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The Profitability of Biodiesel Production in 2016: Feasting on an Expiring Tax Credit?

The U.S. biodiesel production industry has a distinct "feast or famine" pattern in terms of profitability. The industry made very large profits in 2011 and 2013, but losses in most years previous to 2011 and losses again in 2014 and 2015. The feast or famine pattern has been closely tied to expiration of the $1 per gallon biodiesel tax credit in the face of binding RFS biodiesel mandates. The biodiesel tax credit is once again scheduled to expire at the end of 2016. The key is that blenders face a binding RFS biodiesel mandate and it is rational to effectively purchase the biodiesel at a discount in the current year, due to the tax credit, in order to meet mandates in later years. Once the tax credit expires, the incentive to push up prices, profits, and production disappears and the biodiesel industry returns to a norm of losses. This cycle, of course, depends on blenders perceiving there substantial uncertainty whether the tax credit will be reinstated or not for the following year.

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Farm Doc Daily
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