Brazil biodiesel logistics differentials widen as blend mandate rises

Logistical differentials for Brazilian biodiesel contracts between producers and fuel distributors widened substantially for September and October, surpassing industry expectations, amid a seasonally active demand and higher soybean oil prices.

Overall, the differentials were approximately Real 300/cu m higher than those recorded between July and August. Participants were surprised by the ratio, which was nearer to the upper range estimated by the sector.

Platts, part of S&P Global Commodity Insights, surveyed 46 companies between Aug. 19-29 to calculate the simple average differential, or “fee” as it is commonly called, for biodiesel term contracts across eight key microregions highlighted in the map.

The fee reflects the producer’s margin and is part of a pricing formula that also factors in soybean oil futures on the CBOT, the vegetable oil price differential at the Paranagua port and the Brazilian real-US dollar exchange rate.

Fees levels soared across regions during the September and October negotiations. In the Cuiaba-Rondonopolis microregion in Mato Grosso state, the fee value was assessed at Real 230/cu m, resulting in an increase of Real 361/cu m from a discount recorded between July and August.

The microregion Sorriso-Nova Mutum, also in Mato Grosso, recorded the second-largest increase for this period, at Real 341/cu m from the previous interval. The smallest change occurred in Mato Grosso do Sul microregion, where the fee rose Real 235/cu m compared to July and August.

In addition to the high price differentials, the market highlighted the rapid pace of deals closed during the period. Major retailers reported having negotiated between 60% and 80% of their demand for the period as early as the week of Aug. 15, while they had until Aug. 25 to finish the negotiations, according to the national regulation.

In Brazil, biodiesel producers and retailers typically negotiate contracts every two months, a practice inherited from the public auction system that ended in late 2021. Since January 2022, biodiesel has been traded directly in the open market.

Fundamentals behind the increase

A combination of factors was cited as the reason for the increase in contract prices. On the demand side, the influence came from three factors: the increase in the mandatory blending of biodiesel into diesel to 15% from 14%, which took place on Aug. 1, the need for distributors to purchase volumes they could not carry under previous contracts, and a period of seasonally stronger demand for this biofuel.

On the production side, tight gross crushing margins resulted in a less favorable scenario to produce soybean meal and oil, and the expectation that plants will enter scheduled maintenance resulted in a concern about a supply reduction.

The perspective that more secondary raw materials, such as beef tallow, would be available in the Brazilian market was also mentioned by a source. Since it did not occur, the competition for soybean oil was further intensified.

Beef tallow is among the targets of US tariffs against Brazil, and therefore, shipments to the main consumer of the Brazilian feedstocks were expected to decrease. Although this movement has not yet been felt in the domestic market, there is an expectation that the tariffs’ impact will show the first signs in this market in September.

Spot market exposure

While contract negotiations progressed rapidly, the biodiesel spot market remained quieter, and this trend is expected to continue in September, according to industry participants.

Since the spot market also uses the fee as a reference for determining its price levels, most retailers said they have stocked up on contracts to reduce their exposure to the spot market and will only seek out this modality in case of opportunity or specific need.

Tags: Brazil, prices, biofuel