Nov 6 / Pedro Schicchi

Grains, Oilseeds and Livestock Weekly Report - 2023 11 06

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"RIN prices have been declining over the course of the year, a movement that became more pronounced from July onwards.
One major reason for this decline is the significant increase in the supply of D4 RINs. A contributing factor is that renewable diesel, included in the D4 category, generates more RINs per gallon, adding to the supply surge.
Improved profit margins for blenders can increase purchases in the short term, but their influence may be limited, as the total demand is bounded by finished fuel consumption in the country.
Additionally, the D4 RIN surplus can potentially diminish demand for ethanol (D6) since RFS allows them to be used interchangeably."

Unpacking the Decline: Factors Influencing RIN Prices and Production

RIN (Renewable Identification Number) prices, although still relatively expensive when compared to the four-year historical average, have been on a decline since the beginning of the year, particularly accelerating after July.

What's driving this shift?

In addition to the outright drop in prices, another noteworthy factor is the narrowing gap between biomass-based diesel (D4) and conventional (D6) RINs. One of the reasons behind both of these developments is the surge in the supply of D4 RINs. This category encompasses both biodiesel and the rapidly expanding renewable diesel, both of which rely on soybean oil as their primary feedstock in the United States.

As more renewable diesel plants come online, there's a greater incentive to keep them running to justify the recently invested capital. Moreover, renewable diesel, owing to its higher carbon reduction compared to other biofuels, generates more RINs per gallon of biofuel. These factors, taken together, have led to a substantial increase in D4 supplies.
US RIN Prices fall on increased supplies (USD/RIN)

Source: Bloomberg, EPA

US D4 RIN production surges due to the renewable diesel (Millions of RINs)

Source: Bloomberg, EPA

Now, let's delve into the feedstock situation: soybean oil

US soybean oil was relatively expensive compared to other vegetable oils worldwide, primarily due to the tight balance in the US soybean market and some uncertainty surrounding crop numbers. The costly US soybean oil opened up an import opportunity, resulting in increased net purchase of biofuels by the country, further increasing RIN supplies.

However, as the harvest progressed and some of the risk premium diminished, the price differential with other feedstocks started to narrow. Simultaneously, bullish oil fundamentals lent support to heating oil. The result was a more attractive margin for blenders, as shown by the lower bean oil-heating oil (BO-HO) spread, incentivizing short-term biofuel demand.

Nevertheless, it's important to note that the US soybean OIL market remains tight, and the commodity will likely maintain a premium over other oils, such as palm, given the more comfortable supply situation for the latter.

What lies ahead?

The issue is that, even though blenders are enjoying improved profit margins, their overall impact on demand may be limited. The consumption of biofuels in the US is bounded by the demand for finished fuels, namely diesel (in the case of D4) and motor gasoline (in the case of D6).

As a result, unless the actual consumption of these products changes, any increase in biofuel/RIN purchases by blenders due to better margins only means they will have less appetite later, as a greater portion of their annual target will already be fulfilled. Since some RINs can be carried over from one year to the next, a potential surplus of RINs produced in 2023 could also “eat” into the demand for 2024.
For ethanol (D6), there’s another issue. Since D4 RINs have a higher carbon-reducing score, the Renewable Fuel Standard (RFS) allows them to be used to meet a company’s D6 obligation. With the spread between these two categories nearly non-existent, the surplus of D4 RINs may also diminish some of the demand for ethanol.

In summary, the current oversupply of D4 RINs is already putting downward pressure on prices and may discourage sustained high production rates in the sector in the mid-run.
BO-HO Spread is reducing, improving margins for blenders (USD/gal)

Source: CME, NYMEX

In the RFS nesting scheme D4 can be used to meet D6 volume obligation

Source: EPA

Weekly Report — Grains and Oilseeds

Written by Pedro Schicchi
[email protected]
Reviewed by Natália Gandolphi
[email protected]
www.hedgepointglobal.com

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