2025 Biodiesel Economics: High Stakes, Negative Margins, and a Looming Policy Reset

European biodiesel markets closed the week relatively firm in spot trading, but overall sentiment remains cautious. UCOME traded at $830/t for early May loadings, with FAME0 closing the day at $1,280/t, reflecting only marginal changes. In the ARAG window, outright prices nudged slightly higher alongside gasoil, but traders are increasingly watching forward curves where premiums for later loadings are eroding, hinting at underlying market softness.

Across the Atlantic, RIN prices in the US continue to support bullish sentiment. D4 RINs pushed above $1.15/RIN, boosted by a stronger soybean oil export picture and growing awareness that the biomass-based diesel obligation for 2026 will require a sharp step-up in production. According to Lipow Oil Associates, the 2026 Renewable Volume Obligation (RVO) for biomass-based diesel is expected to increase to 5.04 billion gallons, up from 3.35 billion gallons in 2025. This substantial increase is modeled assuming an industry utilization rate around 80% and could theoretically rise to 85% under favorable conditions. However, a closer reading of capacity factors shows that much of this optimism is being driven by ethanol’s stable blending margins rather than actual biodiesel or renewable diesel economics. Renewable diesel producers such as Diamond Green Diesel (DGD) are currently operating at only around 65% utilization according to Valero's earnings report, suggesting that ramping up biomass-based diesel output will be far more challenging than headline estimates suggest.

The firming in RINs prices therefore reflects a structural tightening of compliance supply — yet it may also trigger political backlash. The sharp increase in RIN values will likely reinforce the adversarial position of independent refiners, who already have a sympathetic ear within the current U.S. administration, much like during the 2017 waiver battles. These refiners are expected to fight tooth and nail to pressure Washington for relief, either through the reintroduction of the Biodiesel Tax Credit (BTC/40B) or by watering down the impact of 45Z subsidies. Traders should prepare for a highly politicized second half of 2025 as these tensions build.

Adding to the pressure is the notable carry structure in the soybean crush market: the July/September spread is reflecting nearly $0.50/bushel. This steep carry suggests crushers are incentivized to delay crush activity despite healthy soyoil exports, particularly as margins look set to improve later in the summer.

Despite the rally in D4 RINs to $1.157/RIN, biodiesel crush margins on the futures screen remain sharply negative, currently around –30 cents per gallon. Moreover, the forward curve shows additional deterioration, widening to nearly –42 cents per gallon later in the summer even at today’s RIN levels. The persistent margin compression highlights how even supportive regulatory values are insufficient to offset the overwhelming cost pressure from elevated soybean oil values relative to diesel. Historically, negative screen margins of this depth have foreshadowed production slowdowns, discretionary blending reductions, or government intervention if sustained for several months.

Meanwhile, physical export markets for soybean oil paint a more cautious picture. FOB Paranaguá premiums are deeply negative, with May shipments offered around –50N to –400N, June cargoes at –400N to –550N, and August/September offers widening further to –460N to –700N. This widening discount reflects weak physical demand and abundant availability from Brazil, signaling potential pressure ahead on futures if the export pace slows or buyers retreat.

A persistent concern remains the elevated BOGO (bean oil/gasoil spread), which is now hovering around +487 $/t. This is eerily reminiscent of 2020 or the spring of 2017 — both instances that preceded large corrections. While today's premium can be partly explained by biofuel demand and logistics constraints, the historical risk is that once gasoil strengthens or bean oil softens, the BOGO can compress sharply, leading to sudden margin deterioration for biofuel producers.

Adding to the uncertainty is the evolving U.S.–China trade situation. Should a resolution be forged later this year, it would almost certainly involve China committing to massive purchases of U.S. soybeans and grains. Such a shift would cannibalize South American exports that currently dominate global flows, abruptly tightening U.S. domestic supplies. This potential reordering of trade patterns makes current forward planning for crush margins, feedstock availability, and export competitiveness extremely difficult, and could introduce significant volatility into biofuel feedstock markets during the second half of 2025.

Looking forward, the structure of the crushing market, the growing political sensitivity around RIN prices, the precarious global trade flows, and the stubbornly wide BOGO spread are raising risks of market dislocations. Traders should remain alert: current pricing dynamics are increasingly fragile, and any external shocks — whether from Argentine supply recovery, U.S. planting surprises, political intervention, or China trade realignment — could quickly unwind today's apparent strength.