Biodiesel producers remain profitable despite a recent drop in prices for the green fuel. An analysis from Scott Irwin and Darrel Good with the University of Illinois shows that several factors, including an uncertain future of federal tax credits and a drop in soybean oil prices.

There are likely two explanations for the current spike [in profits]. First, diesel blenders once again are motivated to incentivize an increase in the production of biodiesel during 2013 to take advantage of the blenders tax credit that was reinstated for this year only. It is uncertain whether it will be extended for 2014. Second, the biodiesel mandate under the RFS was expanded by the EPA from 1 billion gallons in 2012 to 1.28 billion gallons in 2013 and there may be a need for additional production above the mandate in 2013 in order to meet parts of the advanced and renewable mandates.

Figure 3 … helps to explain why biodiesel production profits have only dropped slightly since mid-July in the face of falling biodiesel prices. The sharp drop in soybean oil prices has more than offset the decline in biodiesel prices, thus propping up margins.

The analysis goes on to say that the biodiesel market is playing a big role in Renewable Identification Number (RIN) prices, as blenders have bid up the price of biodiesel since the beginning of this year compared to soybean oil prices.