Estimating the Biodiesel Supply Curve

2The CROP Site – The purpose of this post is to derive the biodiesel supply curve from the relationships first presented in the September 25 post.

We begin by reviewing the main results of that earlier post. Figure 1 shows a scatter of monthly biodiesel production and net returns above variable costs for each calendar year between 2010 and 2013. Monthly biodiesel production is estimated by the EIA and monthly biodiesel net production returns above variable costs are based on a model of a representative Iowa biodiesel plant (see the post here).

A best-fit regression line is also shown for each year, with the natural log (ln) of production used as the dependent variable. The data are divided by calendar years because in years when the blenders tax credit is not in place (2010 and 2012) there is little relationship between biodiesel production and returns. Basically, production in these years is “stuck” at the RFS biodiesel mandate regardless of the level of returns.

In the other years (2011 and 2013) market participants expect the credit to expire at the end of a calendar year, so there there is an obvious incentive for blenders to bid up the price of biodiesel in order to increase production and take full advantage of the credit before it expires. In essence, the unusual market circumstances in 2011 and 2013 provide a unique opportunity to identify a biodiesel supply curve even with a seemingly binding RFS mandate in place…>>Continue Reading<<

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