Feature: Biodiesel Fundamentals Support Higher Blends, Brazil Considers Change

by Nicolle Monteiro de Castro (S&P Global) Biodiesel mandate for 2023 remains unclear; Diesel-biodiesel spread falls in August; Glycerin price falls 54% over five months -- Shifting price structures in diesel and soybean oil markets could support an increased biodiesel blending in Brazil, market participants said, while discussions of a potential change in the country's biodiesel mandate gained traction after a proposal was pushed, but ultimately excluded, during a provisionary measure in the country's congress.

Congressman Danilo Forte made the proposal on Aug. 31 to increase biodiesel blending to 13% from the current 10% starting in 2023 and progressively raise the blending percentage to 20% in 2028. However, the paragraph that included the proposal was excluded due to a lack of agreements between the government bench in the Chamber of Deputies.

According to the Brazilian biodiesel policy, the national blending mandate was expected to rise to 14% in March 2022 and reach 15% in March 2023. However, amid high inflation rates in the country, combined with a surge in international soybean oil prices, the federal government announced late 2021 that the blending mandate would be revised down to 10%.

Brazilin biodiesel is widely exposed to soybean oil price movements, as the commodity is the major feedstock used by biodiesel producers. In 2021, soybean oil share in the total feedstock was 70%, and from January to June 2022 the share fell to 66%, reflecting a commitment from the industry to diversify its feedstocks.

"The industry is making a strong effort to increase feedstock mix, either from different sources of vegetable oil, tallow, used cooking oil or a mix of it all," a Brazilian biodiesel producer said. "It is an industry challenge."

Producers have used the supply risk, combined with the increased GHG emissions attributed to a reduced biofuel blend and the economic impact in the whole Brazilian soybean chain, as the main argument to justify increasing the biodiesel blend rate.

"Brazil has enough crushing capacity to retain soybeans in the domestic market and produce soybean oil needed to commit with a biodiesel blending of up to B18 or B20," a biodiesel producer and crusher said. "The government can encourage domestic crushing versus exporting soybeans, to the detriment of encouraging biodiesel."

Producers consider glycerin, a byproduct from biodiesel production, in biodiesel profit margin calculations, and therefore any price movement in that product could potentially be converted in the biodiesel end cost.