Ethanol Blog

Biodiesel Blenders Weigh Odds of tax Credit Expiring

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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If there was any doubt about what the $1 blender’s tax credit for biodiesel means to the industry, an analysis done by economist Scott Irwin at the University of Illinois at Urbana this week said there are some interesting biodiesel price changes when the credit may be about to expire.

Writing for farmdoc daily, Irwin analyzed the relationship between what seems to be an annual pending expiration of the tax credit and profitability.

In other words, if producers know or believe the tax credit will expire, Irwin said it can affect how much biodiesel is bought and sold in the months leading up to the expiration.

Industry officials tell DTN it is fairly unlikely Congress will pass a proposed three-year extension outlined in legislation offered in the U.S. Senate because of election-year politics. In other words, biodiesel producers may be gearing up again for at least a temporary credit expiration. The credit is set to expire Dec. 31.

In his analysis, “The Profitability of Biodiesel Production in 2016: Feasting on an Expiring Tax Credit?,” Irwin said the industry made “very large profits” in 2011 and 2013, but recorded losses in most previous years as well as in 2014 and 2015.

“The feast or famine pattern has been closely tied to expiration of the $1 per gallon biodiesel tax credit in the face of binding RFS (Renewable Fuel Standard) biodiesel mandates,” Irwin said.

In the analysis Irwin explores how a hypothetical Iowa biodiesel plant that uses soybean oil as a feedstock, fairs depending on the state of the blender’s credit.

The spikes in profitability seen from a farmdoc model in 2011 and 2013, “can be directly traced to the race by diesel blenders to take advantage of the blender tax credit set to expire at the end of these two calendar years.”

In other words, because blenders face the RFS mandates to blend biodiesel they tend to buy gallons at a discount in the current year, then take advantage of the tax credit to meet the mandates in future years.

“Once the tax credit expires, the incentive to push up prices, profits and production disappears and the biodiesel industry returns to a norm of losses,” Irwin said. “This cycle, of course, depends on blenders perceiving there substantial uncertainty whether the tax credit will be reinstated or not for the following year.

“Biodiesel production profits in 2016 appeared to be following the 2011 and 2013 script through May, when profits rose to as high as 45 cents per gallon. However, since that time profits have dropped rather sharply, down to 24 cents for the week ending on July 22. So far in 2016, production profits have averaged 18 cents, while not anywhere near the level of 2011 and 2013, a far cry from the average loss of 10 cents over 2014-2015.”

The biodiesel price in 2011 and 2013 was “bid up” between $1 and $1.25 above the “normal relationship” to soybean oil prices, Irwin said.

“If blenders believe that there is substantial uncertainty whether the $1 per gallon tax credit will be extended, then it makes sense to bid the biodiesel price up by the full amount of the credit in order to maximize usage of the credit,” he said.

So far in 2016, Irwin said, biodiesel price spikes have bid up by a maximum of 50 cents per gallon. It could mean there is yet another 50-cent spike to come, he said. However, Irwin said diesel blenders may believe chances are good the blender’s credit will see an extension in 2017.

“After all, the tax credit has been reinstated every time it has expired since 2011,” Irwin said. “If blenders now believe there is a high probability that the credit will be extended as in the past, then the incentives for bidding up the price of biodiesel are lessened.”

Read Irwin’s analysis here: http://bit.ly/…

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