Current Status of the U.S. Biodiesel Market: Supply, Demand, and Producers' Profit Margin

Abstract

The U.S. biodiesel production industry has experienced slow growth despite receiving federal subsidies to produce. The U.S. has fallen below the Renewable Fuel Standard (RFS) in 2010, and it remains questionable if the U.S. can meet the one billion gallon RFS mandate in the coming year. The U.S. biodiesel industry encounters the challenge of feedstock price volatility, high feedstock price diminishes biodiesel producers’ profit margin, reducing producers’ incentive to produce. Soybean oil is the most prominent feedstock in the U.S. biodiesel industry. Investigating the main drivers of soybean oil price will be useful for policy and business suggestions aiming to buffer biodiesel producers’ profit margin. This study analyzes soybean price through supply and demand factors namely: (1) energy cost of producing soybeans, (2) land use competition, (3) demand of soybean oil from export, (4) demand of soybean oil from the U.S. food industry and (5) demand of soybean oil from the U.S. biodiesel industry. The relative importance of the above mentioned factors are evaluated with Principle Component Analysis and multiple regression analysis using monthly data obtained from the U.S. Census Bureau. Analyses results suggest while supply factors do not significantly affect soybean oil price, soybean oil demand from the biodiesel industry and crude oil price are the main drivers of soybean oil price. Policy solutions should target to protect biodiesel producers’ profit margin by paying attention to crude oil price and feedstock demand from the biodiesel industry. Some possible policy solutions include diversifying feedstock, setting a national demand mandate, and implementing a variable subsidy in addition to the RFS mandate.