Biodiesel's added value: Time to get back on message
Now we wait…For farmers across America, crushing plants, 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 standby mode. We are collectively waiting on the possibility of the reauthorization of the biodiesel tax credit and hopefully a revised renewable fuel standard (RFS) renewable volume obligation (RVO) 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 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 more than 2 billion 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.
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-’13, the biodiesel industry has seen growth in discretionary biodiesel blending by an increased number of petroleum marketers, if for no other reason but to gain an advantage and act as a margin maker. 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. Each of those brave, visionary diesel distributors and heating oil entrepreneurs has seen a greater story through the practice of blending biodiesel into distillate fuels. For almost all of the early adopters, the highest benefits and best opportunities came with a new marketing story. Biodiesel marketing provides 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 is a rare occurrence to step out and recreate the business model for petroleum marketers—biodiesel provides just that opportunity.
The message was—and still is—broad, positive and provides added value within the biodiesel gallon, building or reinforcing the relationship between the distributor and the consumer. Simply stated, that message is this: Biodiesel is a domestically produced renewable energy that requires no engine or system modifications for use. Biodiesel-blended fuels provide additional lubricity benefits that are crucial as the diesel industry continues to transition to ultra-low sulfur fuel. From an environmental standpoint, biodiesel or any advanced biofuel adopted in the RFS is required by law to reduce greenhouse gases by a minimum of 50 percent. These wonderful attributes of marketing the biodiesel gallon touch so many U.S. market segments. 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 lines.
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 to increase sales margins to downstream markets. Since establishment of the biodiesel tax incentive and, later, the RFS2 program, the biodiesel industry has ebbed and flowed through periods of positive and negative economics 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 business. Biodiesel has helped launch hundreds of new businesses and, due to its sustainable attributes, diversified hundreds of other business portfolios over the past decade. The biodiesel industry has become, like many other great American initiatives, a great environment for entrepreneurship. While many questions remain as we move into 2014, the industry’s past successes highlight the importance for all stakeholders to get back on message.
Author: Michael Devine