1. Our latest FDD on the renewable diesel boom is titled "Is the U.S. Renewable Fuel Standard in Danger of Going Over a RIN Cliff?" That should get your attention this morning. It is going to take me several twitter threads to go through the highlights.
farmdocdaily.illinois.edu/2023/05/is-the…
2. In this thread, I am going to go through the first part of our analysis. Start with the very basics of binding and non-binding RFS mandates. In a standard supply/demand framework, here is a binding mandate.
3. A binding mandate "binds" in economic terms because the mandate volume exceeds the competitive market equilibrium quanitity. To get the higher than equilibrium Q produced, producers have to be offered a higher price and consumers a lower price.
4. The wedge between producer and consumer prices is the value, or price, of the RIN used for compliance with the mandate. Key takeaway: binding mandate results in positive RIN price and mandate sets maximum demand for the biofuel.
5. Here is a non-binding mandate (they do exist). Key takeaway: non-binding mandate results in a zero RIN price and competitive markets sets the demand for the biofuel.
6. With this lens, lets now take a look at actual RIN prices. Remember: positive RIN prices imply a binding mandate. Except for D6 ethanol prices previous to 2013 and maybe parts of 2019, high RIN prices imply all RFS mandates have been highly binding.
7. Also notice the historically high RIN prices the last few years. Clearly, RFS mandates are highly binding. The key implication is that the RFS mandates then set the maximum demand for the mandated biofuels. So, we know the size of the market once we know RVOs for a year.
8. Another important point. The RFS is a national program so any RFS mandate that binds sets the maximum national demand for the mandated biofuel. The CA LCFS only affects CA demand which is obviously smaller than national demand.
9. These simple S/D results are the foundation for our "RIN cliff" analysis. Will the RFS do this? Stay tuned for the next thread.
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