One bright spot in an otherwise dreary outlook for U.S. soybean farmers, caught in the ongoing China trade war crossfire, has been the 1.5 gallons of biodiesel — a cleaner-burning alternative to traditional diesel motor fuel — that each bushel of soybeans yields.
Protected on one side by the EPA’s renewable fuels mandate and by steep import tariffs on the other, some biodiesel producers were able to post profits last year despite the lapse of the industry’s coveted $1 per gallon tax credit for the sale or use of the fuel.
But the Commerce Department as early as this month could decide whether to lift punitive tariffs on competitors in Argentina, who along with Indonesian exporters have been subject to hefty duties curbing import demand and propping up domestic producers. If that occurs while China’s retaliatory tariffs persist, soybean farmers — already down on their luck from Midwest floods and African swine fever in China, which further limits demand for soybean feed — could really use a lift from the tax credit, backers say.
Soybean farmers “would be wiped out if this were to disappear,” said Wisconsin Democratic Rep. Ron Kind, who hails from a state heavily in play for President Donald Trump’s 2020 re-election campaign. Biodiesel, Kind said, is “about the only thing holding them up right now.”
Iowa, where Trump on Tuesday played up his support for corn-based ethanol, is the largest biodiesel producer and another battleground state where soybeans are a key crop.
Overall U.S. soybean revenue dipped by about $2 billion in 2018, or 5 percent, according to the American Soybean Association. That’s in part due to lower overall prices as demand sagged, but also because the value of exports to soybean farmers’ biggest overseas market, China, dove by 75 percent.
Still, domestic biodiesel production rose about 17 percent in 2018, according to EPA data. And soybeans’ share of the biodiesel supply — other feedstocks include animal fats, used cooking grease and canola oil — rose from just over half in 2017 to 57 percent last year.
Biodiesel props up soybean prices by 63 cents a bushel, according to industry estimates, contributing about $2.9 billion to soybeans’ market value last year, even without the lucrative tax credit driving purchases. That incentive, worth an estimated $3 billion annually to truck stops, convenience store chains and other fuel marketers who buy and blend biodiesel, has been out of commission since the end of 2017.
Nonetheless, soybean-based biodiesel produced and consumed domestically rose to about 1.1 billion gallons in 2018, so if the credit were reinstated retroactive to the start of last year, soybeans would be responsible for about one-third of the value. And under marketing arrangements, blenders and retailers typically share the proceeds of retroactive tax credit renewals with biodiesel producers.
For instance, the biggest domestic producer, Renewable Energy Group of Ames, Iowa, estimates in Securities and Exchange Commission filings that profits for 2018 and the first quarter of 2019 would be padded by $292 million if Congress retroactively reinstated the tax credit.
Fly-ins and mandates
Biodiesel is an industry buffeted by what University of Illinois agricultural economist Scott Irwin calls “a witch’s brew of policy interventions.” The industry barely existed before the tax credits were enacted in 2004, and biofuels like biodiesel were mandated through the Renewable Fuel Standard, first adopted in 2005, Irwin said.
Tariffs imposed in late 2017 due to domestic biodiesel industry complaints, particularly on Argentine producers, boosted U.S profits last year. But the industry is worried that the Commerce Department, now reviewing those tariffs, will lift them. Industry officials met with Commerce Secretary Wilbur Ross last week and are expecting a preliminary indication of what the decision will be this month. Domestic producers are “very concerned” about the prospect of the tariffs being lifted, said Paul Winters, spokesman for the National Biodiesel Board.
Meanwhile, biodiesel demand fell last year because of the growing impact of small refinery hardship exemptions from the RFS, preventing them from having to mix biodiesel and other renewable fuels into their petroleum-based diesel. Exemptions exploded in the first year of the Trump administration. In 2016, 19 refineries were exempted from blending 790 million gallons of renewable fuels with their petroleum-based diesel. In 2017, according to EPA figures, 35 refineries were exempted from having to purchase 1.82 billion gallons of renewables.
But the drop in imports from Argentina and Indonesia more than made up for the lost demand from the exemptions, allowing U.S. producers to not only grab a much bigger piece of a shrinking market, but to command better prices, according to Irwin. He estimates the industry as a whole made about 28 cents on each gallon sold, its third-highest margin in the last decade.
‘Let what is dead remain dead’
In a recent letter to congressional leaders, farming and industry groups called biodiesel “a glimmer of hope” in an otherwise troubled soybean market, and urged them to extend the biodiesel credit as soon as possible. But the incentive has its critics as well.
In May, a dozen groups spanning the political spectrum urged congressional leaders not to renew any of the tax extenders, as they are known.
“Let what is dead remain dead,” wrote the groups, which range from the conservative Heritage Action and Americans for Prosperity to the liberal Economic Policy Institute and U.S. PIRG. They object to reinstating the tax breaks on two grounds: That the 2017 tax code overhaul was supposed to either make permanent or shed tax breaks from the code, and that retroactive perks do nothing to encourage the economic behaviors they were designed to promote.
June could be a make-or-break month for the renewal effort as leaders of the Senate Finance and House Ways and Means panels say they will study tax extenders to determine which should be recommended for renewal. And Congress’ hallways were a little more clogged Tuesday as more than 70 producers, agribusinesses and other biodiesel advocates descended on Capitol Hill in a lobbying fly-in with 130 meetings scheduled with congressional offices.
Ways and Means ranking Republican Kevin Brady of Texas hails from a state with a surprisingly heavy biodiesel presence — not because of an abundant soybean crop, but due to a huge Port Neches facility that benefits from easy access to feedstock shipments and storage terminals. He introduced a measure late last year to phase out the credit over seven years, preserving it at $1 per gallon for the first four years and then gradually scaling it down.
Brady said he looks at it like the multiyear phaseout lawmakers provided for the wind electricity credit in 2015, which backers said was a fair trade for a mature industry that needed time to adjust.
Senate Finance Chairman Charles E. Grassley of Iowa, the biodiesel credit’s original author, introduced earlier this year a two-year renewal of that credit and other extenders, but also said he’d accept a multiyear phaseout. Industry stakeholders also back a phaseout, though they’d be happy with any renewal at this point.
A bipartisan Senate Finance task force is expected to complete its work and make recommendations on extending energy-related tax breaks this month. Meanwhile, some 50 House members spoke at last week’s members’ day hearing before the Ways and Means panel, and one of the more frequent topics was the tax extenders and biodiesel credit.
Farmers in Iowa and across the country have “taken the brunt of an ongoing trade war” with China, Iowa Democratic Rep. Abby Finkenauer told the panel.
“When the major markets for soybeans shrink, prices go down, and when you combine that with an expired biodiesel policy, and an actual ongoing severe weather that we continue to see throughout the Midwest, it quite literally is a perfect storm hurting our soybean farmers across the country,” the freshman lawmaker said.
Finkenauer, who unseated a Republican in a district that backed Trump in 2016, is among the House GOP campaign arm’s top targets this cycle.