A recent note to investors from J.P. Morgan broke down the implications that the EPA's recently announced biofuels volume mandates for the next 3 years could have on the ag industry.
J.P. Morgan analysts summarized the proposed mandates as dictating "the amount of biofuels (e.g. ethanol, biodiesel, renewable diesel, renewable natural gas) that must be mixed in with nonrenewable fuels (e.g. gasoline, diesel) at a national level" and called them "disappointingly low."
The portion of the biofuels mixing mandate that is main fulfilled by biodiesel and renewable diesel — D4 and D5 RINs (credits used for compliance with biofuel mixing mandates) — will increase by only 300 million over the next 3 years vs. an annual average increase of 320 million RINs over the last 7 years.
"The EPA’s volume mandates assume that total biomass-based diesel consumption increases by only 123 million gallons over the next 3 years, which could quite abruptly change the outlook for renewable diesel (RD) growth in the U.S," the note said. "We are surprised by certain assumptions that were cited by the EPA as reasons for posing such low volume increases for renewable diesel. First, the EPA’s RD production assumptions seem too low to us. For 2023, it assumes 135 million gallons of increased RD supply, well below the EIA’s forecasted 654 million gallon increase in U.S. RD production. We can arrive at over 650 million gallons of RD growth next year based only on the ramp of RD plants that are already open.
"Second, the EPA could be underestimating the availability of feedstocks over the next 3 years. The EPA assumes a 5% increase in soybean oil supply when justifying the RVO. But it then mentions that, based on industry data from a year ago, U.S. crush capacity is expected to increase 15% by 2025. Based on conversations with ADM and Bunge this fall, we think the current figure is closer to 30%."
“For years after 2022,” the EPA said in its report, “we anticipate that the growth in the production of feedstocks used to produce advanced biodiesel and renewable diesel… will be limited, particularly in the U.S.… If pushing volume requirements beyond the supply of low GHG feedstocks results in an increased use of high-GHG feedstocks in non-biofuel markets as low-GHG feedstocks are increasingly used for biofuel production, then it would prove counterproductive.”
J.P. Morgan analysts believe that by 2025, U.S. renewable diesel production could exceed 5 billion gallons and that EPA's low mandated support could lead to either "severe oversupply of RD and/or capacity expansion plans being delayed/canceled."
EPA is forecasting U.S. renewable diesel supplies to grow by 135 million gallons in 2023, 59 million in 2024 and 71 million in 2025. This falls well below the 322 million gallons of increase the industry saw in 2021 and the estimated 497 million gallon increase for 2022.
To learn more about alternative fuels in the ag equipment industry, check out Ag Equipment Intelligence's research report, Alternatives to Fossil Fuels in Farm Machinery: Overview & Outlook Through 2027.