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  • Kristof Reiter

The Records Dilemma Is Decimating the UCO Market—but There Is a Way Out

Updated: Feb 2


How and why the used cooking oil market broke and what can be done to fix it.

 

After more than a decade of consolidation in the used cooking oil (UCO) recycling industry, the number of independent collectors has been slashed in half. Early on, acquisitions were limited to substantially sized regional players, but the latter years of consolidation have been punctuated by a newer focus on small to mid-size collectors tempted to cash in on recent price spikes.

 

With each stage of consolidation, the voices and needs of independent collectors and fuel producers became quieter in the halls of U.S. EPA and Washington, D.C., while the voices of vertically integrated fuel producers drowned them out. The small UCO collector, formerly able to ride the coattails of their larger recycling competitors who were actively funding industry groups and lobbyists, suddenly found themselves unprotected.

 

With no group representing independent collectors in the regulatory sphere to any substantial extent, UCO collectors’ feedback to recent regulatory changes seems to be going largely unheard.

 

The result is that new regulations were formed, and then revised as a result of the Clean Fuels v. EPA lawsuit, without much input from independent UCO collectors, creating a new market landscape little shaped by their need for a competitive, free and secure UCO trading market.

 

This article is an attempt to paint a clear picture of how and why the UCO market broke and, more importantly, what the industry can still do to fix it.

 

A Newly Fragmented Market

For years, EPA has emphasized the need for detailed records that account for the point of origin of UCO to root out fraud—primarily import fraud pertaining to mislabeled foreign palm oil—but also to assist in reducing the trade of stolen oil. In the latest iteration of the regulations, the agency offered two pathways through which a biofuel producer can meet the compliance regulations.

 

Option 1 is that the producer can take all responsibility—and liability—for compliance, but they may accomplish this in any way they see fit. In this scenario, anyone can be in charge of holding the records, which include the exact address (and commercial value to the recycler) of each and every one of the restaurants from which the UCO was collected. The producer can decide that it wants to hold the records, meaning the collector has no option but to hand over its confidential business records to a company that oversees one of its competitors, or that could trade their material and records to one of their competitors. Since the producer is the one ultimately responsible for compliance, it may view holding and reviewing the records itself as the lowest-risk—and lowest-cost—option.

 

A more supplier-friendly twist on this arrangement is that the producer can entrust the collector or a trader to maintain the records and be ready to hand them over in the case of an audit by a Renewable Fuel Standard or Low Carbon Fuel Standard auditor. There is, however, some risk to the supplier in this scenario, as it’s possible that records could end up being lacking, fraudulent or even nonexistent. This would be similar to the existing LCFS compliance system in which recyclers hold their own records until requested by an auditor.

 

Then, factor in the additional players in the market and you end up with a variety of compliance strategies and a further-segmented and noncommoditized market. In the end, only certain buyers match the needs and risk profile of certain sellers, and vice versa, resulting in a substantially less liquid and less competitive market. The end result? Lower prices for UCO, the planet’s most sustainable feedstock.

 

In the end, you have a segmented, confused and potentially risky market. It’s risky for the UCO collector wanting fair market value without giving up confidential business information. It’s risky for the fuel producer struggling to discern between authentic traceability and greenwashed feedstock.

 

An Ever-Deteriorating UCO Basis

For years, the price of distillers corn oil (DCO) and the price of UCO have tracked each other closely. The two garner nearly identical subsidies and are substitutable for each other at most renewable fuel facilities. However, since the finalization of the new EPA regulations in spring 2023, a sudden and dramatic divergence has been seen between the prices of these two commodities. In fact, as of December 2023, DCO is trading at a multiyear-high premium, while the price of UCO has fallen, as can be seen in Figure 1: “DCO minus UCO.”

 

Figure 1 (Source: Graph produced by Reiter Trading using CME and Fast-Market data)

One might ask, “Did UCO suddenly start having less BTUs per gallon? Did technology suddenly change, advantaging DCO?” The answer is “no.” The only difference is little to no perceived “provenance” risk with respect to DCO.

 

The “DCO minus UCO” graph is part of an internal derivate work performed by Reiter Trading utilizing CME and Fast-Market source data. With a gallon of UCO weighing 7.5 pounds, that’s a 60-cent-per-gallon discount on UCO being transferred from the UCO recycler to the profit margin of the fuel producer. Are there 60 cents of RIN risk when buying UCO?

 

The U.S. averages roughly 50 million gallons of UCO collected per month. At a 60-cent-per-gallon discount, there is $30 million per month in market mispricing in favor of the fuel producer due to market disruption and fragmentation. A fully vertically integrated operation would not be affected by this—it would just be moving money from one pocket to the other—but an independent UCO collector is taking this 60-cent-per-gallon hit to their top line.

 

A Nearly Perfect Solution Is Out There

In the latest clarification of EPA’s rule, the agency proposed an alternate compliance pathway (Option 2) in which the UCO collectors transfer their records to a third-party record holder that would hold the records for 10 years. The record holder would allow access to auditors hired by the fuel producers to do audits on their behalf.

 

The only problem with this solution is that in addition to choosing and hiring the auditor, the fuel producer is also the one authorized to select the record holder. It would make more sense and seem fairer if the UCO collectors were allowed to choose the record holder while the fuel producer selects the auditor. Under the current system, there’s no financial penalty to the fuel producer. In fact, as can be seen in Figure 1, they are benefiting at 8 cents per pound. It’s unrealistic to hope that fuel producers will be the ones to make the push to invest in third-party record holders.

 

If independent UCO collectors want a solution, they’ll need to band together and insist on using EPA’s alternative compliance system—third-party record holders—and insist that their customers do as well. Reiter USA is currently building such a record-holding company.

 

We are working hard to preserve a functioning marketplace for both collectors and producers. If you’d like to support us as we advocate for independent companies and build this record-holding company, please consider using our Reiter Trading services and the Route Simplified UCO-collection software. Not only will this help build your most-efficient routes, but it will also collect and organize all of your compliance records so you can easily transfer them to a third party when you need to.

 



Author: Kristof Reiter

CEO, Reiter Companies

888-428-5617

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