Successful Farming
05-10-07
Will biodiesel flounder in a sea of soybean oil?
Dan Looker
Successful Farming magazine Business Editor
Central Iowa Energy's new 30-million gallon biodiesel facility near Newton, Iowa
(photo by Dan Looker).
Earlier this week, state and local government leaders gathered outside Newton,
Iowa, to dedicate one of the largest and most efficient biodiesel plants in the
nation, a 30-million gallon facility owned by Central Iowa Energy.
"Behind me is a state-of-the art biodiesel plant that is the result of an investment
of about 500 Iowans," Jeff Stroburg, CEO of the company that built the plant, the
Renewable Energy Group, said just before cutting a ceremonial ribbon on
Tuesday.
The small crowd of investors and officials had a lot to be proud of.
It took just 14 days to raise nearly $20 million from the 533 investors, Central
Iowa Energy's board chairman Jim Johnston told the group gathered under a tent
outside the plant.
After the plant opened on April 5, it was running at about full production after just
five days, another board member, Warren Bush of Wall Lake, Iowa, told
Agriculture Online.
And, according to Stroburg, all of the biodiesel made since then has met or
exceeded REG's high quality standards. Not only did the Ralston, Iowa-based
company build the plant, it manages it and will market its fuel to places like
Safeway gas stations in California and New England heating oil distributors. REG
sells between 40% and 45% of the nation's biodiesel fuel. With two similar plants
in its network expected to open later this year, it will have 212 million gallons of
capacity, more than the entire nation produced in 2006.
Yet, while ethanol catches most of the media attention these days, the fledgling
biodiesel industry faces a huge economic challenge. The soybean oil that can
make up to about 80% of a typical plant's production costs is approaching record
prices, at a time when the soybean crushing industry is almost swimming in a
record supply of oil.
That's right. Near-record prices. Record stocks.
If that doesn't make economic sense to you, it doesn't to a lot of people in the
industry, including a somewhat bemused Stroburg.
"Probably our biggest challenge, and you've probably heard it from others, is the
cost of feedstock," Stroburg told Agriculture Online after the ribbon cutting.
Nearby futures prices for soybean oil on the Chicago Board of Trade closed at
nearly 33 cents per pound Wednesday. Industry observers like Iowa State
University ag economist Roger Ginder estimate the breakeven price of
soybean oil for the biodiesel industry at about 34 cents for efficient plants.
"We're still in the black, but it's a challenging market," Stroburg said.
The soybean oil market also looks odd to Matt Upmeyer, a risk management
consultant at FC Stone in West Des Moines, Iowa. Upmeyer's group within FC
Stone hedges soybean oil for a large portion of the nation's biodiesel industry
and he understands the market for soybeans and their products, meal and oil.
Currently the nation has about 3.3 billion pounds of soybean oil stocks and it's
been setting records for the last five months, he said. And futures prices, while
not a record, are close to the recent historical high of about 35 cents per pound.
"There's no fundamental reason why soybean oil is where it's at," Upmeyer told
Agriculture Online.
One possible reason is that there seems to be more correlation than usual
between soybean oil futures and heating oil futures, suggesting that futures
traders are starting to view soybean oil differently than in the past.
"I think people are focusing on biodiesel more as an energy source than as a
piece of the soybean crush," Upmeyer said.
Also, with planted acres of soybeans expected to decline this summer, traders
seem to be bidding oil prices up just on expected future demand. The USDA's
most recent Oil Crops Outlook mentions, too, that India, China and Europe are
expected to import more soybean oil in the coming months.
Not all biodiesel plants are paying current spot prices tied to near-record futures.
"The folks that did forward contract are way ahead of the curve and producing
biodiesel at a decent margin," Upmeyer said.
Another way that biodiesel plants are staying competitive is to make fuel from a
mix of soybean oil and cheaper animal fats.
Central Iowa Energy board member Warren Bush said that his group opted to
spend an additional $5 million on a fatty acid stripper that will allow it to make fuel
from animal fats as well as soybeans. Currently, animal fats cost about 8 cents
per pound less than soybean oil, he said.
In spite of tougher economics for the biodiesel industry, REG's Stroburg expects
the industry to continue expanding this year but at a slower pace. In 2005, the
industry had a capacity of about 75 million gallons that grew to about 200 million
gallons last year. This year it may grow to about 300 million gallons, Stroburg
said.
Because of tougher market conditions, "some of the plants that have been
announced have been slowed," Stroburg said.
One that is close but not quite ready to start is Heartland Biodiesel of Rock Port,
Missouri, another REG-network plant that will be owned by Missouri investors.
"If we'd gotten into this game maybe two months earlier, we'd be done by now,"
said Stan Griffin, a Rock Port banker and manager of his family's farm who is
Heartland's board chairman. "We're looking at a $23 million goal and we're just
short $1.8 million."
The project is expected to cost about $50 million for the plant and working capital
needed at startup. About half of that cost would be lender financing.
The minimum investment in the plant is $20,000. Higher soybean oil prices may
have discouraged some investors, Griffin said.
Heartland's equity drive started last August. That's when a new Missouri law
kicked in that will give biodiesel plants with majority ownership by Missouri
investors a tax credit. For the planned 30-million gallon plant, it will amount to $6
million per year for five years.
That gives Heartland an advantage. So does the fact that it, too, will be a plant
capable of converting animal fats or vegetable oils to biodiesel.
"We felt like we had a little bit better business model because you can shop, if
you will," Griffin told Agriculture Online this week.
Heartland will be 60 miles away from a Bunge soybean crushing plant in Council
Bluffs, Iowa, one of the largest continuous crush plants in the U.S .Bunge has an
equity interest in REG, but Heartland would also be free source soybean oil from
several other soybean crushers, including an AGP plant in St. Joseph, Missouri
and Cargill in Kansas City.
Several livestock packers and renderers are located just as close.
In spite of the current high soybean oil prices, Griffin believes the outlook for
soydiesel production remains good. Like the ethanol industry, biodiesel now has
federal tax credit that cuts the cost of the renewable fuel for blenders. The tax
credit is $1 per gallon. And many of some 800 people who have already invested
in the plant like the idea that it will help the U.S. lower its dependence on foreign
oil, Griffin said.
"We feel very positive as far as the energy market goes," Griffin said. "Fuel prices
are going to be high and you can afford to pay high prices for soybean oil if
gasoline is $4."
If Missouri residents are interested in investing in Heartland Biodiesel, LLC,
Griffin said they can call the project coordinator Paul Zimmerman at 660/7446210.