US EPA denying small refineries biofuel blending waivers to aid corn, soybean demand

The US Environmental Protection Agency increasingly rejecting requests by small refineries seeking biofuel blending exemptions is likely to aid domestic demand for corn and soybeans, commodity analysts said.

Over the past few months, the EPA has been frugal in providing blending waivers to small refineries. A request from 15 small US-based oil refineries to waive off their biofuel blending obligations for 2016-2018 and 2021-2023 compliance years was rejected by the EPA on July 14. In 2022, the agency denied 69 such small refinery exemption petitions.

US-based oil refiners are required to blend certain percentage of biofuels into each gallon of gasoline and diesel sold under the renewable fuel standard mandate, or RFS. The obligation is seen as a critical energy policy, which supports the government's initiatives toward reducing greenhouse emissions and enhance the country's energy goals.

However, the EPA holds the right to exempt small oil refiners from the biofuel blending mandate. The EPA may grant a temporary exemption to a small refinery from its annual renewable volume obligations, or RVOs, if it can demonstrate that compliance with the RVOs would cause the refinery to suffer disproportionate economic hardship.

The EPA's latest stance on biofuel blending obligations is likely to boost corn demand, albeit slightly, said Pete Meyer, crops and feedstock economist at S&P Global Commodity Insights.

Projections for soybean and corn usage in the country's biofuel mix in marketing year 2023-24 (October-September) have been rising steadily over the years.

"Ultimately, lesser exemptions equal more biofuels required to blend with petroleum fuels," said Susan David, commodity analysts at agricultural consultancy No Bull Ag.

According to the US Energy Information Administration's latest estimates, soybean oil used for biofuel in MY 2023-24 has been forecast to rise 7.7% on the year to 12,500 million lb (5.67 million mt).

Corn processed into ethanol and its byproducts has been projected at 5,300 million bushels (134.6 million mt) in MY 2023-24, 1.4% higher on the year, the US Department of Agriculture said in its latest World Agricultural Supply and Demand Estimates on July 12.

The EPA's tougher stance on RFS waivers benefits corn and soybean farmers, said Sherman Newlin, partner at commodity brokerage and agricultural risk management firm Risk Management Commodities. "But it may not impact prices much as a lot of it is just insuring what they're supposed to be blending already."

Biofuel blending policy

Oil refineries that are unable to blend biofuel inputs in their fuel mix must buy equivalent tradable credits called renewable identification numbers, or RINs, from other refiners that comply with the RFS mandate.

According to EPA data July 20, 1.28 billion ethanol blending credits were generated in June in the US, unchanged from May's volume. Simultaneously, 674 million biodiesel blending credits were generated in June, compared with 750 million in May, the data showed.

The RFS mandate has been widely backed by US farming groups as it enhances their domestic corn and soybean crop sales to biofuel makers, analysts said.

Challenges for corn, soybean feedstocks

Commodity analysts expect some challenges ahead for corn and soybean feedstocks amid lower-than-expected biofuel capacity expansion prospects, despite the EPA's stance on biofuel blending waivers.

"We are still in a situation where we have increased biofuel production capacity fighting for limited amounts of feedstocks," Susan said. "This is driving margins lower and serves as another reminder that we have built more (renewable diesel) capacity than the EPA has mandated, which will likely squeeze traditional FAME biodiesel producers' margins going forward," she said.

FAME is a generic chemical term for biodiesel derived from renewable sources. It is used to extend or replace mineral diesel and gasoil for fueling on and off-road vehicles and static engines. Most common oils and fats to produce FAME fuel are soybean oil, rapeseed oil, used cooking oils, animal fats, sunflower oil and palm oil.

A key part of the EPA's biofuel push has been its RVO, which dictates the amount of renewable fuel that gasoline and diesel refiners must blend into the transportation fuel supply in a given year.

Under the final rule released June 21, the EPA set RVOs for biomass-based diesel at 2.82 billion gallons for 2023, steady from a December 2022 proposal. For 2024 and 2025, RVOs for biomass-based diesel have been respectively set at 3.04 billion, up 5% from the previous proposal, and 3.35 billion gallons, 14% higher than the prior proposal.

For ethanol-equivalent gallons, the agency has established RVOs at 5.94 billion gallons for 2023, up 2% from the December 2022 proposal, 6.54 billion gallons for 2024, down 1%, and 7.33 billion gallons for 2025, down 1%.

Although, the EPA's RVO parameters were mostly seen strengthening over 2023-25, the biofuel industry was expecting much higher volumes under the mandate, analysts said. There was a concern of biofuel capacity underutilization amid a lower-than-expected RVO mandate.

"I am not sure that you will see anyone in the biofuel sector applauding EPA for their disappointing 2023-25 RVO mandate, but this (denying blending waivers) is at least a move in the right direction," Susan said. Allowing waivers would only add salt in the wound for the biofuel and feedstocks producers, she said.