An Alternative View of Biodiesel Production Profits: The Role of Retroactively Reinstated Blender Tax Credits
Previous analysis of U.S. biodiesel production profitability has not accounted for a little known feature of marketing agreements between biodiesel producers and blenders. These agreements include provisions for sharing the biodiesel tax credit if it is reinstated retroactively. Since the biodiesel tax credit is $1 per gallon, sharing of the credit could have a major impact on profitability in years where the credit is reinstated (2010, 2012, 2014, and 2015). We estimate biodiesel production profits for a representative plant with 50/50 sharing of retroactively reinstated tax credit revenue and without sharing. A 50/50 split is reportedly the norm in the industry. The impact of adding the retroactive tax credit revenue to profits is striking, increasing returns by $15 million in each of the years when the credit lapsed. The effect on the overall profitability picture is equally striking. The average return to equity holders without adjusting for retroactive tax revenue is 10.5 percent over 2007-2016 and the standard deviation, a measure of risk, is 30.2 percent. With the addition of $0.50 per gallon in years when the credit lapsed, the average return increases to a whopping 36.1 percent and the standard deviation drops to 25.0 percent.
In sum, consideration of the tax credit revenue garnered through sharing agreements yields a very different picture of the profitability of U.S. biodiesel production. Unfortunately, we do not have comprehensive data on the actual prevalence and terms of such agreements, so the estimates in this article should be considered suggestive rather than definitive. We also have not addressed the rationale for the sharing agreements in the first place. We will take up that issue in an upcoming farmdoc daily article. READ MORE