Who Killed The Grain Market?
The Environmental Protection Agency, "Sources", and the Renewable Fuels Standard
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He who sells first, sells best.
Part 1: Loose lips💋
One week ago, the US Grain Trade had a lot to think about - a potential railroad strike, a never ending drought, and what the future held for renewable fuels in America. The last topic, the policy surrounding renewable fuels, ended up taking center stage in a very negative way.
Here’s how it all went down 👇
Day 1 - The leak🕵️♂️
On Wednesday November 30th, the Environmental Protection Agency (EPA) was to release proposed blending volumes of renewable fuel into the US Fuel Supply under the Renewable Fuels Standard (RFS.) These proposed volume figures are widely watched by both Big Oil and Big Ag (Agriculture.)
For Big Ag, volumes largely determine the demand outlook for agricultural feedstocks - corn🌽 into ethanol and vegetable oil🌱🛢️ into biomass-based diesel (biodiesel or renewable diesel.)
For Big Oil, the volume figures determine how much renewable fuel needs to be blended with gasoline and diesel to comply with the enforced volume mandate.
As mentioned, the volumes were supposed to be released officially on November 30th. They never were released officially that day, but judging by the price action, they surely were leaked.
9:45 am, without warning, Chicago agricultural futures sold off across the board lead by soybean oil, which plunged 2.2% in the span of 15 minutes. Little did market participants know, the selloff would deepen and continue for the remainder of the week.
10:04 am, Reuters reminded the market of the release, quoting “sources” that the EPA would be releasing not just 2023 figures, but 2023 and beyond.
2:21 pm, after the futures market closed, wire headlines reported the EPA is “Preparing to boost biofuel quotas for the next three years”.
2:43 pm, Bloomberg reported RFS blending volumes for 2023 -2025 according to “people familiar with the matter”.
3:32 pm, Reuters reported RFS blending volumes for 2023 - 2025 citing “Sources”
7:00 pm, Chicago agricultural futures trading opens and soybean oil futures plunge 4% within minutes.
Day 2 - Sell the rumor, sell the news, and keep on selling
By next morning, prices recovered for several agricultural commodities, but there were more surprises in store for the market..
8:30 am, Chicago agricultural futures market reopens and sells off across the board.
8:47 am, EPA confirms volumes reported by Reuters are accurate.
8:51 am, Soybean oil trades down 6.2% for the day and officially trades limit down (the maximum price allowed by the exchange for the day.) Prices bounce back and off the limit for the next hour.
Between 10:00am and 11:00am the EPA finally publishes official RFS volumes on their website.
10:20 am, Soybean oil futures trade limit down and proceed to stay limit down into the close.
7:00 pm, Chicago agricultural futures trading opens and soybean oil futures plunge 2% on the open.
Data leaks 💦
The example above is nothing new in markets - someone gets ahold of information earlier then the masses, acts on it, profits on it, and life goes on - but it’s not exactly right, and probably not exactly legal either. Regardless of legality, we’re not here to debate that. We’re more interested presenting to you how market participants took the information and what that information meant to the market.
Part 2: Why so bearish?🐻
So what was so bearish regarding the volumes proposed by the EPA? Well, it’s complicated, but we’ll try to do our best to explain.
Biomass-Based Diesel & Advanced Biofuel
Biomass-based diesel (biodiesel and renewable diesel) proposed volume increases were less than the market anticipated. For 2022 , the mandate was 2.76 billion gallons, by 2025 it increases to 2.95 billion gallons.
Advanced biofuel proposed volumes increased from 5.63 billion RINs in 2022 to 7.43 billion RINS in 2025.
Although the volumes for advanced biofuels grew significantly, the biomass-based diesel volumes barely budged. Historically, much of the advanced biofuels category ends up being met by blending biomass-based diesel and submitting those credits (called RINS - renewable identification numbers) to demonstrate compliance. Not only does the RFS allow using biomass-based diesel credits to show compliance in other blending categories, the credits are worth more too - either 1.5, 1.6, or 1.7 RINs can be generated for every gallon blended.
I’m sure you’re already confused by the above, so let’s step into it.
First off, the biodiesel industry in the US has approximately 2.2 billion gallons of capacity. Below you can see where most of the biodiesel capacity is located…right where most of the nation’s soybean oil is produced.
Next, let’s look at the capacity of renewable diesel facilities below. In the US, there is approximately 1.75 billion gallons of renewable diesel capacity.
Taken together, the capacity from biodiesel and renewable diesel facilities, there is a potential of 4 billion gallons of biomass-based diesel that can be domestically produced, not to mention any imported renewable diesel or biodiesel which also generate biomass-based diesel RINs. To add to those figures, the future build out of renewable diesel capacity is expected to grow exponentially.👇
According to the Energy Information Administration (EIA), there is potentially over 5 billion gallons of renewable diesel capacity online by 2024. Although not all projects will materialize, the writing is on the wall. When you have a mandate of 2.95 billion gallons of biomass-based diesel, but have 5 billion gallons of projected renewable diesel capacity and 2.25 billion gallons of biodiesel capacity, you might ask yourself, “can the market support this much volume?” The answer is reflected in the math.
2.95 *1.5 = 4.425 Billion biomass-based diesel RIN mandate in 2025 (biomass-based diesel blending mandate converted to RIN equivalent)
5 * 1.7 + 2.25 * 1.5 = 11.875 Billion of potential RINs production in 2025 (renewable diesel expected capacity multiplied by the equivalent value RIN multiplier of 1.7 plus current biodiesel capacity multiplied by the equivalent value RIN multiplier of 1.5.)
If the biomass-based diesel mandate requires 4.425 billion RINs, but the industry is expected to produce 11.875 billion RINs, then that category is more than supplied. As mentioned earlier, the overflow of RINs from biomass-based diesel blending usually ends up being applied to the advanced fuel category, which in 2025 stands at 0.875 billion gallons (Advanced Mandate - Biodiesel Mandate [in RINs] - Cellulosic Mandate = Advanced Fuel RIN Mandate). So when you take the overflow of RINs and apply them to this category, the RINs will be in oversupply (11.875 - 4.425 - 0.875 = 6.575 Billion RINs).**(See Footnote) This is not even including any advanced biofuel blending that is not coming from biomass based diesel - which as of October YTD, stands at 361 million RINs.🐻
If the biomass-based diesel mandate requires 4.425 billion RINs, but the industry is expected to produce 11.875 billion RINs, then that category is more than supplied. As mentioned earlier, the overflow of RINs from biomass-based diesel blending usually ends up being applied to the advanced fuel category, which in 2025 stands at 7.43 billion gallons. Now take the overflow of RINs and apply them to this category, and the volumes are nearly in balance. (11.875 - 4.425 - 7.43 = 0.02 billion RINs.) This is not even including any advanced biofuel blending that is not coming from biomass based diesel - which as of October YTD, stands at 361 million RINs.🐻
Based on the proposed volumes by the EPA, the volumes were not exactly encouraging of more biodiesel or renewable diesel expansion, and this is exactly what sparked the selloff. It may take a few more days to find the bottom of this market, but future expansion projects and refinery investments to produce renewable diesel into the future do not seem as lucrative. Many of these announcements regarding renewable diesel projects were largely driven by Big Oil interests. Not only does Big Oil lose out on potential volumes to renewable fuels in the future, but also their renewable diesel investments are less encouraged by the EPA. Big Ag is in the same boat as Big Oil, the EPA sent warning shots that the expansions in biodiesel blending are not nearly as large as predicted, putting pressure on agricultural feedstocks such as soybean oil or canola oil.
So what’s next? The EPA will schedule a public hearing and accept comments regarding the proposed volumes. Thereafter, the EPA is required by consent decree to release the final rule regarding blending volumes by mid-June 2023.
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**Bolded text edited on 5/3/2023, due to an error in how the advanced biofuel (D5) RIN category was calculated.