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International Animal Fats Update

Posted on Nov 14, 2016 in U.S. and International Animal Fats & Protein

Trading over the last week has been steady to higher for fats. Over the last 36 hours many have put weekly price discussions aside and have focused on what the market landscape could look like under the newly elected President Trump. As a candidate he ran on a largely populist and protectionist platform which leaves the passage of the Trans Pacific Partnership in doubt. Doubt over the future of the TPP may affect the commodity markets in the coming weeks as the promise or prospect of increasing free trade diminishes. The USDA WASDE published bigger than expected volumes on corn and soybeans, which has turned the macros lower yesterday before a rebound this morning. Succinctly put, the macro discussion is full of uncertainty right now and this will certainly continue for the near future. President Obama has two months left in office and a lame duck session which is certain to see a flurry of activity.

Fat trading in AUS was up US$10 on exports and trading out of the NZ market was up NZ$15. Sources in the NZ market have suggested that if the NZ$ continues to gain against the US$, price corrections could be seen in the coming weeks. Demand has been strong from both China and Singapore, but uncertainty over tax credits in the US biofuels market may slow demand from Singapore for 2017.

EU trading continues to rise as product remains tight and demand strong. Sources have reported strong demand from both the chemical and biodiesel sectors. Spot supply for both UCO and Cat 3 fats is limited, hence the €50 jump in UCO over the last month and €30 – 50 increase on Cat 3 fats.

The US export market is flat with not a lot of action reported. Sources reported higher offers, but buyers have been unwilling to pull the trigger on additional material. December and early Jan are reported as well-booked and sellers are in a comfortable position right now. Those looking to cover sales may be less comfortable with the US interior seeing prices jump this week.

Chicago BFT traded up to $705/MT or $0.3200/lb yesterday morning as nearby demand surfaced in a market with thin spot supply. Sources had been offering December shipment material at this value throughout the week, but had been unable to move product at that price for that time period. The tech market is $760 – 770/MT or $0.3450 – 0.3500/lb, but offers for Dec shipment at the $770/MT mark into Chicago have gone untraded. Sources have commented that chemical demand is strong through the rest of the year and orders for finished goods are exceeding past seasonality. Prices have bucked the seasonal trend as well, following the macro markets higher for the first Q4 climb in six years.

Figure 1.

Chicago packer BFT is shown for 2011 – 2015 as an average by month and for 2016.

 

 

US Animal Fat Exports

Total fat exports were up over 8,000 MT from August at 84,303 MT. The biggest increase was seen in the yellow grease market, which saw a jump of just shy of 6,000 MT from the month prior. The biggest importer of YG in September was Mexico, which nearly doubled its imports of US tallow at 7,152 MT. This was up 3,377 MT from August. Cheaper AV prices in California helped push material into the Mexico market. Inedible tallow was mainly destined for Mexico at 9,484 MT. Honduras, Guatemala, Nicaragua and El Salvador accounted for a combine 5,789 MT. Finland was the fourth largest importer of US inedible tallow at 2,000 MT.

Table 1.

Figure 2.

Figure 3.

Guest Commentary – California Low Carbon Fuel Standard

The Status of LCFS: Where are we now?
An Overview

John D. Courtis is an independent consultant on fuels and biofuels issues and was the architect of LCFS for California Air Resources Board 

There were a number of debated discussions in the last seven years weather the LCFS program would be able to establish itself and become an important tool for GHG emissions reductions in California.  The LCFS includes carbon intensity (CI) performance standards for gasoline and diesel as well as provisions that award innovation and promote improvements on biofuels, on crude oil production, and on refineries. The LCFS also includes a fuel pathway approval process, a web-based reporting and registration system, and the requirements for a credit market system with a cost containment mechanism setting a ceiling on credit prices at $200 per ton of CO2.  Since its adoption in 2009, the LCFS has gone through a series of evolutionary changes from numerous revisions in 2011, to a number of legal challenges, to the final revisions in 2015 and its full implementation in 2016. There are elements in LCFS without significant controversies, such as the use of the CA GREET methodology in estimating direct GHG emissions, the pathway approval process for different fuels, and the reporting and credit marketing systems.  There are however other significant challenges ahead.  The iLUC methodology and its application are still debated, questions are raised on the LCFS ability to meet the 10% CI reduction targets as are set for 2020, and the full details of verification and monitoring are yet to be defined.  As a result, additional work may be needed for iLUC.  An evaluation and report to the Board in 2017 or 2018 on the ability to meet the 2020 standards are required. Also, in addition to the ongoing verification and monitoring of records, the verification standards need to be further defined.  ARB has already initiated the process for evaluating these and other issues and for proposing potential enhancements to LCFS by the end of 2017.  In the next months, a more detailed and in depth discussion of all these items is expected.

As of today it appears that the regulated parties are in full compliance with the LCFS requirements.  A careful review of the CIs for the fuels in the LCFS market reveals that there have been a number of evolutionary changes in CIs from 2011 to 2016.  As figure 1 shows both gasoline and diesel substitutes have scored reductions in CI over the period 2011-2016. Similar improvements have occurred for other fuels such as CNG and bio-methane.

Figure 1 shows changes in CI for ethanol, biodiesel, and renewable diesel, highlighting the importance of biodiesel and renewable diesel for LCFS credit generation.  The much lower CI biodiesel and renewable diesel have the potential to generate much higher credits on per gallon basis than ethanol would.

Figure 2 shows the evolution of the credit market from 2011 to 2016. It presents the credits and deficits that have been generated from various fuels, most importantly the bank of credits accumulated as of 2016. 

 

Despite the gains depicted in Figure 2, this past trend of credit generation and banking accumulation may not continue with the same strength in future years due to standards becoming progressively more stringent. Fuels in future years will have much more difficult time to generate and accumulate credits.  In 2015 as well as in previous years, the gasoline and diesel standards were at 1%.  The percent reduction is increasing to 2% in 2016 and to 10% in 2020.  These increases in stringency along with the proportional increase in yearly deficits will not allow significant credit accumulation.  A glimpse of the future of credits is shown in the graph for the first quarter of 2016.  The generated credits for that period are closely balanced with deficits. As a result, the credits added to the bank are not significant.

The question of generating credits from 2017 to 2020 remains as does the issue of achieving compliance with the gasoline and diesel standards by 2020 and beyond.   The answer largely depends on the amount of credits that will be generated from existing fuels between now and 2020 as well as on the CIs and on improvements of CIs for these fuels.  The recent trade of credits, when standards became more stringent, demonstrated the importance of the credit market. Although it is too early to draw a complete picture, Figure 3 shows significant increases in trading at the start of the last quarter of 2015 and 2016 as compared to previous years.

Figure 3: Volumes of credits and credit prices

(source: ARB)

Two key questions remain: Which low CI fuels are expected to play an important role in helping meet future targets? And what is the ability for volumes of lower CI fuels to reach the market?  From a monetary perspective, it appears that a LCFS credit price at about $100 per ton combined with the RIN value will create a significant incentive to attract low CI fuels to the California market.

A more detailed review of the gasoline side of the market reveals that it may be challenging to meet the future gasoline standards with gasoline substitutes currently available.  Ethanol blending in gasoline is currently limited to 10%, participation of E85 in the CA market is also limited, and no significant volumes for low CI cellulosic ethanol are predicted at this time.  While there is potential of lowering the CI for ethanol and providing some additional credits, it may not be enough to meet the 10% reduction for gasoline by 2020.

To meet the gasoline compliance obligations fuel producers-marketers must rely heavily on credits generated by other fuels or on credits bought in the LCFS credit market. Some of same challenges may apply to the diesel side.  However, since biodiesel and renewable diesel have much lower CI values, they allow for the generation of much higher credits between now and 2020.  Furthermore, there is potential for higher biodiesel or renewable diesel blends (B20 and above), assuming that infrastructure and NOx issues are resolved. Still, finding additional credits needs to be addressed. In addition to lower CI ethanol and diesel substitutes, LCFS allows credits to be generated from the following fuels or sources:

1.     Electricity and hydrogen

2.     Natural gas and renewable natural gas

3.     Innovative technologies for the production of crude oil

4.     Credits generated by the refineries such as Co-processing of bio-feedstocks, refinery improvements, use of renewable H2

 Figure 4 shows the contribution of various fuels to credits from 2011 to 2015. 

In addition to ethanol, the major source of credits in 2015 was from biodiesel and renewable diesel; and that(TREND) is expected to continue in the very near future. 

It is clear that electricity credits are on the rise. The 2015 electricity credits were at about 300,000 MT CO2, including the electricity used by fixed rail, buses, and light duty EVs.  Light duty EVs had cumulative sales at about 186,000 from 2011 to 2016. Credits from the use of bio-methane have also increased from close to zero in 2011 to about 590,000 MT of CO2 in 2015. The future credits generated from electricity and bio-methane will mostly depend on the number of vehicles powered by these fuels.  That said, there are limitations on the numbers of EVs or CNG or RNG vehicles that will be in the MV market before 2020.

Since refinery provisions did not take effect in 2015, there were no credits generated from refineries or from innovative crude oil production technologies.  There is a future potential for small amounts of credits from electricity or solar use for crude oil production and potentially small credits from the refinery provisions but not a lot before 2020.

In a summary, the major source of credits must come from increased volumes of biodiesel and renewable diesel, providing the needed feedstocks will become available, their production will be directed towards the lower CI diesel, the infrastructure issues will be addressed, and credit prices remain healthy.

 

Table 1 illustrates the critical role of waste/residue based biodiesel or renewable diesel to the success of LCFS.  The importance of biodiesel and renewable diesel will be covered in depth in a follow up article.   

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International Animal Proteins Update

Posted on Nov 14, 2016 in U.S. and International Animal Fats & Protein

Ruminant MBM traded $450 – 510 into the Indonesian market over the last week. Trading in the $495 – 510 range was reported from the ANZ market. Sources have reported that export availability out of those markets remains extremely tight due to limited slaughter. Sellers finding buyers in need of smaller parcels delivered quickly are able to fetch prices at the higher end of the range. With domestic US pricing as low as $195/MT FOB, the $450 – 470 CIF range works very well for US sellers and confirms the buyers reports of continued offers in the $450 neighborhood despite trading happening above the $500 mark.

Trading into China was done at higher levels, $485 – 490 CIF. Trading into Thailand was reported at $515 and sources have reported strong interest from Vietnam. Early chatter in regards to the US election was that buyers may start to pick up their demand ahead of a perceived trade war. President-elect Trump rode a hard protectionist platform and buyers in Asia are worried that potential tariffs on goods could spill into the feed ingredient markets.

Australian export values were higher on MBM, AUS$600 – 630. Sources continue to report tight supplies and many have suggested that not a lot of material is leaving the country. Kills remain very tight and local demand is gobbling up a significant portion of the supply. Pet grade poultry meal was reported steay at AUS$1050 for export.

Figure 1.

Trading out of the NZ market was done in a wide range at a lower average, NZ$600 – 650 for 50 pro material. Sources commented that the decline was a combination of a stronger NZ$ as well as the withdraw of some short covering demand from the traders. Sellers continue to report long positions at NZ$700 or better.

Protein values for US exports were unchanged into SEA. Sources selling into that region from other countries have reported higher numbers, but US sellers are comfortable at current levels given the low prices in the US interior. Sources in SEA reported offers for FM as low as $480 out of the US, but sellers in the ANZ markets have seen prices as high as $550 CIF. PFG PBM was similar with trading reported from non-US sellers as high as $810 CIF.

The local US ruminant MBM markets are trading in a wide range, anywhere from $175 – 230/ST or $193 – 254/MT FOB interior. Sellers with good relationships into nearby buyers have been able to fetch prices at the top end of the range, while those loading into rail cars and those looking to unload extra material are seeing prices in that $193 – 205/MT range. Cattle and hog kills continue along at a strong pace, but the US is just two short weeks away from the Thanksgiving holiday and a slow, slaughter week.

Feathermeal trading was mostly sideways in the interior over the last week. Interior values are trading in a range of $330 – 385/MT FOB. Sellers were a bit more optimistic last week, but uncertainty has crept in again as supplies remain strong. Pet grade poultry meal prices are firming as demand remains very strong and 2017 contract volumes look very good. Spot tightness seems likely in the new year and with it, higher prices.

US Animal Protein Exports

Protein exports for both inedible meatmeal and feathermeal were off from August totals. IE MM fell by 11.2 TMT to 34,517, which is on par with the average tonnage for the Jan – Jul period. Big drops were seen into the top three importing market, Indonesia, Mexico and Canada. Indonesia saw the biggest drop at 2,895 tons. FM trading was down as well with reductions into Indonesia, Chile and China.

Table 1.

Figure 2.

Figure 3.

 

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The Jacobsen Leather Demand Index (JLDI)

Posted on Nov 13, 2016 in Hide & Leather

Summary

Leather demand edged lower in August, despite a bounce in Chinese imports which showed its first increase of 2016. Car sales dipped along with Chinese exports, which offset a seasonally adjusted gains in U.S. shoe sales. Global economic data continues to reflect very modest growth, as near zero interest rates have not been enough to stimulate developed economies. The JLDI and Heavy Texas Steer prices moved lower, with steer values revisiting support levels. The trajectory of the JLDI appears to be flattening at a faster pace than hide prices, which reflects the stabilization in Chinese imports.

Economic Data and Monetary Policy

Hide values have slipped, despite an uptick in overall Chinese imports, as global demand moved lower in the latter half of the summer. The Chinese trade number for September were in line with expectations, as hide prices look for a bottom. Chinese authorities reported that August exports fell 2.8% year over year following July’s 4.4% drop. Imports unexpectedly rose 1.5% year over year, reversing a 12.5% in July. August’s increase was the first year over year rise in imports since October 2014.

In the U.S., the data has been mixed. September retail sales increased 0.6% on the headline. The Headline strength was thanks to a vehicle sales bounce and an estimated 6% increase in gasoline prices. Chain store sales were fairly restrained through September, but the major consumer confidence gauges posted gains. Vehicle sales remain strong but their year on year comparisons makes it difficult to post gains. Earnings for the third quarter will shed light on shoe sales and furniture sales.

There are many unknowns that are weighing on the global capital markets which is depressing trade and economic growth. The UK Brexit appears to be heading for a hard exit, which will disruption trade in Europe. U.S. politics are headed for a climax in November, and the Fed is discussing a rate hike in December. Currently the futures markets are forecasting a 65% chance of a rate hike in December, compared to a 15% change in November. This is capping stock prices, which reduces top down spending. The market appears to have priced in a Clinton victory, but if the polls contract, volatility is likely to increase.

As we look forward to the September JLDI, the focus will be on how the Fed maneuvers policy and how the ECB deals with fewer bonds to buy for their quantitative easing program. The catalyst for global growth will be U.S. GDP, where forecasts for the Q3 continue to drop. Higher oil prices could help manufacturing rebound, which could spill over into global GDP, and help increase commodity demand. Chinese imports appear to have bottomed, with September numbers coming in negative, but near expectations. Exports looks like they have stabilized, which should allow Chinese growth to find a foothold between 6.5% – 7.0%.

chart

To produce an index that reflects perceived demand for leather, the JLDI combines changes in the shoes sales, furniture and automobile market given assumption made about the makeup of these markets as leather is concerned. Fluctuation in shoes sales, auto sales, and furniture sales will change the demand dynamic for leather globally.

JLDI Index

The Jacobsen derived its leather demand index by using an oscillator that captured an index from 1-100. The index is created from year over year changes to each of 4 time series.

  • Car sales data using a multiplier which includes the percentage index of leather construction is weighted by approximately 14%.
  • Year over year leather furniture sales is weighed by approximately 18%.
  • Chinese exports of shoes is evaluated along with imports of hides.
  • US sales of shoes that are leather – which is then weighted by approximately 68%.

The JDLI readings are on the right axis accompanied by prices of Heavy Texas Steer on the left side.

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Envisioning a West Coast LCFS, and Beyond

Posted on Nov 13, 2016 in Biodiesel, Vegetable Oil, and Grain

Ian Thomson, Joe Gershen & Kevin Kuper – October 27, 2016
West Coast Biodiesel Industry Commentary

In May 2007, British Columbia (BC) and California signed a climate action MOU that set Canada’s westernmost province on the path to a California-style low carbon fuel standard. A decade later, the regulation that resulted may be poised to take Canada up a big notch in the climate action race.

Many know that the BC LCFS is not the only biofuels-related initiative in Canada. Its most populous province, Ontario, and two Prairie provinces, Saskatchewan and Manitoba, have had ethanol mandates since 2007, and in the 2010- 2011 period, the four western provinces all brought in biofuels mandates in diesel and gasoline. Also in 2010 and 2011, the federal government mandated renewable content in gasoline (5%) and diesel (2%) respectively, and by 2015, every province between Ontario and BC had a mandate for renewable content in diesel (ranging from 2-4%).

Canadian biodiesel producers responded by building sufficient capacity to meet the 170 million gallon per year (Mgpy) demand from provincial and federal mandates. But as is the case with Canada’s fossil fuels, cross-border trade in biodiesel and renewable hydrocarbon diesel (RHD) has been substantial. In 2015, US producers shipped 10 million gallons more of biodiesel into Canada than was imported from Canada to the US, and this trend is likely to be maintained.

The relative lull since 2011 in new regulation development appears to be ending. A number of factors are lining up to drive what could be a doubling or tripling of biofuel demand in Canada. The election in October 2015 of a pro-climate action federal government has renewed the call to expand and update renewable fuel standards. Unlike RFS2 and its GHG buckets, Canadian federal biofuel regulations have had no reduction thresholds or renewable biomass criteria.

An example of the pivot to including carbon intensity in biofuels regulations can be found in Ontario. It’s 2015 Greener Diesel regulation has a multiplier that allows obligated parties to use less of a lower carbon fuel, and the draft June 2016 Climate Change Action Plan is calling for a new regulation in the gasoline pool to reduce GHG pollution 5% by 2020. If that proposed Ontario regulation were expanded to the diesel pool from 2020 onward and deeper reductions set for 2025 or 2030, it would double or triple demand in a market with Canada’s largest fuel consumption.

There are also broad calls to update the federal RFS. Canada’s signing of the Paris climate agreement in October 2016 has refocused Ottawa’s hunt for significant GHG reductions. With transportation at 25% of Canada’s emissions, squeezing more reductions out of biofuels is likely to require GHG reduction criteria in regulations going forward. Whether this is in the form of a federal LCFS, or changes to existing biofuel mandates has yet to be determined.

Then we come all the way back to BC. In August 2016, the province announced that it will extend the LCFS to 2030, requiring a 15% reduction below 2010 levels (from the current 10% by 2020). And BC brings us to another trend in Canada: carbon pricing. BC has North America’s oldest scheme, a carbon tax that started in July 2008. Quebec has a cap and trade program, and Ontario has passed the legislation to implement one, with the regulation pending. Alberta has announced a carbon levy, and in October 2016, the federal government announced a carbon tax starting in 2018 that will hit $50/tonne by 2022.

A debate is currently underway in Canada as to the relative value of carbon pricing towards greater adoption of low carbon fuels. Analysis by Advanced Biofuels Canada and others show that carbon pricing’s current structure in Canada is having little impact on incenting lower carbon fuels, and in some cases is actually regressive on carbon (charging higher carbon taxes on low-carbon biofuels than on gasoline or diesel.) With lower-density fuels taxed volumetrically, consumers end up paying more carbon tax than for the fossil equivalent per distance travelled. And the structure of BC and Alberta carbon taxes sees B20 and E85 blends taxed at the same rate as diesel and gasoline. This clearly remains an area where regulatory change is required to align GHG reduction goals with the rules and tax codes to realize the reductions.

The months ahead will see decisions on the format of fuels policies, and their targets. Will Canada develop a RIN-style registry? Will it have a 2030 LCFS with CA-level targets? Provincial and federal governments will grapple with balancing support for a hard-hit upstream oil sector and support for renewables, and gaining agreement on shared actions across the confederation of provinces and territories with widely ranging economic realities and political orientations. Translating the surge in announcements on fuels-related climate action into stringent new regulations may drive new demand, but other actions are needed to ensure that Canada builds and operates competitive domestic production capacity in the face of US support for its biofuels industry. Keep an eye on Canada in 2017.

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