EAST PEORIA, Ill. – There is a biofuels boom on the horizon, according to esteemed agricultural economist Scott Irwin.

Irwin came out of retirement after a long career at the University of Illinois – where he had been the Laurence J. Norton Chair of Agricultural Marketing and director of the farmdoc program, among many other roles – to join his former colleagues for the 2024 Illinois Farm Economics Summit. There, he shared his excitement for a potentially “huge” explosion of demand for soybeans needed to produce renewable diesel fuel with a group of central Illinois producers on Jan. 10.

“The boom is BIG,” Irwin emphasized. “We have been building renewable diesel capacity like wild. Up until just a few years ago, there were only one or two renewable diesel plants in the entire United States producing well less than a billion gallons per year.

“Look at how rapidly we are adding capacity. In 2022 we added one billion gallons, in 2023 we added 1.5 billion gallons, and in 2024 another 1.4 billion gallons (will be online). If all goes according to plan, sometime after 2025 we could go north of 7 billion gallons of renewable diesel capacity.”

With standard biodiesel struggling to fill 2 billion gallons of capacity per year, this development heralds a new era in biofuels production, according to Irwin. Not surprisingly, the surge in demand for soybean oil is influencing the overall demand for soybeans for crushing. Irwin speculated that this demand is currently adding around $2 per bushel to the value of soybeans.

However, it is estimated that an additional 18 to 30 million acres of soybean production will be required to satisfy the anticipated demand increase due to the renewable diesel boom, according to reports. “If this were to occur there would be an impact on the ag sector as big as the ethanol boom,” Irwin said.

Why is there a renewable diesel boom on the horizon in the U.S.? Rather than being market-driven, the impetus behind the increase in capacity and investment in new facilities is policy-driven. “I call it a policy stack for a policy market,” Irwin said. “Without policy incentives, straight out subsidies in one form or another, not one gallon of renewable diesel would be produced or consumed. So, we have to have a layer of policy incentives to make it happen.”

These policies include the U.S. Renewable Fuels Standard (RFS), which drives the renewable diesel boom, along with the Blenders Tax Credit of $1 per gallon through 2024, import tariffs on biodiesel imports, state biodiesel incentive programs and low carbon fuel standards.

“The renewable diesel boom does not happen without that policy stack,” Irwin reiterated. “If you want to understand where it’s headed, it’s all about the policy.”

The veteran farm economist warned the farmers and agribusiness professionals in attendance not to get too excited about the renewable diesel boom, as there is still plenty to work out. For example, renewable diesel capacity will outperform the current RFS demand ceiling for biodiesel and renewable diesel products. For the years 2023-2025, there is expected to be demand for between 4 and 5 billion gallons of renewable diesel in the U.S., meaning that there is more capacity infrastructure being built than would be necessary to meet RFS demand mandates.

Irwin can envision both a bearish scenario domestically for renewable diesel, and a more bullish market regarding the export market. “Given this mismatch between capacity and demand, several things can happen,” he said. “We may have to shelve some of the plans for new biodiesel plants. Capacity utilization in existing domestic plants may have to be reduced drastically in the short run, or biodiesel plants en masse get mothballed – or most likely some combination of all three. At least through 2024 I believe that a bearish scenario in terms of expansion of production of renewable biodiesel is in operation.”

However, that scenario should flip-flop, according to Irwin, especially if Congress can be convinced to raise the recommended volume obligations (RVOs) for renewable biodiesel in 2026. Another opportunity for a more bullish outcome can be found in the Inflation Reduction Act, which will provide some supply relief for biodiesel in 2025. But the “real wild card” that could spike demand for U.S. renewable biodiesel could come via a huge increase in demand from Canada, the economist speculated.

“Canada has just recently started their own low-carbon fuel standard like California, where there is a 4 billion gallon per year diesel market that has been flooded with renewable diesel. 85 percent of the renewable diesel in the U.S. goes to California because of the incentives,” Irwin said. “Canada has an 8 billion gallon per year diesel market. I think we are going to get a boom in renewable diesel exports going to Canada, and it’s only a question of magnitude and whether it will be big enough to soak up that extra capacity that we are building.”

Renewable diesel differs from FAME (fatty acid methyl ester) biodiesel in that it includes organic waste fats and vegetable oils, including used cooking oil and soybean oil. “Then it is literally put through a petroleum refinery,” according to Irwin. “Many of the renewable diesel plants that have been going in are retrofits of small and medium sized refineries.” 

Irwin will host a farmdocDAILY webinar on Feb. 22 at 11 a.m. CST to follow up on his remarks from the Illinois Farm Economics Summit. Registration for the free webinar, along with other Summit-related webinars, can be completed at www.farmdocdaily.illinois.edu/webinars.