Market Matters Blog

Renewable Rumors Plus Time

Todd Hultman
By  Todd Hultman , DTN Grains Analyst
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May soybean oil shot up 2 cents in two days, a sharp turn higher as traders were surprised with the possibility of a bullish change in the biodiesel tax credit. (Source: DTN's ProphetX)

Tuesday started off like any other day in grains with corn a penny higher and soybeans up a few as I checked prices in my morning routine. It was odd, I thought, that May soybean oil was up 0.55 at the 7:45 a.m. break, but I chalked it up to commercials responding to bean oil's lowest prices in six months.

What was not expected was how corn, soybeans, and wheat all ran sharply higher after the 8:30 a.m. open. And of all grain-related contracts, soybean oil was leading the way with a 5% gain. What is going on, I thought? Is South America on fire? No, this time it wasn't South America's weather. Bogged-down soybean trucks in muddy roads did not explain this move.

As it turns out, Tuesday's bullish surprise was largely the result of two rumors swirling, both of which are still not confirmed as of this writing. Because we will likely be revisiting this conversation in the months ahead, I thought it would be a good time to consider the potential market impact.

The first rumor affected corn and was explained well by DTN Staff Reporter Todd Neeley in Tuesday's DTN article, "RFS Order Eyed." The Renewable Fuels Association told DTN that President Donald Trump is considering changes that would include an easing of restrictions on the sale of E15 ethanol in summer months. I'll refer to Neeley's article (http://bit.ly/…) for the details, but if true, this change would have a slight long-term bullish consequence for corn prices. I can't say it justified May corn's 18-cent rally at the peak of Tuesday's excitement, but it's understandable when traders get jolted by surprises.

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The second possible change being circulated was harder to track down, but help came Tuesday in the form of a tweet from University of Illinois Ag Economist Scott Irwin around 10 a.m. CST. Dr. Irwin is a popular reference for explaining all things renewable and he tweeted, "Hearing rumors part of 'deal' might be conversion of biodiesel tax credit to producer credit. I always thought Trump would like that."

This particular rumor made a lot of sense and explained the sudden popularity of soybean oil. The biodiesel tax credit actually expired at the end of 2016, but the old method applied the tax credit to biodiesel blended in the U.S. even though the source of the biodiesel might have been imported. Many, including the National Biodiesel Board, have advocated applying the credit to U.S. producers only, a move that their web site, Biodiesel.org, says could have saved the U.S. Treasury $600 million in 2015.*

Applying the tax credit only to biodiesel produced in the U.S is very much in line with the president's aims and, if enacted, would have some bullish impact on U.S. soybean oil and soybean prices, putting imported biodiesel sources at a disadvantage. The catch is that the biodiesel tax credit is still waiting to be restored, so the timeline is unclear.

Later Tuesday, White House spokeswoman Kelly Love claimed there was no ethanol executive order in the works, but other sources disagree. Tuesday's excitement and Wednesday's follow-through of higher corn and soybean prices stopped row crops from sliding lower, but as cooler heads prevail, the bullish enthusiasm may be difficult to maintain.

The rumors sound reasonable and, if true, will have some bullish consequence, especially for soybean oil. But who can say when?

"Reforming the Biodiesel Tax Incentive to a Production Credit," by the National Biodiesel Board, 2016 at: http://biodiesel.org/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(AG)

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