by Michael Devine
For farmers across America, crushing facilities, biodiesel production refineries, commodity trading desks, petroleum terminals and bulk plants, petroleum distributors, transport fleets, oil heat consumers and many other related biodiesel market segments, we find ourselves in stand-by mode. We are collectively waiting on the possibility of the reauthorization of the biodiesel tax credit and hopefully a revised Renewable Fuels Standard ‘ Renewable Volume Obligation in 2014. In short, all of these respective biodiesel stakeholders must all try and rationalize where we go from here. As a veteran of biodiesel marketing and distribution over the past decade, my first suggestion for the current state of the biodiesel industry is to ‘get back on message.”
Looking forward as we move into 2014, biodiesel industry stakeholders must once again consider a recalibration of their respective business plans. The mighty volume gains the biodiesel industry enjoyed in 2013 were driven by a confluence of market events, such as the full year’s implementation of the biodiesel blenders tax credit, an overall year of D4 RINs (bio-based diesel renewable identification numbers) strength; a very favorable HOBO (heating oil bean oil) spread; and perhaps, most importantly, a pricing discount to diesel fuel and heating oil. Enter an uncertain 2014: The biodiesel industry is a market that currently has a static RVO obligation at 1.28 billion gallons, causing uncertainty in the RINs markets and the added questions regarding the reinstatement of the biodiesel tax credit. The hard reality is any negative news on any one of these fronts could affect the biodiesel market balance very quickly, thus reversing the value of discretionary blending of biodiesel into the downstream distillate markets.
The arbitrage opportunities for discretionary biodiesel blending were never more on display then in 2013. As we take a step back and evaluate the industry growth in 2013, biodiesel monthly production figures show a current production capacity of two billion plus gallons per year. While this new benchmark is certainly worth noting, is this growth in production capacity sustainable without the discretionary blending opportunities downstream?
Discretionary biodiesel blending has grown steadily over the past 10 years. Initially a significant barrier for growth was petroleum marketers gaining confidence in the operational quality of biodiesel as a drop-in fuel. As downstream markets gained confidence in biodiesel, many users noticed performance enhancements. Over more recent years, as the industry began to demonstrate more favorable blending economics, the marketing message moved from the added value of the biodiesel gallon to simply marketing the price per gallon. Look, we are all pragmatists; it’s very easy to punt the talking points out the door and cut to the chase when biodiesel has a better cost basis. From 2011-2013 the biodiesel industry has seen the growth in discretionary biodiesel blending by an increased number of petroleum marketers if for no other reason, I would argue, but to gain an advantage and act as a margin maker. Truth be told, the successful biodiesel marketers recognize that growing the business model over the long haul requires not only marketing the benefits, but embracing the added-value throughout the company and customer relationship.
Over the past 10 years the growth of the biodiesel industry has been nothing short of dramatic. Those brave visionary diesel distributors and heating oil entrepreneurs each saw a great story through the practice of blending biodiesel into distillate fuels. For almost all of the early adopters, the greatest benefits and best opportunities came with a new marketing story. Biodiesel marketing provided a new branding opportunity for these downstream marketers, turning the business model of your grandfather’s oil distributor, into an innovative 21st Century, renewable fuels marketer. It had been a rare occurrence to step out and recreate the business model for petroleum marketers, and biodiesel provided just that opportunity and still does.
The message was and still is broad, positive and provides added value within the biodiesel gallon, building or re-enforcing the relationship between the distributor and the consumer. Simply stated: Biodiesel is a domestically produced renewable energy that requires no engine or system modifications for use. Biodiesel blended fuels provide additional lubricity benefits which are crucial as the diesel industry as it continues to transition to ultra-low sulfur diesel. From an environmental standpoint, biodiesel, or any fuel adopted in the RFS, is required by law to reduce green house gases by a minimum of 50%. These wonderful attributes of marketing the biodiesel gallon touch so many market segments in the United States. Biodiesel blended fuels can be integrated into cars, trucks, boats, locomotives, mining equipment and heating oil systems without having to make any changes or modifications to the engines or heating systems. There is a tremendous value added proposition for biodiesel marketers to diversify their fuel products offerings, as well as improve their corporate and public images and, of course, bottom line.
Creating margin opportunities in any business plan requires providing a higher value offering to the end user. Regardless of the arbitrage opportunities, biodiesel value-added sales and marketing consistently provides a cost effective way towards increasing sales margins to the downstream markets. Since the advent of the implementation of the biodiesel tax incentive and the establishment of the RFS 2 program, the biodiesel industry has ebbed and flowed through periods of positive and negative economics relative to the distillate markets. Astute petroleum marketers have quietly built a successful renewable fuels program based on value-added quality, while simultaneously seizing these margin opportunities when the economics present themselves to grow their businesses. Biodiesel has helped launch hundreds of new businesses, and, due to the sustainable attributes of biodiesel, diversified hundreds of other business portfolios over the past decade. I think that it’s fair to say the biodiesel industry has become, like many other American initiatives, a great environment for entrepreneurship. While the biodiesel industry may still have questions as we move into 2014, the past successes highlight the importance for all of the biodiesel stakeholders to take the time to get back on message.
As an early Bioheat/Biodiesel adopter, Michael Devine has been a leader in the retail oil heat industry by successfully integrating biodiesel into distillate fuels. As founder and CEO of Earth Energy Alliance, Michael has been a featured national speaker on the subject of biodiesel integration into the U.S. petroleum supply chain representing the National Biodiesel Board (NBB). Michael also worked with national and state petroleum associations to develop successful biodiesel education and outreach programs.
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