Secondary Impacts from Rising Used Cooking Oil Demand on Crop-Oil Prices

December 20, 2024

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by Andrew Swanson, Shawn Arita, Joseph Cooper, and Seth Meyer (farmdoc daily) Renewable fuel policies like the national Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) have created a boom in the consumption of alternative diesels. These alternative diesels come in the form of biodiesel or renewable diesel, or biomass-based diesels (BBDs) as a group. National consumption of BBDs more than doubled from 2015 to 2023, and 70% of the diesel consumed in California comes from biofuels. BBDs hold the promise of emitting less greenhouse gas emissions than petroleum diesels without requiring major changes in heavy-duty engine technology like switching to battery technologies. Thus, BBDs could serve as a bridge technology away from petroleum fuels as battery and fuel-cell technology in the heavy-duty sector is not ready for mass adoption, and many industry leaders in agricultural states view the heavy-duty market as a growing source of demand for biofuels for decades to come.

BBDs can be produced from a variety of renewable oils, and the states with clean fuel programs provide incentives that can vary significantly by feedstock. BBD feedstocks primarily fall into two categories: crop-based vegetable oils like soybean and canola oil or by-product oils like rendered beef tallow or used cooking oil. By-product feedstocks are also called waste-based feedstocks or waste oils by some government organizations and industry analysts. Generally, BBDs made from crop oils are considered to have higher emissions than BBDs made from by-products because of the emissions from growing crops and because of induced land use change from increasing crop prices. In contrast, increasing the demand for byproducts is assumed not to impact the consumption and/or production of the source commodity such as vegetable oil use in restaurant kitchens and to have no secondary impacts on land used to grow crops.

Under the RFS, fuel producers must demonstrate that their product emits 50% less greenhouse gases to qualify for generating RIN credits. So, once meeting the threshold, crop-based and by-product BBDs are treated equally under the RFS, even though the EPA considers BBDs made from crops to have higher emissions than BBDs made from byproducts. However, in clean-fuel programs like the LCFS, BBDs from byproducts can earn significantly more subsidies per gallon than BBDs made from crop oils. Thus, while most BBDs consumed nationally come from crop-based oils, around 70% of BBDs in California come from byproducts.

Controversies, however, are emerging around the use of byproduct oils for BBDs. Increasing the domestic supply of beef tallow and used cooking oil (UCO) in response to biofuel demand has proved difficult. To bridge the supply gap, BBD producers now import millions of tons of UCO from Asia. The primary vegetable oil consumed in most Asian countries is palm oil, which is associated with far worse emissions from land use change than soybean and canola oil, and renewable fuel programs in the United States essentially ban the oil as a result. Thanks to biofuel programs in the United States and European Union, Asian UCO is often more expensive than virgin palm oil in UCO exporting countries. Thus, industry leaders have raised concerns about illicit mixing of cheaper palm oil with more expensive UCO and about the possibility of rising UCO demand causing higher palm oil prices as the two oils are close substitutes in animal feed and oleochemical production markets.

This article focuses on the potential spillover effects from increasing UCO biofuel demand on crop oil prices. We have written a companion article on the possibility of UCO being mixed with palm oil for the ARE Update journal, and we invite readers interested in that issue to refer to it. We lay out the close price relationships between UCO and crop oil markets with a special emphasis on how these price relationships can differ by country and region, and then we conclude by highlighting the importance of better understanding these price dynamics to fully understand the greenhouse gas emission implications of biofuel policies.

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Refined UCO has a variety of uses outside of biofuels such as animal feed or oleochemical production.

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Transportation costs also likely played a role.

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The rapid expansion of BBD consumption, propelled by renewable fuel policies like the RFS and California’s Low Carbon Fuel Standard LCFS, has significantly impacted global vegetable oil markets, raised concerns about increased greenhouse gas emissions, and challenges in resource sustainability. The heightened demand for waste-based feedstocks such as UCO has outpaced domestic supply capacity, leading to an increased reliance on imports from Asian countries where palm oil—a commodity linked to deforestation and significant greenhouse gas emissions—is prevalent.

This dependence on imported UCO introduces potential risks to environmental integrity, including the adulteration of UCO with cheaper palm oil and the displacement of UCO from traditional uses, potentially leading to increased palm oil production to meet this demand and associated emissions. The interconnectedness of global oil markets suggests that heightened demand for UCO can influence prices of both waste-based and crop-based oils like soybean and canola oil, as they serve as substitutes in various industries.

Our observations indicate that U.S. soybean and canola oil prices surged above global levels starting in 2021, coinciding with increased domestic biofuel production and pandemic-related transportation constraints. The price divergence from other oils underscores the complexity of market dynamics and the potential for indirect effects stemming from biofuel policies. The assumption that utilizing waste-based feedstocks does not impact crop production or associated emissions warrants further scrutiny, as market substitutions may offset environmental benefits.

These findings highlight the need for a deeper understanding of the market relationships between UCO and other vegetable oils. An econometric assessment of these linkages would provide valuable insights into the extent of spillover effects and market integration. Quantifying the elasticity of substitution between different oils and analyzing the factors contributing to price fluctuations can help disentangle the interplay between biofuel demand and commodity markets.

Further research is essential to enhance our comprehension of the indirect impacts of renewable fuel policies on global vegetable oil markets.

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It’s worth noting that the increasing demand for waste-based feedstocks like tallow, particularly from countries like Brazil, raises concerns about the environmental impacts of their production. While many countries and sectors have restrictions limiting demand for commodities associated with environmental degradation, these restrictions often don’t extend to waste or co-products. This can lead to unintended consequences, as subsidies for these non-source-discriminating waste products may disproportionately benefit those associated with environmental degradation, such as palm oil.

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References

California Air Resources Board (CARB). 2024. Quarterly Data Spreadsheet. https://ww2.arb.ca.gov/resources/documents/low-carbon-fuel-standard-reporting-tool-quarterly-summaries

Fastmarkets. 2024. Agriculture and biofuels. https://www.fastmarkets.com/agriculture/

National Agriculture Statistics Service. 2024. Fats and Oils: Oilseed Crushings, Production, Consumption, and Stocks. https://usda.library.cornell.edu/concern/publications/mp48sc77c

Xu, Hui, L. Our, Y. Li, T. Hawkins, and M. Wang. 2022. Life Cycle Greenhouse Gas Emissions of Biodiesel and Renewable Diesel Production in the United States. Environmental Science and Technology, 56:7512-7521. https://pubs.acs.org/doi/full/10.1021/acs.est.2c00289

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yellow grease white grease vegetable oils used cooking oil (UCO) Transportation Fuels Policy tallow soybeans RINs (Renewable Identification Numbers) Renewable Fuel Standard (RFS and RFS2) Renewable Diesel/Green Diesel/HVO/Paraffinic Diesel palm oil markets/sales market forces market forces LCFS (Low Carbon Fuel Standard) land use change land use import/export ILUC (Indirect/Induced Land Use Change) heavy duty vehicles (HDV) GHG (Greenhouse Gas Emissions) Intensity GHG (Greenhouse Gas Emissions) fuel cells fraud FOG (Fats/Oils/Grease) European Union (EU) environmental policy Electric Car/Electric Vehicle (EV) Canola/Rapeseed California brown grease biodiesel Battery Electric Vehicles (BEV) animal fat Agricultural Policy BioRefineries/Renewable Fuel Production fuel prices Regulations-Federal Regulations-State Department of Agriculture (USDA) Sustainability

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