Soft Oils Slide, 45Z Stalls—Is Palm Oil the Next Big Winner?

This week’s developments in biofuels policy and pricing offer a glimpse into a sector navigating both regulatory gridlock and shifting feedstock dynamics. On the U.S. front, the much-anticipated “big and beautiful” biofuels bill has stalled in the House Budget Committee, delaying proposed reforms to the 45Z clean fuel production credit. D4 RINs traded flat at 1.065, offering no improvement to screen biodiesel crush margins, which remain negative at –44 cents per gallon. Meanwhile, CARB has requested an early effective date of July 1 for its revised Low Carbon Fuel Standard (LCFS), signaling California’s determination to press ahead on transport decarbonization despite federal inaction.

Feedstock economics reflect this policy uncertainty. In Europe, soybean oil continues to command a premium over rapeseed oil, with July SBO quoted at €1,085/mt versus €1,070/mt for RSO. This spread translates into a gross margin of $124/mt for soybean oil, while FAME 0 trails with only $69/mt. UCOME continues to lead the ARAG window, priced at $1,397.63/mt, while FAME 0 lags at $1,295.96/mt. BOGO has dropped nearly two standard deviations to +463, while POGO for July remains near +320—both suggesting persistent softness across soft oil markets amid fading demand signals.

In parallel, the debate over ILUC (Indirect Land Use Change) continues to intensify. Treasury’s consideration of removing ILUC from the GREET model—originally designed to improve CI scores for U.S. crop-based fuels like soy and canola—may have unintended consequences. Environmental groups warn that eliminating ILUC would dilute the climate integrity of the 45Z program by allowing credits for fuels with questionable net GHG reductions. The Clean Air Task Force and others argue that ILUC remains essential for evaluating true emissions impacts, particularly for high-risk feedstocks like palm oil.

This concern is not abstract. While Chinese UCO naturally contains palm oil due to its common cooking practices in Asia, the removal of ILUC could make virgin palm oil once again eligible for U.S. tax credits under 45Z. Palm oil has long been excluded from advanced biofuel categories due to its ILUC burden, but without that filter, its competitive price and strong direct emissions profile could make it economically attractive again. This would reshape U.S. import dynamics and potentially crowd out domestic oilseeds, while also raising concerns about deforestation and biodiversity loss.

In summary, removing ILUC may provide short-term gains for U.S. agriculture, but it risks opening a backdoor for palm oil—both indirectly via waste streams and directly through requalification. As policymakers weigh farmer profitability against climate credibility, the decisions made around 45Z will have far-reaching implications for credit values, feedstock sourcing, and the environmental legitimacy of U.S. biofuels policy.