Column: U.S. rush for renewable diesel may ignite fresh food fight

While renewable diesel and biodiesel are made from the same edible oils and animal fats, different manufacturing methods result in distinct end-product characteristics that have cemented renewable diesel’s status as the world’s fastest-growing biofuel.

Biodiesel is traditionally a blending component. It can only be added into the diesel pool in limited quantities due to its tendency to congeal at low temperatures and corrode rubber seals and tubes.

Renewable diesel, however, is chemically identical to petroleum-based diesel – so can be consumed in place of or along with normal diesel in whatever quantities are desired by end users.

Renewable diesel also emits fewer emissions than both biodiesel and regular diesel. That makes it attractive to logistics firms and other companies seeking to lower their supply chain pollution levels.

WIDE APPEAL

Beyond reducing emissions – by roughly 4.2% for carbon dioxide from the same volume of regular diesel, according to the U.S. Department of Energy – renewable diesel’s ability to be used as a ‘drop-in’ fuel in all diesel engines also makes it attractive for businesses involved in fuel production, transportation and storage.

U.S. renewable diesel production capacity has boomed, expanding by more than 90% within 2022 alone to 2.1 billion gallons, from 11 facilities spread mainly across the U.S. Gulf coast region and western states, data from the U.S. Energy Information Administration (EIA) shows.

That compares to total biodiesel capacity of just under 2.1 billion gallons at 72 plants that are spread more evenly across the United States.

Further increases in renewable diesel production capacity are expected in the near term, with the EIA projecting capacity to climb to 5.1 billion gallons a year by 2024, from less than 1 billion in 2020.

BIG DRAW

That rapid rise in processing heft will have a significant draw on the main renewable diesel feedstock markets, principally soybean oil in the United States.

Biofuel production already accounts for more than 40% of total U.S. soy oil demand. But that consumption share looks set to grow further as more renewable diesel production comes on line.

Such a high level of sustained demand for soy oil is likely to have knock-on effects on major U.S. crop markets, as soybeans compete with corn for production space on prime farmland.

In the latest harvest, the U.S. soybean area was already 2.3 million hectares larger than corn’s – the largest soy crop area advantage over corn in four seasons.

U.S. farmers tend to regularly rotate corn and soy plantings to manage soil health, so there is a risk that soy area may drop next season unless soybean prices offer growers a strong incentive to further expand soy areas at the expense of corn.

Current crop prices slightly favour corn over soybeans. Still, the key time slot when final acreage decisions are made for 2023 is next spring, so there is still time for price trends to adjust in support of additional soybean area.

IMPORT GROWTH

While most U.S. renewable diesel supplies are produced at home, more than a third was imported in 2021 as American fuel producers tapped the growing global market.

The majority of recent supplies have come from Singapore, home to one of the world’s largest traditional fuel refining centres and a major trading hub for palm oil, EIA data shows.

Other major renewable diesel suppliers include Finland and the Netherlands, although both those countries have stepped up their own domestic consumption of renewable diesel in recent years, leaving little left for exports.

Singapore looks set to remain a steady supplier of renewable diesel as biofuel giant Neste (NESTE.HE), oil major Shell (SHEL.L) and other firms line up plant expansions on the island state.

However, stepped-up renewable diesel production and exports from Singapore are likely to directly impact the market for palm oil – the world’s most-traded edible oil and a vital cooking medium for millions of people across Asia and Africa.

Palm oil prices are currently more than $500 a tonne cheaper than U.S. soybean oil. Fuel producers are highly motivated to use palm oil instead of soyoil as a feed stock.

But any sustained rise in palm oil demand from major renewable diesel facilities will lift palm oil prices over time, and reduce palm’s discount to other soybean and rapeseed oils.

In turn, higher edible oil costs could renew global food inflation fears, which flared up earlier this year after the United Nations index of vegetable oils hit record highs.

For U.S.-based trucking firms looking to reduce fuel emissions and comply with corporate goals to go green, the link between diesel tank top-ups and food inflation may appear distant.

But with renewable diesel production swelling in scale at such a record pace, food and fuel markets are quickly becoming so tightly connected that a sustained rise in demand for renewable diesel in California could soon trigger shortages of edible oil on the other side of the world.

The opinions expressed here are those of the author, a columnist for Reuters