Arkansas Democrat Gazette, AR
12-02-07
Is biofuel industry boom going bust?
BY NANCY COLE
The fledgling U. S. biodiesel industry is struggling to cope with soaring soybeanoil prices, a glut of production capacity and a poorly developed distribution
system.
One of Arkansas’ two biodiesel producers operates only seasonally, yet four new
plants are scheduled to open during the first half of 2008, adding more than 63
million gallons of annual production capacity to the existing potential of 27 million
gallons.
Industry experts say a shakeout is inevitable, with many plants closing and
others operating at well below their production capacities.
“It’s absolutely devastating the industry,” said Rich Byers, biofuels manager at
FutureFuel Chemical Co. near Batesville, referring to mounting raw material or
feedstock costs.
FutureFuel, which began producing B 100 — pure biodiesel — in October 2005,
uses soybean oil to make about 85 percent of its fuel.
“When we started, we were buying soybean oil at between 22 and 25 cents a
pound. Now it’s 45 to 47 cents a pound,” Byers said.
Because feedstocks account for about 85 percent of biodiesel production costs,
“margins are very sensitive to feedstock costs,” said Miguel Carriquiry, an
agricultural economist at Iowa State University in Ames.
Even though biodiesel can be made from a variety of vegetable oils and animal
fats, supplies of most feedstocks other than soybean oil are more limited and
their prices tend to be closely related with that of soybean oil, Carriquiry said.
FutureFuel also uses cottonseed oil, pork lard, beef tallow and poultry fat to
make biodiesel, and the company has tested hundreds of other feedstocks
including castor oil, sunflower oil and canola oil, Byers said.
“We’ve even done experiments with trying to recover spoiled and soured oils
and, unfortunately, they don’t work. Bad oil makes bad biodiesel,” he said.
The price of another key biodiesel ingredient also has skyrocketed during the
past month, Byers said. Methanol, which is used as a catalyst in making
biodiesel, used to sell for about 14 cents a pound but now costs 45 cents a
pound, he said. Thirteen pounds of methanol are required for every 100 pounds
of soybean oil.
FutureFuel is not facing these challenges alone.
The entire biodiesel industry is confronting difficulties, said Jenna Higgins,
communications director for the National Biodiesel Board, the industry trade
association based in Columbia, Mo.
As of Sept. 7, the industry consisted of 165 commercial biodiesel plants with an
installed annual production capacity of 1. 85 billion gallons, Higgins said. Four of
those plants are being expanded and 80 new ones are under construction, which
will add 1. 37 billion gallons of annual production capacity.
“Some biodiesel projects are being put on hold, some plants have shut down....
Unfortunately, not everyone will make it through,” Higgins said. Such problems
are not unusual for an emerging industry, she said, and the current strain should
have some positive effects. “It’s sending signals to the market to produce more
vegetable oil as well as spurring new technology that will lead us down the path
toward second-generation biodiesel,” Higgins said.
SOYBEAN OIL PRICES The price of soybean oil, which serves as the feedstock
for about 80 percent of all the biodiesel made in the United States, has risen
more than 75 percent in the past two years, according to the U. S. Department of
Agriculture’s Economic Research Service. Soybean oil is trading on the Chicago
Board of Trade at record high prices of more than 47 cents a pound, exceeding
the previous high of 45 cents a pound that was set in 1974.
Biodiesel producers need 7. 5 pounds of soybean oil to produce one gallon of B
100. At 47 cents a pound, that means $ 3. 53 in feedstock costs alone.
“The major problem is getting the physical supply,” said Mark Ash, soybean and
oil crops analyst with the USDA’s Economic Research Service. “It’s the food
processors that are fighting [biodiesel producers ] tooth and nail for soybean-oil
supplies.” Food processors used to consume more than 90 percent of the
approximately 20 billion pounds of soybean oil produced annually in the United
States, Ash said. Today, however, biodiesel production probably consumes
about 20 percent of U. S. soybean oil, and export demand is growing, he said.
Soybeans are Arkansas’ No. 1 row crop in terms of acreage, and the state ranks
10 th nationwide in soybean production. The state’s farmers harvested an
estimated 2. 8 million acres in 2007. Last year’s crop was valued at $ 698. 4
million.
Nonetheless, Arkansas has only three soybean crushing plants that produce
soybean oil and meal. The largest, Riceland Foods Inc. in Stuttgart, can produce
about 25 million gallons of soybean oil annually; Arkansas SoyEnergy Group LLC
near DeWitt can produce 3. 5 million gallons; and England Dryer and Elevator
Inc. in England can produce 1 million gallons.
The pressure on soybean-oil prices increased in 2007 because many U. S.
farmers shifted from soybean to corn production, in response to high corn prices
buoyed by strong ethanol demand. That crop-planting pendulum is expected to
swing in the opposite direction in 2008, Ash said.
“We’ll probably have a lot bigger soybean crop next year, but that may only
moderate prices a bit,” he said.
Soybean-oil prices are likely to remain high, in part, because of the recent influx
of speculators and traders in agricultural commodity markets, said Lenny
Carpenter, who follows renewable fuel and vegetable-oil markets for The
Jacobsen Publishing Co. in Chicago.
As a result, it will be “incredibly tough” for biodiesel manufacturers to make a
profit, Carpenter said.
“About the only way you can do it is to have a dedicated feedstock that next to
nobody else wants, you’ve got a plant that’s paid for and you have somebody
with a ‘green mind-set’ who wants to blend biodiesel with diesel,” he said.
Arkansas SoyEnergy, which expects to begin producing biodiesel in March, will
be the state’s only facility with a dedicated feedstock supply. The company’s
soybean crushing operation went into operation earlier this year, General
Manager Terry McCullars said.
Although the company’s biodiesel plant will be able to produce up to 7. 5 million
gallons of fuel annually, “we’re only going to be producing 3. 5 million gallons of
soy oil, and our intentions are not to go out and buy any other oil,” McCullars
said.
Increasing petroleum-diesel prices have been one of the few positive trends
affecting the biodiesel industry, economist Carriquiry said.
During the past year, for example, the average price of petroleum diesel in
Arkansas has increased from $ 2. 50 a gallon to $ 3. 37 a gallon, according to the
AAA.
These higher petroleum-diesel prices make it possible for biodiesel producers to
raise their own fuel prices, thus covering more of their own production costs,
Carriquiry said. Unfortunately, soybean-oil price increases have often outpaced
petroleum-diesel price increases, he said. Finally, biodiesel blenders benefit from
a major federal tax incentive: a $ 1 excise tax credit for every gallon of B 100 that
they mix with petroleum-diesel fuel. The most common blends are B 2 and B 5,
with the number representing the percentage of biodiesel. But many engine
manufacturers warranty their equipment for use with blends of up to B 20. The
federal biodiesel tax incentive is to expire Dec. 31, 2008.
OVERCAPACITY Brad Anderson, a senior vice president with Informa
Economics Inc. in Memphis, says the biodiesel industry is largely responsible for
creating its own predicament. “The problem is there’s not enough vegetable oil to
satisfy all the biodiesel capacity that we’ve built over the last couple of years,”
Anderson said. “The biodiesel industry can only pay so much for [feedstock ],
and then biodiesel becomes uneconomical,” he said. “There will be a shakeout in
the industry for the most efficient plants and the ones that are best positioned
relative to the source of soybean oil and the demand for biodiesel.” With this
year’s anticipated U. S. biodiesel production of approximately 400 million gallons,
the industry is using only about 20 percent of its installed capacity.
Signs of this excess capacity are everywhere.
Last month, for example, a biodiesel plant in northeastern Oklahoma filed for
Chapter 7 bankruptcy. Green Country Biodiesel LLC in Chelsea, Okla., had
begun operating in 2005.
At least one Arkansas biodiesel project has been shelved.
Green Way Bio Energy LLC no longer plans to build a 5-milliongallon annual
production capacity biodiesel plant at the Little Rock Port, according to Keith
Thompson, a principal in the project.
Other planned facilities in the state also have encountered problems.
RBE Arkansas LLC, which wants to build a $ 1. 8 billion complex at the HelenaWest Helena-Phillips County Port — a foodgrade processing plant, a fishpellet
plant, an 81. 5-million-gallon biodiesel plant and an ethanol plant — has been
delayed because of financing problems.
Construction plans for a soybean-crushing facility and a 150-million-gallon
biodiesel plant at the Port of Yellow Bend in southeast Arkansas are “on hold,”
said John Harbour, who has been working on the project with Chicot County,
International Bio Fuels Corp. of Vancouver, Wash., and Consolidated Biofuels
Inc. of Chicago.
“It’s scary getting into the market right now,” said Bernie Crowley, owner of Delta
American Fuel LLC, which is building a 40-million-gallon biodiesel plant near
Helena-West Helena that is to open in March.
“When we started this project about two years ago, I had an offer to buy ‘as much
soybean oil as I could take’ at 18 cents a pound,” he said.
Despite the fact that soybeanoil prices now are approaching 50 cents a pound,
Crowley believes the biggest challenge to biodiesel production is ethanol’s
favored position. Specifically, the Energy Policy Act of 2005 established a
“renewable fuel standard” that requires gasoline sold in the United States to
contain a minimum amount of renewable fuel. By 2012, for example, the
standard requires that 7. 5 billion gallons of renewable fuel be blended into
gasoline.
No such renewable fuel standard or built-in floor for biodiesel demand exists on
the national level.
“Biodiesel’s kind of got one arm tied behind its back in the competition for
feedstock acres,” Crowley said.
Establishment of a diesel renewable fuel standard is a major legislative goal of
the biodiesel industry said, Larry Schafer, a Washington-based senior adviser
with the National Biodiesel Board. Starting with a floor of 450 million gallons in
2008, the proposed biodiesel standard would increase to 1. 25 billion gallons by
2012, he said.
This legislative proposal is based upon current biodiesel production levels and
the relative sizes of the U. S. gasoline and diesel markets, Schafer said. In 2006,
the United States consumed about 140 billion gallons of gasoline and about 60
billion gallons of diesel fuel, according to the Energy Information Administration.
Other legislative initiatives of the biodiesel industry include an extension to Dec.
31, 2010, of the blenders tax credit and reinstatement of a 2002 Farm Bill
program that subsidized biodiesel producers for a portion of their feedstock
costs.
Some states also have passed legislation supporting the biodiesel industry.
Since September of 2005, for example, Minnesota has mandated that all diesel
fuel sold in that state contain at least 2 percent biodiesel. Gov. Tim Pawlenty
recently announced plans to gradually increase that mandate, eventually
reaching 20 percent biodiesel by 2015. Last month, Massachusetts Gov. Deval
Patrick proposed legislation that would require diesel fuel and home-heating oil to
contain at least 2 percent renewable fuel by 2010 and 5 percent by 2013. The
Arkansas Agriculture Department recently announced the availability of grants
designed to help develop the state’s alternative fuel industry. The program, which
was established by Act 873 of 2007, received $ 20 million for the biennium that
ends June 30, 2009. Grants of up to $ 2 million per year are available to
alternative fuel producers and feedstock processors. Grants to alternative fuel
distributors are limited to $ 50, 000 per distribution site.
DISTRIBUTION Many biodiesel producers believe the sale of biodiesel has been
hampered by a poorly developed distribution system. “If you drive down the
interstate, it’s difficult to find biodiesel,” said Steve Danforth, co-owner of Patriot
BioFuels Inc., a 3 milliongallon annual capacity biodiesel producer in Stuttgart.
Only 59 retail fuel outlets in 28 of Arkansas’ 75 counties sell biodiesel blends,
according to Arkansas Farm Bureau, which tracks biofuel availability. Sixteen of
those outlets, however, sell only off-road biodiesel.
Those numbers compare with a total of about 2, 300 retail fuel outlets statewide,
1, 200 of which sell diesel fuel, according to the Arkansas Bureau of Standards.
Biodiesel is largely a seasonal product, Danforth said, because it relies heavily
on the agricultural community for retail sales. As a result, Patriot only produced
biodiesel from March through September this year, he said.
“It’s an infrastructure issue,” said Marie LaRiviere, a biodiesel analyst for the
Energy Information Administration, speaking of biodiesel distribution. “Liquid
fuels are really expensive to transport, so usually biodiesel will go to the outlets
closest to the production plants that are willing to purchase it,” LaRiviere said.
Tanker trucks generally carry only 7, 100 gallons of fuel, she said, and there’s no
pipeline infrastructure like petroleum-based fuels have. Ann Hines, executive vice
president of the Arkansas Oil Marketers Association, believes a biodiesel
distribution system can develop over time. “We are an extremely resilient
industry, we figure out ways to handle stuff,” Hines said.
ALGAE One important effort to help the biodiesel industry is the search for new
feedstocks, industry adviser Schafer said.
In the short term, one of the most promising possibilities is “fractionating” corn, a
process that would extract some of the oil from corn grains before they are
processed to make ethanol, he said.
Used oil and grease from restaurants also is likely to become an important
biodiesel feedstock in the future, Schafer said. Although used materials qualify
for a blender tax credit of just 50 cents per gallon, “that seems to be sufficient”
given the lower cost of the material itself, he said.
“We think we can get to a really solid 3 billion gallons [of biodiesel production ] by
about 2015,” Schafer said.
One of the most exciting new prospects for the biodiesel industry could be the
development of algae as a feedstock, said Michael Popp, an agricultural
economist at the University of Arkansas at Fayetteville.
Algae could be an excellent feedstock because it grows quickly and wouldn’t
require the use of good farmland. Certain algae species also contain high
amounts of oil.
“If that starts to pan out on a more significant scale, then we’re going to have a
whole bunch more designated feedstock for biodiesel plants,” Popp said.
From 1978-96, the U. S. Department of Energy conducted extensive research
into the production of biodiesel fuel from algae. In October, the National
Renewable Energy Laboratory in Golden, Colo., announced that it would
collaborate with Chevron Corp. to develop algae strains that can be harvested
and processed into transportation fuels.
Marty Matlock, an ecological engineer at the University of Arkansas at
Fayetteville, is preparing to launch his own algae research project in northeast
Arkansas.
“Our goal is to demonstrate that we can take water out of the Mississippi River,
treat it — provide cleaner water with less nitrogen and phosphorus and sediment,
and grow algae as a biofuels feedstock,” Matlock said. He has a $ 75, 000
Smithsonian grant and will be working with research partners in Florida,
Maryland and Michigan.
Matlock cautions that algae won’t be “the end-all and be-all” of biofuel
development but just one of many tools that will be required if the industry is to
flourish.
“It’s going to take every tool we’ve got in our toolbox.”