Biofuels and agricultural feedstocks Report Interpretation

Overview

This Goldman Sachs primer explains why biofuels are becoming a more important driver of agricultural feedstock prices. It links demand for ethanol, biodiesel and renewable diesel to oil prices, government mandates, tradable compliance credits, infrastructure constraints and limited near-term crop supply.

Core views

Biofuels are estimated to be a roughly 3.5 mbd industry in 2026, used almost entirely in transport, which represents about 95% of consumption. Production is concentrated in the US, Brazil and the EU, together accounting for roughly 80% of global output. Goldman Sachs argues that higher oil prices in 2026H1 lifted biofuel demand and that energy-diversification and farm-income objectives may lead governments to raise blending mandates further. As more crops are redirected from food and feed into fuel, biofuel demand becomes a more important determinant of crop prices. The feedstock link differs by fuel and region. Ethanol is made from corn and sugarcane and is generally blended into gasoline, although Brazil's flex-fuel fleet can use pure ethanol (E100); about 85% of new Brazilian light-vehicle sales are flex-fuel. Biodiesel uses vegetable oils from soybeans, rapeseed and palm, while renewable diesel mainly uses waste fats and used cooking oil and can directly substitute for conventional diesel. Local raw-material availability drives regional specialization: US corn ethanol, Brazilian sugarcane and corn ethanol, Indonesian palm biodiesel, and European rapeseed biodiesel. Ethanol was about 60% of global biofuel consumption in 2024. Biofuel production and consumption are also largely regional because domestic mandates require producers to consume most output locally, keeping exports small. Government mandates are the central demand mechanism because biofuels would often be less competitive than petroleum products without intervention, given their higher production costs and lower energy density. In the US and Europe, mandates account for nearly all demand and create a minimum consumption floor largely independent of feedstock availability. In Brazil, mandates account for roughly 40–60% of ethanol demand; the balance is influenced by drivers switching between gasoline and subsidized ethanol when relative prices favor ethanol. The report notes that Brazil has moved to a 32% mandatory ethanol blend in gasoline and Indonesia to a 50% palm-biodiesel blend. In the US, soybean oil's share used for biofuels has risen from 40% in 2020 to about 55% in 2026. Tradable compliance credits transmit policy and supply conditions into biofuel economics. Each gallon of renewable fuel generates a Renewable Identification Number (RIN), which becomes a tradable credit after blending. The EPA's annual Renewable Volume Obligation requires refiners and importers to submit RINs; they can either blend biofuels themselves or buy credits. Raising the obligation increases RIN demand, while feedstock shortages reduce RIN supply; both raise RIN prices. Higher credit prices incentivize blending and help sustain biofuel production when feedstock costs are elevated. The report also highlights the US RFS Set 2 rule for 2026 and 2027, under which 70% of exempted 2023–25 volumes are partially reallocated, seeking to preserve the aggregate mandate and support feedstock demand while shifting compliance costs to larger non-exempt refiners. Demand growth is not unlimited. The "blend wall"—the maximum biofuel share that existing fuel infrastructure, engines and vehicle fleets can absorb—constrains growth, particularly in Brazil and Indonesia where blend rates are closer to technical limits. Ethanol above certified levels can damage engines, while biodiesel can gel in cold weather. In the US and Europe, limits are more policy-driven: fuel-quality standards and vehicle-certification rules cap blends below what modern infrastructure could potentially handle, so regulators could raise those limits. On supply and price transmission, Goldman Sachs stresses that attractive margins can shift some feedstock toward fuel in the short run, but crop supply is fixed within a crop year and new processing capacity takes time to build. Brazilian flex-mills can reallocate sugarcane between sugar and ethanol based on relative returns, yet sugar production is typically capped at around 50% of cane crush, so much of the adjustment occurs through additional ethanol output. A global sugar surplus in 2018/19 depressed sugar prices and increased ethanol production; more recently, higher oil prices following the 2026 Hormuz disruption lifted ethanol prices closer to sugar prices and again shifted cane toward ethanol. Overall, stronger biofuel demand intensifies competition for crops across food, feed and fuel, raising the floor under feedstock prices.

Analysis framework

The report first maps the biofuel market and its feedstocks by region, then explains how oil prices and blending mandates affect demand. It follows the policy transmission through RVOs and RIN credits, assesses blend-wall constraints, and finally connects limited crop-year supply and Brazilian mill switching economics to feedstock-price support.

Methodology notes

• Industry AnalysisSupply-demand framework

  Biofuel demand and constrained feedstock supply

  The report links stronger oil-price and mandate-driven biofuel demand to crop prices because feedstock supply is largely fixed within a crop year and processing capacity expands slowly.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Policy-credit transmission from fuel mandates to agricultural feedstocks

  The report explains how mandates and RIN credit prices support blending and biofuel output, transmitting policy incentives into demand for corn, sugarcane, vegetable oils and waste fats.

• Industry AnalysisSubstitution-Effect Analysis

  Brazilian sugar-versus-ethanol allocation and flex-fuel switching

  The report compares relative fuel and mill economics to show how consumers and Brazilian mills can substitute toward ethanol when it becomes more attractive.

Key data

• Global biofuel production~3.5 mbd in 2026The US, Brazil and the EU account for roughly 80% of global production.
• Transport share of biofuel consumption~95%Biofuels are used almost entirely in transport.
• US soybean oil used for biofuels40% in 2020; ~55% in 2026Rising diversion of vegetable oil toward biofuel production.
• Brazil gasoline ethanol mandate32%Recently increased mandatory blend.
• Indonesia palm-biodiesel mandate50%Recently increased mandatory blend.
• Brazilian ethanol demand covered by mandates~40–60%The remainder is influenced by flex-fuel economics and relative gasoline and ethanol prices.
• Global ethanol share of biofuel consumption~60% in 2024Ethanol remains the largest biofuel segment.
• US RFS Set 2 reallocation70% partial reallocation of exempted 2023–25 volumesApplies for 2026 and 2027 and aims to preserve the overall mandate.
• Brazilian sugar output limit~50% of cane crushPhysical constraints mean changes in relative returns mainly affect ethanol output.

Impact & implications

The report's central implication is that energy-market conditions and biofuel policy can increasingly support agricultural feedstock prices by redirecting crops from food and feed into fuel. Tradable credits reinforce the mandate-driven demand floor, although technical and regulatory blending limits constrain how far demand can expand.

Risks

• The blend wall can limit biofuel-demand growth because existing engines, vehicles and fuel infrastructure can only absorb a maximum biofuel share.
• Brazil and Indonesia face more immediate technical constraints as blending rates approach certified or operational limits.
• Feedstock shortages can constrain biofuel output, although they also reduce RIN supply and raise credit prices.
• Biodiesel can gel in cold weather, creating an operational constraint on blending.

What to watch

• Further changes in blending mandates, including potential regulatory updates to US and European fuel-quality and vehicle-certification standards.
• Oil prices and the relative economics of gasoline, ethanol, sugar and other feedstocks.
• RVO requirements, RIN prices and implementation of the 2026–27 partial reallocation of exempted US volumes.
• The share of crop and vegetable-oil feedstocks diverted from food and feed to biofuels.
• Brazilian flex-mill allocation between sugar and ethanol and the proximity of blending rates to technical limits.