20 per gallon, peaking at $1.00.

Normally, OPIS prices should exceed Fastmarkets by at least the transportation cost from Midwest plants to Chicago. The absence of this differential pre-2021 suggests potential reporting anomalies. Fastmarkets ultimately provides the more representative price for profitability analysis, particularly as it directly reflects plant-level prices during the renewable diesel expansion.

To assess biodiesel production profitability, we examine a representative Iowa biodiesel plant model—a facility built in 2007 using soybean oil as feedstock. Several adjustments were made to this model:

• Marketing costs for biodiesel and glycerin were adjusted using CPI inflation metrics
• Non-soybean oil/non-natural gas variable costs were similarly CPI-adjusted
• Added rail transportation costs for soybean oil delivery to plants

The revised analysis shows average losses of $0.02 per gallon from 2007-2020—a significant decline from previous estimates of $0.07 profits due to rising costs. The renewable diesel era (2021-2024) brought extreme volatility, with profits swinging from $1.50 losses to $1.00 gains, averaging $0.20 losses per gallon.

This period breaks into three distinct phases:

• Early Phase (Jan 2021-May 2022): Soybean oil prices surged while biodiesel prices lagged, creating average losses of $0.59/gallon
• Middle Phase (Jun 2022-May 2023): Biodiesel prices rebounded, delivering record profits averaging $0.41/gallon
• Recent Phase (Jun 2023-Mar 2024): Conditions deteriorated again with average losses of $0.19/gallon

Comparing biodiesel prices to shutdown prices (where revenue equals variable costs) reveals critical industry dynamics. During the renewable diesel boom's early phase, prices fell below shutdown thresholds, suggesting many plants should have ceased operations. The middle phase saw prices soar above shutdown levels, encouraging maximum production. Recent months have shown mixed signals, with 2024 trending negative again.

EIA data on FAME biodiesel plant capacity reflects these economic pressures. Operating capacity peaked at 2.461 billion gallons in September 2021 before plunging 15% (372 million gallons) by July 2022 as losses mounted. While capacity stabilized below 2.1 billion gallons during profitable periods, recent plant closures suggest another wave of shutdowns may be imminent as 2024 losses accumulate.

The biodiesel market continues its volatile trajectory, presenting producers with both unprecedented opportunities and existential challenges. Navigating these turbulent conditions requires careful attention to shifting price relationships and production economics.