Brazil biodiesel logistical differentials narrow amid supply glut

Logistical differentials for Brazilian biodiesel contracts supplying fuel distributors narrowed in January-February, reflecting high stockpiles at the plants due to lower-than-expected blended diesel sales at the pumps in November-December and the start of the 2024-25 soybean harvest in Mato Grosso, the country's largest producing state.

In Brazil, producers and retailers discuss biodiesel contracts every two months. This negotiation style is a legacy of the period when biofuel was sold through public auctions, which ended in late 2021. In January 2022, market participants began trading biofuel directly.

The logistical differential, also known as the "fee," is linked to the producer's margin as part of a formula that also considers soybean oil future contracts on the Chicago Board of Trade, the differential of vegetable oil at the Paranaguá port, and the Brazilian real-US dollar exchange rate.

January-February logistical differentials had a discount of up to Real 200/cu m from the November-December period, depending on the region.

Retailers purchased 1.38 million cu m for the first two months of the year, according to the National Agency of Petroleum, Natural Gas and Biofuels, or ANP. The volume is 26% over the oil regulator's goal for the period. The legislation sets that retailers must buy at least 80% of the volume contracted in the same period of the prior year.

Facilities in the center-west and southern regions report that stockpiles reached up to one-third of production. Trucks began making more domestic trips and delivering fewer cargoes to ports, reducing the diesel consumption since November 2024, sources said.

Diesel demand in Brazil is expected to increase by the end of February after a flurry of pressured sales in 2024, supported by the soybean harvest and the refinery maintenance season. Fossil fuel sales dropped 11.4% in November 2024 to 5.52 million cu m, ANP data showed.

Market participants expect that the start of the soybean harvest in the center-west state of Mato Grosso will help to rebound demand for blended diesel and help lower biodiesel inventories. Participants believe that stocks will only decrease after the mandatory blending is increased.

Farmers have started harvesting their crops after a late start to the season, the Mato Grosso Soybean and Corn Producers Association (Aprosoja-MT) said. It was not provided an estimate regarding the current progress of this year's harvest, which is still in its initial phases.

Soybeans harvested at the beginning of the year tend to be more expensive because they are planted in an irrigated area. S&P Global Commodity Insights estimates that Brazil started this marketing year with the soybean carryover stock totaling around 3 million mt.

Brazil's National Energy Policy Council will raise the biodiesel mandate to 15% from 14% March 1, 2025. Domestic biodiesel demand is forecast to hike 13.5% to 10.33 million mt this year as the 2024-25 soybean crop may total 175 million mt, according to Commodity Insights data.

Oversupply impacts

High biodiesel inventories have led to unscheduled interruptions since the end of last year, causing financial losses for plants. Several producers have already halted industrial activities for more than 10 days since December and have not ruled out stopping again this month.

Some players are planning to export biodiesel and soybean oil and lower prices to attract buyers in the spot market. In the second quarter of 2024, soybean crushers shipped vegetable oil because the supply glut in the biodiesel industry was also caused by delays in withdrawals by retailers.