pots kuala lumpur - palm oilmpoc.org.my/upload/p9_ethanhendricks_potskl2012.pdf · market...

October 15, 2012 Rabobank International

U.S. Biodiesel Ethan Hendricks Rabobank International

POTS Kuala Lumpur

2 Rabobank International Market Developments & Outlook

Tax treatment has been inconsistent, leading to rocky growth.

Volume mandates are needed to provide framework for more stable growth.

Source: US EPA EMTS, 2012

U.S. Biodiesel Production

Million gallons

0

200

400

600

800

1,000

1,200

1,400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013m

Tax credit expires

Tax credit reinstated at beginning of year, expires at end of year


Biodiesel cost of production and market price exceeds price of petroleum diesel.

Blending margins are negative.

Production is driven by mandates, not economics.

Wholesale Diesel Price – B100 Biodiesel Price

Source: Bloomberg, Rabobank, 2012

Biodiesel Blending Margin

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00


Complicated

Corn ethanol production flattening.

Delta is in advanced biofuels, specifically biodiesel.

RFS2

Source: US EPA, 2012

Renewable Fuels Standard – RFS2

Billion gallons

2006 4 - - - - - -

2007 4.7 - - - - - -

2008 5.4 9 0 0 0 0 9

2009 6.1 11.1 0.6 0 0.5 0.1 10.5

2010 6.8 12.95 0.95 0.0065 0.65 0.2935 12

2011 7.4 13.95 1.35 0.0066 0.8 0.5434 12.6

2012 7.5 15.2 2 0.00865 1 0.99135 13.2

2013 - 16.55 2.75 0.01 1.28 1.46 13.8

2014 - 18.15 3.75 1.75 ≥1.28 1 14.4

2015 - 20.5 5.5 3 ≥1.28 1.5 15

2016 - 22.25 7.25 4.25 ≥1.28 2 15

2017 - 24 9 5.5 ≥1.28 2.5 15

2018 - 26 11 7 ≥1.28 3 15

2019 - 28 13 8.5 ≥1.28 3.5 15

2020 - 30 15 10.5 ≥1.28 3.5 15

2021 - 33 18 13.5 ≥1.28 3.5 15

2022 - 36 21 16 ≥1.28 4 15

Implied Corn

Ethanol

RFS1 RFS2 Total Advanced

Biofuels

TotalCellulosic

Biofuel

Biomass

Based Diesel

Implied

Other

Advanced


Corn ethanol production flattening.

Delta is in advanced biofuels, specifically biodiesel.

RFS2


Renewable Fuels Standard – RFS2

Billion gallons

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Implied Corn Ethanol Cellulosic Biofuel

Biomass Based Diesel Implied Other Advanced Biofuel


Classification Minimum GHG Reduction Potential Feedstocks

Cellulosic 60%

Cellulose, hemi-cellulose, lignin from dedicated crops (miscanthus, switchgrass), crop residue (corn stover), trees, algae, yard and food waste

Biomass-based Diesel 50% Vegetable oils, animal fats, waste grease, animal byproducts

Other Advanced 50%

Anything that qualifies for cellulosic or bio-based diesel plus sugar cane or non-corn starches

Renewable 20% Any of the above plus corn


Potential RFS Feedstocks


There are some cheaper alternatives to soybean oil…

But grease and palm oil have higher cloud points…

Better suited for renewable diesel production (provided palm can be approved as a pathway).

Source: Bloomberg, 2012

Biodiesel Feedstock Prices

US cents/lb

0

10

20

30

40

50

60

70

80

90

1/7/2005 1/7/2006 1/7/2007 1/7/2008 1/7/2009 1/7/2010 1/7/2011 1/7/2012

Yellow grease - Illinois Inedible corn oil - Illinois Crude Palm Oil - US

Soybean oil - Illinois Canola oil - Toronto


103/195 plants operating

Total capacity = 2.1 billion gallons installed capacity (2.9 nameplate capacity)

Top 5 = 25% market share

Top producers:

Renewable Energy Group

RBF Port Neches

AGP

Green Hunter Biofuels

Imperium Grays Harbor

Source: Biodiesel Magazine, 2012

U.S. Biodiesel Industry


Feedstock % of total feedstock

Biodiesel production volume (gal)

Feedstock required (lbs)

Corn oil (mostly from ethanol) 23% 300,000,000 2,280,000,000

Yellow grease & rendered fats 30% 380,000,000 2,888,000,000

Virgin vegetable oil 47% 600,000,000 4,560,000,000

Total 100% 1,280,000,000 9,728,000,000

2012 YTD run rate is 1.2 billion gallons.

1.28 Billion Gallons Mandated


EPA 2013 Feedstock Projection


Corn Oil


Ethanol production

DDGs Corn oil

extraction Biodiesel

production

Corn oil from wet mills is edible and has typically gone to higher value end users

Corn oil extracted from DDGs is inedible and is sold mostly to biodiesel producers

Corn Oil as a Biodiesel Feedstock

• Ethanol plants are installing corn oil extractors

• Incremental source of supply for biodiesel production


Assumes 18 lbs DDGs per bushel of corn

Source: USDA, Rabobank, 2012

US DDG Production

1,000 mt

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000


Chicken and pork companies have cut back use because of decreased energy value after oil is extracted.

Assumptions:

• 0.5 lbs of oil extracted per bushel of corn

• Ethanol industry produces at maximum nameplate capacity

Biodiesel Production from Extracted Corn Oil


Corn Oil

Million gallons

0

50

100

150

200

250

300

350

35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%

Current implementation rate








Total 100% 1,280,000,000 9,728,000,000

This is a relatively cheap form of oil…

But supply is limited to what can be extracted from DDGs and DDG production is closing in on a ceiling.





Rendered Fats and Grease


Americans are aging and diets are shifting away from center of plate meat items.

Any recent growth in animal protein production has been to serve export markets.

Animal Protein and Rendered Fats Production


Availability of rendered fats is driven by animal protein production, which is flat.

Tallow and grease in million lbs, animal protein production in 1,000 mt

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

2,000

4,000

6,000

8,000

10,000

12,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e

Beef (RHS) Pork (RHS) Chicken (RHS) Tallow and grease (LHS)


Census Bureau does not count edible tallow and lard used for biodiesel so may underestimate actual use.

Total use likely closer to 2 billion lbs in 2011.

Source: NRA, US Census Bureau, 2012

Rendered Fat Used in Biodiesel Production

Biodiesel production in million gallons, rendered fat use in million lbs

0

200

400

600

800

1,000

1,200

0

200

400

600

800

1,000

1,200

2008 2009 2010 2011

Rendered fat use in biodiesel (mil lbs) Biodiesel production (mil gal)


Highest and best use for rendered fats may not be traditional biodiesel.

High cloud point means only viable in warm weather.

Renewable diesel is potential game changer.

Big rendering companies investing.

Renewable diesel is molecularly same as petroleum diesel and has higher RIN multiple – better logistics and economics.

Source: Darling, Informa Economics, EIA, Rabobank estimate, 2012

Volume Share of Rendered Fats Sales

Feed 50%

Exports 20%

Biofuel 20%

Oleo-chemicals 10%








Total 100% 1,280,000,000 9,728,000,000

Can rendered fat use really increase 50-100% without a major change in production technology, ie renewable diesel?





Vegetable Oils


Lowest ending stocks to use since 1974/75

Growing emerging market demand

Drought in Brazil

Drought in U.S.

Rebuilding stocks will require time, better weather, and incremental land into production in South America.

Source: USDA, 2012

Global Vegoil Stocks to Use

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%


Soy / corn ratio of 2.4 is rule of thumb for breakeven.

U.S. corn stocks are extremely tight.

Farmer economics have heavily favored corn in last couple years.

2013/14 looks like another corn year.

Soybeans / Corn Ratio

Source: Bloomberg, 2012

Farmers will need price signal if acres are going to shift to soy

Soy/corn ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1/1

/2001

6/1

/2001

11/1

/2001

4/1

/2002

9/1

/2002

2/1

/2003

7/1

/2003

12/1

/2003

5/1

/2004

10/1

/2004

3/1

/2005

8/1

/2005

1/1

/2006

6/1

/2006

11/1

/2006

4/1

/2007

9/1

/2007

2/1

/2008

7/1

/2008

12/1

/2008

5/1

/2009

10/1

/2009

3/1

/2010

8/1

/2010

1/1

/2011

6/1

/2011

11/1

/2011

4/1

/2012

9/1

/2012

2/1

/2013

7/1

/2013

12/1

/2013

Soy/corn ratio Soy/corn futures curve

More profitable to grow soybeans

More profitable to grow corn


Farmer economics are better for canola than wheat in the prairie states.

Slow transition in the U.S., but likely to see steadily increasing production from a very low base.

Great feedstock in terms of cloud point, but higher value use in food production

Source: USDA, 2012

Canadian + U.S. Canola (Rapeseed) Production

1,000 mt

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Canada United States








Total 100% 1,280,000,000 9,728,000,000

April WASDE was last one to report soy oil biodiesel use and showed 4 billion lbs for 2011/12.

Assuming 50% of biodiesel feedstock is derived from vegoil, biodiesel is already consuming 5 billion lbs of vegoil this year.





Beyond 2013


Assume zero cellulosic production and entire advanced biofuel mandate is filled by biodiesel.

Assume ceilings on inedible corn oil and rendered fat availability as outlined above.

Incremental vegetable oil feedstock requirement EXPLODES.

Incremental vegetable oil requirement is impossible

Source: US EPA, US Census Bureau, Rababank, 2012

Advanced Biofuels Beyond 2013

Billion lbs

10.1

13.9

19.0

27.9

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2012 2013 2014 2015

Rendered Fats Corn Oil Soybean/Other Veg Oil


Peak U.S. vegoil production (soybean oil) occurred in 2007/08.

23.2 billion lbs

Vegoil Required for Biodiesel vs Total U.S. Vegoil Production


Biodiesel to consume 100% of peak U.S. vegoil production?

Billion lbs

6.5

8.9

13.8

22.7

0%

20%

40%

60%

80%

100%

120%

0.0

5.0

10.0

15.0

20.0

25.0

2012f 2013f 2014f 2015f

Soybean/Other Veg Oil Used for Biodiesel (LHS)

Peak U.S. Veg Oil Production (LHS)

% of Production (RHS)


New best case assumptions:

Brazilian sugarcane ethanol imports are 10% of advanced biofuel mandate.

All announced renewable diesel capacity comes on line during 2014 – 2015 and uses only rendered fats and oils for feedstock.

Vegoil Required for Biodiesel vs Total U.S. Vegoil Production


Best case scenario still not encouraging

Billion lbs

5.5

7.5

11.2

18.3

0%

20%

40%

60%

80%

100%

120%

0.0

5.0

10.0

15.0

20.0

25.0

2012f 2013f 2014f 2015f

Soybean/Other Veg Oil Used for Biodiesel (LHS)

Peak U.S. Veg Oil Production (LHS)

% of Production (RHS)


This overstates total corn taken out of livestock and poultry feed use because ethanol dry mills produce 18 lbs of DDGs per bushel of corn processed.

Corn Used in Ethanol vs Total U.S. Corn Production


The corn/ethanol analogy pales in comparison

1,000 mt

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Corn Used for Ethanol (LHS) U.S. Corn Production (LHS) % of Production (RHS)


• European Commission leaked proposal that would limit crop based biofuels to 5% of transport fuel, down from target of 10% by 2020.

• Proposals have yet to gain traction in U.S.

• EPA administrator may waive mandate if fulfilling it “would severely harm the economy or environment.”

• Bio-based diesel mandate can be modified if there is a “significant renewable feedstock disruption or other market circumstances that would make the price of biomass-based diesel fuel increase significantly.”

EPA has little sensitivity to market disruption.

4 U.S. chicken companies went bankrupt in 2011.

How high is the bar for “harm”?

Political pressure emerging in U.S. and E.U.

Source: Energy Policy Act, sec. 1501 para 7.A.i., EISA, sec. 202 para e.3.E.ii

Waiver possibility?


Summary


• Continued biodiesel production growth will mean serious dislocations in feedstock markets.

• Incremental feedstock will be vegoil unless/until renewable diesel scales up.

• Soybean oil exports decline in favor of domestic biodiesel production – positive for palm oil.

• U.S. imports low cost vegoils – positive for palm oil.

• Increased N. American canola production – negative for palm oil but canola is more commonly a food oil.

Barring a major breakthrough in cellulosic

Especially if palm oil can get approval as renewable feedstock

Summary and implications for palm oil


The End

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