What’s Up with RINs Prices?
by Scott Irwin (Farm Doc Daily/University of Illinois at Urbana-Champaign) RINs prices have been making headlines in recent months, with prices at times crossing the psychologically important $1 per gallon mark. Echoing earlier complaints (farmdoc daily, July 19, 2013; December 4, 2015), this has caused some to question whether the RINs market is manipulated or even outright fraudulent. For example, on July 28 (as reported by OPIS) Jack Lipinski, CEO of CVR Refining stated that, “RINs have become a black pool allowing exempt parties, and even speculators, to drive prices to confiscatory levels. We believe the market may be cornered, the effect of which will be to bring small merchant refiners to the brink of bankruptcy while unjustly enriching speculators and exempt blenders.” A few days later, (again as reported by OPIS) the President of the Renewable Fuels Association (RFA), Robert Dineen, stated in a letter to the U.S. Commodity Futures Trading Commission (CFTC) and the Environmental Protection Agency (EPA) that, “The recent spike in RIN prices appears contrived and driven by something other than basic supply-demand fundamentals…Indeed, the spike raises renewed questions about potential manipulation of the market by entities who may believe the specter of higher RIN prices supports their political efforts to repeal or reform the RFS.” Well-known investor Carl Icahn upped the ante in August by arguing that the RINs market had become “the mother of all short squeezes” for independent refiners. These are serious charges about the operation of the RINs market, particularly in light of the fact that RINs prices represent the marginal cost of complying with RFS mandates. The purpose of this article is to analyze recent movements in RINs prices and provide some historical perspective regarding the manipulation charges.
The key takeaway point from this review of RINs prices is that if you want to understand the movement of ethanol RINs prices, which garner most of the headlines, then you have to first understand the movement of biodiesel RINs prices. The reason is that biodiesel is the marginal gallon for compliance with the conventional ethanol mandate and is expected to continue as the marginal gallon for some time into the future. When biodiesel is the marginal gallon D6 prices track D4 prices closely. So, to understand the 2016 “spike” in RINS prices one must figure out what has been driving D4 prices.
It is also abundantly clear from Figure 3 that biodiesel prices in 2016 have increased substantially more than have soybean oil prices. There is no mystery why this has happened. Just as in 2011 and 2013, the 2016 spike in biodiesel prices relative to soybean oil prices can be directly traced to the race by diesel blenders to take advantage of the blender tax credit set to expire at the end of the calendar year (e.g., farmdoc daily March 19, 2014; July 27, 2016). With blenders facing a binding RFS biodiesel mandate, it is rational to effectively purchase biodiesel at a discount in the current year, due to the tax credit, in order to meet mandates in later years. Once the tax credit expires, the incentive to push up prices, profits, and production disappears and the biodiesel industry returns to a norm of losses. This cycle, of course, depends on blenders perceiving there is substantial uncertainty whether the tax credit will be reinstated or not for the following year. The 2016 version of this spike is not as large as in 2011 and 2013 and this may be related to the belief there is a much higher probability that the credit will be extended than in the past, which lessens the incentives for bidding up the price of biodiesel. Another factor that may have contributed to the more muted cycle in 2016 is the rapid run-up in biodiesel imports, particularly from Argentina. Regardless, the looming expiration of the biodiesel tax credit at the end of 2016 is an important driver of increasing biodiesel prices, and hence, D4 RINs prices.
The next step is to examine the movement of biodiesel and diesel prices, in order to determine the relative contributions of each to changes in the biodiesel blending margin. READ MORE and MORE (Ethanol Producer Magazine)