Irwin, Good analyze ethanol, biodiesel RINs relationships

By Susanne Retka Schill | September 24, 2015

Ethanol D6 RIN prices have stayed relatively stable over the summer while D4 biodiesel RINs prices plummeted, Illinois economists Scott Irwin and Darrel Good point out in a recent FarmDocDaily post, “Why Isn’t the Price of Ethanol RINs Plummeting?"

Understanding why changes in RINs pricing occur is important, the economists write, “since RINs prices represent the marginal cost of complying with RFS mandates.”  In an ongoing analysis of RINs markets, they economists point out the relationship between D4 biodiesel and D6 ethanol RINs have been following unusual patterns since the U.S. EPA issued its proposal for the 2014, 2015 and 2016 RFS mandates in late May. “The ratio of D6 to D4 prices dropped from about 0.90 before the EPA announcement to near 0.45 at the bottom, recovered all the way back to 0.90 in early September, and then has fallen back to around 0.70 in recent days.”

They describe the economic models they have built to help conceptualize and analyze drivers affecting RINs prices. The authors say “the key to understanding the large fluctuations in the relative price of D6 and D4 RINs is market expectations about how soon the stock of RINs will be exhausted.”

The ratios between D6/D4 RINs provide insights on those expectations. They write in the final implications section of their analysis: “Before the EPA released its preliminary proposal for 2014-2016 RFS standards on May 29, 2015, the ratio of D6 and D4 RINS prices was in the vicinity of 0.90. This indicated market participants expected the EPA to return to statutory renewable mandate levels in the near future, perhaps as early as 2016, which would quickly exhaust the stock of RINs. The plunge in the D6/D4 price ratio below 0.50 after release of the EPA proposal suggests market participants initially viewed the proposed renewable volumes as pushing the exhaustion date for RINs stocks well off into the future. The recovery of the D6/D4 price ratio back above 0.75 over the summer may be related to some uncertainty or confusion about how the RFS mandates announced by EPA would be enforced.”

Underlying the uncertainty is the policy direction to be unveiled when EPA publishes the final rule, expected in late November. “Whether the mandates would be enforced based strictly on volumetric requirements or based on fractional blending requirements could influence the size of the renewable gap and how soon the stock of RINs is exhausted.”

To read the full analysis and view the supporting charts and tables, click here