High agricultural feedstock costs offset declines in RIN prices

High feedstock prices are offsetting declines in the cost of renewable identification number (RIN) credits—the compliance mechanism used for the Renewable Fuel Standard (RFS) program administered by the U.S. Environmental Protection Agency (EPA). The EPA in June set the Renewable Volume Obligation lower than biofuel production trends, putting downward pressure on prices, which were already down from highs of nearly $2 per gallon (gal) in 2021 and 2022. However, rapidly rising feedstock prices, which raise costs for biofuel producers, have counteracted the downward trend and RIN prices have increased. On July 18, the price of the biomass-based diesel (D4) RIN, which is generated from the production of biodiesel or renewable diesel, closed at $1.54/gal, and the ethanol (D6) RIN closed at $1.53/gal (Figure 1).

The EPA sets annual volume obligations for the volume of renewable fuels that must enter the U.S. fuel supply. Obligated parties—petroleum refiners and importers of motor gasoline and diesel—comply either by blending biofuels into petroleum-based fuels or by purchasing RIN credits. Ethanol production generates D6 RINs that satisfy the total biofuel obligation. Biomass-based diesel production generates D4 RINs that satisfy the biomass-based diesel, the advanced biofuel, and the total biofuel obligations. The value of a RIN credit is the price that biofuel plants and fuel blenders need as incentive to produce and blend at levels suitable for RFS compliance.

This year, high renewable diesel production and biodiesel imports have resulted in D4 RIN generation that is on track to significantly exceed the required biomass-based diesel and advanced biofuel targets in the RFS. The high production has led to D4 RINs selling at a historically low premium to D6 RINs. The price of a D6 RIN sets the price floor for D4 RINs because excess biomass-based diesel blending can substitute for D6 RINs to comply with the total biofuel requirement. D4 RINs typically sell at a premium to D6 RINs because the biomass-based diesel and advanced biofuel blending requirements are typically set at levels that require high D4 RIN prices to provide incentive to produce enough. High D4 RIN generation has resulted in D4 RINs trading near the price floor set by D6 RINs. The ratio of the D6 RIN price to the D4 RIN price has averaged 0.98 in 2023, compared with an average of 0.69 from 2019 through 2022. In July 2023, the two have mostly traded within 1 cent of each other.

In general, RIN credit prices are driven by renewable volume obligations set under the RFS and agricultural feedstock costs.

Although the renewable volume obligation set under the RFS is a primary driver of RIN prices, the RFS likely did not significantly affect RIN prices until June 21, when the EPA announced a final rule. In that rule, the EPA set the advanced biofuel obligation (which can be met by blending cellulosic biofuel or biomass-based diesel into petroleum-based fuels) for 2023 at 5.94 billion RINs and the total renewable volume obligation for 2023 at 21.19 billion RINs. Although the EPA set both of those volume obligations at record highs, current rates of biofuel production have exceeded the volume obligations (Figure 2). To reach 5.94 billion advanced RINs, obligated parties must retire an average of nearly 0.50 billion RINs per month. To reach 21.19 billion total RINs, obligated parties must retire an average of nearly 1.77 billion RINs per month. Those averages have been exceeded in 2023 as of the end of May because of increasing renewable diesel production. In May 2023, a record 0.83 billion advanced biofuel RINs and 2.11 billion total RINs were generated.

RIN prices initially dropped in response to the EPA setting the renewable volume obligations lower than the current biofuel production rates. On June 21, the D4 RIN decreased from $1.48 to $1.38, and the D6 RIN decreased from $1.45 to $1.35. However, since June 21, RIN prices have generally increased, likely because soybean oil prices have increased by more than $1.00/gal.

Prices for soybean oil, the most-used agricultural feedstock for biodiesel and renewable diesel, generally decreased from January through May as a result of forecasts of record soybean production. In June and July, however, drought in major soybean-producing areas of the U.S. Midwest worsened soybean crop conditions, increasing soybean oil prices from $3.64/gal on June 1 to $4.87/gal on July 18 (Figure 3). Other agricultural feedstock prices have also increased substantially during this period. Higher feedstock prices increase costs for producing biodiesel and renewable diesel. Because biodiesel and renewable diesel are not profitable without RINs, RIN values must increase with feedstock costs to continue to make production profitable.

We revised our forecast down for renewable diesel production in our July Short-Term Energy Outlook (STEO) because the renewable volume obligations were set lower than current rates of production. We previously forecast record-high growth in renewable diesel production in 2024, but we now forecast less growth in renewable diesel during 2024 than in 2023 (Figure 4).

Prior to this month’s STEO, we assumed that some of the announced capacity additions for renewable diesel would not be completed because increased feedstock costs or decreased credit values were possibilities. In response to the final RFS rule and recently increasing feedstock costs, we now assume lower plant utilizations and more proposed plants to be canceled than before. We still expect production growth based on our assumption that some of the announced projects will come online in the next 18 months. We will revise our forecast each month as we obtain more insight into how production levels respond to developments in RIN prices and feedstock costs.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.