When it comes to the U.S. biofuel market, ethanol receives all the attention. To be sure, ethanol production and consumption dwarf the size of the biodiesel market.
Nevertheless, biodiesel was thrust into the limelight recently. The Jan. 1 deal passed by Congress to avoid the fiscal cliff included a provision to extend the $1-per gallon tax credit for companies that blend biodiesel with petroleum-based fuel through the end of 2013. In addition, the new legislation makes the extension retroactive to its December 2011 expiration.
Since biodiesel broke onto the scene in a meaningful way in the mid-2000s, approximately 10%-15% of U.S. soybean oil output has been used for biodiesel. Despite its relative low-profile status, soyoil-based biodiesel usage almost doubled in the 2011-12 marketing year from the previous year, to 4.87 billion pounds, from 2.73 billion pounds. The estimate for 2012-13 usage is slightly higher at 4.9 billion pounds. With smaller soybean crops over the past two seasons, the combination of lower bean oil supplies and the jump in consumption have caused a sharp drop in ending stocks.
From the 2005-06 marketing year through 2011-12, the advent of biodiesel did not affect the availability of soybean oil. U.S. ending stocks during that period averaged 14% of consumption. This year the estimate has fallen to 7.7% of usage. If the government’s tax breaks are successful in stimulating production and ultimately usage, we can see inventory levels strained further.
Our original bullish foray into this market was based on a surge in U.S. exports and was independent of any developments on the biodiesel front. At the time, the USDA was underestimating 2012-13 exports by a wide margin. That situation has been rectified, with upwards revisions in both the December and January crop reports. The estimate now stands at 980,000 tonnes, up from the 540,000-tonne November estimate. That is still well above last year’s final sales tally of 660,000 tonnes, but far below 2011-12 sales, which reached 1.47 million tonnes. Exports of soybean oil have been steady, but nothing like the volumes we saw in mid-November.
Is the tightness in the U.S. indicative of tightness among the other major producing nations, or will South American producers, for example, pick up the slack? Global ending stocks averaged 9.3% of consumption over the past 10 years, but the estimate for 2012-13 has fallen to a modern-day historical low of 7.5%.
Argentina is expected to recover from last year’s disastrous 40.1-million-tonne crop, which was down 18% from a year earlier. Early forecasts called for a 55-million-tonne crop, but growing regions have once again suffered from hot and dry weather, which has left the crops with insufficient moisture. Some analysts have lowered their estimates to 52 million tonnes.
Brazil, on the other hand, is enjoying favorable growing weather. While Argentinean estimates have been falling, Brazilian estimates have been growing. The USDA raised its estimate for Brazil in the December crop report, by 1.5 million tonnes, to 82.5 million tonnes. Still, the output losses in Argentina are larger than the increases in Brazil, and unless the weather improves, the South American supply side will put some further pressure on global inventories.
In conclusion, there are three separate issues that bear observation. First, it’s hard to know how much of an incentive the new tax breaks in the U.S. will be for biodiesel producers. At the very least, it is fair to expect some growth. Then, foreign demand has shown strength, and that could resurface. Finally, Argentinean crops will remain a wild card unless timely rains appear.
We were stopped out at 49.50¢ per pound as per our Dec. 12 recommendation. The market has now broken out above the highs, with the potential to test the 2012 highs of $0.58 per pound. If you followed the stop, reenter long positions, and raise stops to $0.5050 per pound, basis the nearest contract, close only.
