The Outlook

As energy markets take center stage this summer in a number of global dramas (from the inflation/interest rates/recession watch to China's economic recovery to the war in Ukraine), businesses with exposure to these markets are likely bracing for new waves of volatility.

Immediate benefits of biodiesel and renewable diesel

For those looking to reduce their exposure to legacy fossil fuel markets like crude oil and natural gas, alternative fuels such as biodiesel and renewable diesel can provide a number of immediate benefits, according to Nate Burk, who co-leads the Fats, Oils and Greases segment within StoneX Financial Inc.

"First, these domestically produced fuels can help users wean themselves off of foreign oil supplies," explains Burk. "This can provide a little relief from the volatility so prevalent in those markets. Second, there are often subsidies and tax credits available for producing or using these alternative fuels – which can also help somewhat with costs and cost certainty. Third, these fuels burn cleaner than their fossil counterparts. This can enable companies with an eye on sustainability or who are subject to state decarbonization requirements to lower their carbon footprints – and even earn carbon credits that they can trade to offset costs."

Expertise and influence of StoneX in the renewable fuels market

Burk should know. In 2022, his team worked with over 75% of the 2.9 billion gallons of biodiesel and renewable diesel fuel stock produced domestically. Clients run the gamut from first-generation, family-run biodiesel producers to sustainable aviation fuel producers to major airlines, international food companies, and even infrastructure investment funds.

"Depending on which airline you fly, we might have 'touched' everything from the fuel in the plane's tanks to the snacks they serve you at your seat," quips Burk.

The result of serving companies involved in nearly every step of the supply chain is a uniquely wide and deep perspective on this developing marketplace. This perspective includes insights on opportunities but also challenges – including drivers of volatility and uncertainty.

Understanding market uncertainty: the role of policy

"Policy is one of the biggest sources of uncertainty for these markets," explains Burk. "That's because significant amounts of demand are still driven by subsidies, tax credits, and government mandates like the RFS2 program nationally, and the LCFS in California, which has become the "signal" state for where things are headed."

Burk says that updated standards for RFS2 are expected in mid-June, and that those will have an effect on prices in the short term.

Future of renewable fuel: production constraints and supply competition

Longer term, constraints on production capacity and competition across industry types for the commodities that provide the feedstocks of these fuels may limit supply.

"We have to remember that these fuels are produced from the surpluses and byproducts of growing crops and raising animals for food," says Burk. "So, the question comes down to 'How much renewable fuel can we produce before we start running out of feedstock?' In the case of soybeans, for example, we recently saw use of soybean oil for renewable fuels increase tenfold in 12 years. Can production keep up, or will some users need to find substitutes in the form of imports or new crops such as camelina or carinata?”

"For fats, we just aren't going to start raising more animals simply to generate more feedstock for renewable fuels, so there are natural limits on the horizon for those feedstock sources, too."

Interplay of food and fuel markets: an emerging trend

As demand soars and supplies begin bumping up against these limits, the markets for food and fuels will start to become very tightly intertwined, as opposed to operating somewhat in parallel.

"We work with one of the largest, most well-known food companies in the country, and they've been buying and hedging oils with us for years," says Burk. "Today, one of the biggest market movers of their flat price isn't competition for supply by competitors, but consumption by producers of renewable diesel and sustainable aviation fuel. That's a big change."

Increasing participation in the renewable and biofuel markets: expert advice

Indeed – and it's one that Burk and his team are on the front lines of every day. So, what's his advice for businesses looking to increase their participation in the renewable and biofuels markets?

"Call us," he says. "I know that sounds self-serving, but I don't think there are many teams out there right now that are directly involved in all the facets of this developing marketplace like we are. If we can't help you, we can connect you with someone who can."

For more information on biodiesel and renewable diesel fuels, contact Nate Burk at [email protected].

Originally published as part of The Outlook Newsletter

Vol. 2, Issue 2C