Des Moines Register
05-20-07
Economists foresee bleak growth in biodiesel
As the price of soybeans for the fuel goes up, even soaring petroleum costs may
not help the industry
By PHILIP BRASHER
REGISTER WASHINGTON BUREAU
Washington, D.C. - Willie Nelson may want to stick to his music. Biodiesel, the
fuel additive that the singer has tried to make famous, is eating the dust of corn
ethanol.
Biodiesel is made primarily from soybean oil, and the price of soybeans is up as
farmers put more and more land into production of corn, the more lucrative crop
of the two.
That is cutting the profit out of biodiesel production and could stunt the industry's
growth for a long time to come.
A new study by economists at Iowa State University suggests the biodiesel
market won't grow substantially unless the government requires its usage or
adds more subsidies.
"In our projections, we can't see why anyone would build a biodiesel plant right
now unless you are speculating on a biodiesel mandate," says Bruce Babcock,
director of Iowa State's Center for Agricultural and Rural Development.
Even an increase in petroleum prices, which raises the price of gasoline and
conventional diesel, wouldn't help much. Farmers would plant still more corn and
fewer soybeans. And that shift, from corn to soybeans, pushes up the price of
soybeans further, making biodiesel production even dicier.
Biodiesel producers are finding it harder to raise money for new plants, and some
planned refineries may not be built, said Jeff Stroburg, chief executive of
Renewable Energy Group Inc. of Ralston.
His company operates five biodiesel plants, and they are still making a profit, he
said. Three more plants are under construction in Washington, Farley and
Algona.
Development leaders hope Renewable Energy Group's newest plant, in Newton,
will help cushion the blow as Maytag winds down operations there.
"If we're going to continue to grow this industry and benefit society in the way it
will, certainly additional (government) incentives would help," he said.
Renewable Energy Group's plants are now running nearly at capacity. Production
typically slows down in the winter because there is less demand for biodiesel
then, he said.
The ISU study sees U.S. corn ethanol production growing over the next 10 years
to 15 billion gallons a year, triple last year's production, under current economic
projections. Ethanol production could double, to 30 billion gallons, if oil prices are
$10 a barrel higher than projected, the economists say.
Biodiesel production would reach just 500 million gallons a year, twice last year's
sales and about 1 percent of U.S. diesel consumption, even with the higher
petroleum prices.
The study was funded by the U.S. Agriculture Department as well as
agribusiness and food interests.
The economics of biodiesel are heavily dependent on the price of the feedstock,
whether it is vegetable oil, animal fats or waste restaurant grease, which
accounts for 80 percent of the cost of production.
Producers are struggling to break even at the current cost of soybean oil, more
than 30 cents a pound, economists say.
The U.S. industry also is being squeezed from other directions:
- Europe is moving as aggressively in biodiesel production as the United States
is in ethanol, another factor in rising global prices for vegetable oil. (Germany
alone produced nearly 700 million gallons of biodiesel last year.)
- A recent Bush administration ruling means that U.S. refiners can use vegetable
oil or animal fats in their diesel production and qualify for the $1-a-gallon tax
credit that had exclusively gone to biodiesel. ConocoPhillips has already
announced a deal to make diesel from fats generated by Tyson Foods' many
slaughterhouses.
Monte Shaw, executive director of the Iowa Renewable Fuels Association,
acknowledges that the profit margins are thin in biodiesel, but he's more bullish
about its future.
"There is the belief that the world market has the capacity of freeing up a lot of
feedstock for biodiesel when the demand hits," he said.
Iowa has 10 biodiesel plants with a production capacity of 167.5 million gallons a
year, according to Shaw's group. Four additional plants now under construction
can produce 150 million gallons annually.
Biodiesel producers are asking Congress to authorize a 43-cent-a-gallon subsidy
to go with the $1-a-gallon tax credit for biodiesel that lawmakers enacted in 2004.
Additionally, two Republican congressmen, Tim Walberg of Michigan and Phil
Gingrey of Georgia, have introduced legislation that would require U.S. diesel to
contain 2 percent biodiesel.
But the prospects in Congress for new biodiesel incentives are not clear. Both
the Bush administration and lawmakers are focused on targeting additional
subsides and usage mandates to cellulosic ethanol, which would be made from
crop residue, forestry waste and perennial grasses, not biodiesel.
"Hopefully, we will be successful by the end of the day," said Larry Schafer, who
advises the National Biodiesel Board.
Nelson, who markets his own brand of biodiesel called BioWillie, likes to call the
fuel a "light at the end of the tunnel" for farmers.
If the economists are right it will be a long tunnel.
Reporter Philip Brasher can be reached at (202) 906-8138 or
pbrasher@dmreg.com