Economic Pressures on the Biodiesel Industry
AgMRC Renewable Energy Newsletter
Dr. Robert Wisner
Ag Marketing Resource Center
Iowa State University
While biodiesel does not rank as high in expected contribution to the nation’s future energy supply as ethanol, it is still an important component of U.S. renewable fuels policies. The Energy Security and Independence Act of December 2007(1) established mandated levels of biodiesel to be blended in the nation’s diesel fuel supply that were to begin in 2009. So far, however, it appears that the mandate is not being enforced at this time but likely will be enforced in 2010. Like ethanol, the biodiesel industry experienced a period of rapid growth in 2006 and 2007, when returns were attractive and many new plants were constructed. Investment requirements for biodiesel plants typically are only a fraction of the amount needed to build an efficient-size ethanol plant. Even so, many biodiesel plants are experiencing severe economic pressures and a high percentage of the nation’s biodiesel production capacity currently is idle. Part of that capacity was used to supply biodiesel to the European Union, but new EU policies appear to have shut U.S. producers out of that market, at least for the rest of this marketing year and probably longer.
This article provides an overview of the U.S. biodiesel industry, its economic challenges, and government biodiesel mandates. It identifies some key strengths and weaknesses of biodiesel that differ significantly from the fuel ethanol industry. It also outlines EU policy concerns that led to restrictions on imports of U.S. biodiesel.
Overview of the U.S. Biodiesel Industry
Biodiesel is a product that can fuel diesel engines and is made from renewable feedstocks such as vegetable oils or animal fats. It can be manufactured from a wide range of feedstocks including the following vegetable oils: soybean, cottonseed, rapeseed, sunflower seed, peanut, sesame, palm, palm kernel, olive and coconut oils. Other potential feedstocks include recycled cooking oils.
Corn oil from ethanol refineries is another oil that is beginning to emerge as a biodiesel feedstock. There are two general types of technology that can be added to ethanol plants to produce corn oil as a co-product. One type removes the corn oil from the co-product stream that is left after ethanol has been removed. This technology requires less capital investment than the other method and produces lower quality oil. The other technology involves fractionating the corn kernel at the beginning of the refining process, thus separating out the germ and other components of the kernel. The germ contains the oil, so more complete oil removal is possible with this process. The oil from fractionation technology also is higher in quality than when removed from the co-product stream at the end of the production process and can be sold into either the food market or biodiesel, depending on price relationships. Only a small number of ethanol plants currently remove corn oil. Most of those which do so use technology that removes the oil at the end of the process stream rather than at the beginning. Oil from this process is not suitable for food use but can be used by the feed industry or for biodiesel. Because of its lower quality, it typically has a price discount to food-grade oil, but if prices for food-grade oil rise, its price is likely to rise also. In the future, if crude petroleum prices rise, incentives for ethanol plants to add oil-removal technology will increase and corn oil may become a more widely used biodiesel feedstock.
To meet the designation as biodiesel, the fuel must meet the American Society for Testing and Materials standards for ASTM D-6751.(2) Soybean oil is the most commonly used feedstock in the U.S. because of its widespread availability. However, biodiesel also can be and is produced from poultry fats, lard, used cooking oil (known as yellow grease), and animal fats. In Europe, rapeseed and palm oil have been used extensively. Unlike ethanol, there are no restrictions on the level of blending that can be used for blending biodiesel with diesel fuel: blends can range from one percent to 99 percent. Common blends are B-2, B-5, B-10, B-20, and B100. Because biodiesel has an 11% lower energy content per gallon than petroleum-based diesel fuel, higher blends of biodiesel do modestly reduce fuel mileage of vehicles.(3) Blend modifications may be needed if biodiesel is to be used in very cold weather.
|Unlike ethanol, there are no restrictions (1 percent to 99 percent biodiesel) on the level of blending biodiesel with diesel fuel.|
The National Biodiesel Board (NBB) lists 33 members that are BQ-9000 accredited producers.(4) Some of these have more than one plant. There also are other producers who are not yet members of the NBB. BQ-9000 is a quality and integrity program. It provides assurance to buyers that these suppliers are providing the highest quality biodiesel available.
The biodiesel industry is much newer than its fuel ethanol counterpart. The fuel ethanol industry is more than three decades old. A mere 9 million gallons of biodiesel were produced in the U.S. in 2001. In contrast, U.S. Department of Energy, Energy Information Administration data show that 632 million gallons of biodiesel were produced in the nation in the first 11 months of 2008. With December production at the October and November level, about 700 million gallons would have been produced in the calendar year 2008. That would be a 43% increase from the previous year and a 180% increase from 2006. At that production level, output was well above the level mandated by the December 2007 energy legislation.
Location of Biodiesel Refineries
The Biodiesel Magazine web site provides a map showing the location of U.S. and Canadian biodiesel plants. At this writing (late April 2009) the web site shows approximately 103 operating U.S. plants, along with 47 plants or 31% of the total that are idle. Another 14 are reported to be under construction. Biodiesel plants are more widely spread out than ethanol refineries. U.S. plants are heavily concentrated east of the Missouri River (including a substantial number in East Coast states), and in Texas, California, and the state of Washington. The map shows 8 operating biodiesel refineries in Canada along with one plant that is idle.(5) Biodiesel magazine information indicates the top three states in numbers of biodiesel plants are Texas (with 20 plants), Iowa (with 12 existing plants and one under construction), California (with 12 existing plants and two under construction), and Missouri (with 11 plants and one under construction). The Iowa Renewable Fuels Association, which may have a more recent update, shows 14 Iowa plants and two under construction.(6) Factors influencing location for Iowa and Missouri are plentiful supplies of soybean oil. For Texas and California, proximity to petroleum refining and blending plants likely is a factor.
The size of biodiesel plants ranges from a few million gallons to as much as 50 million gallons per year. The smaller plants typically are a batch technology, with which a batch of biodiesel can be produced and the plant can be temporarily shut down if economic conditions are not favorable. Idling the plant obviously incurs costs and lost revenue, but with this type of plant less financial pain is involved than idling a typical ethanol plant. For the large continuous-flow biodiesel plants, halting production is much more complicated.
The substantial number of idle biodiesel refineries indicates that, like the ethanol industry, recent net profit margins for biodiesel production have unfavorable. Net returns have been quite small and/or negative for the least efficient plants and those that have less than ideal locations. The depressed margins in part reflect a sharp decline in diesel fuel and biodiesel prices since last summer that has been greater than the decline in vegetable oil prices. Unlike ethanol, biodiesel does not face a blending wall since vehicle engine modifications are not needed for high blend levels of biodiesel. Thus, blending limitations are not responsible for the disappointing profit performance of the biodiesel industry.
Vegetable Oil Markets and Biodiesel Margins
The primary use of vegetable oils such as soybean oil and rapeseed oil is for food, in salad and cooking oils and various processed foods. Motor fuel has become a significant market only within the last four to six years. In the domestic vegetable oil market, soybean oil is by far the dominant ingredient, as shown in Figure 1. It makes up about 60% of the total domestic fat and oil use, excluding butter. Other vegetable oils include canola oil, cottonseed oil, sunflower oil, corn oil, palm oil, palm kernel oil, and a number of minor oils. Edible tallow and lard are the major animal fats for food use, in addition to butter (not included in the chart). Food demand for vegetable oils includes both domestic markets and exports. Over the years, a large part of U.S. soybean oil exports have tended to go to lower income developing nations under government assistance programs.
As shown in Figure 2, domestic demand is by far the largest source of demand for U.S. soybean oil. Exports can vary significantly from year to year, depending on foreign oilseed crop production and foreign government policies. A small portion of the domestic demand is from use of soybean oil for paints, other protective coatings, plastics, solvents and other industrial products. Biodiesel has recently become a substantial market for soybean oil, as indicated in Figure 2. In the last few years, its use has exceeded total U.S. soybean oil exports. Government mandates call for additional increases in biodiesel production in the next several years. If enforced, this market may become an increasingly important market for soybean oil.
Vegetable Oil Supply and Price Challenges
The demand for vegetable oil is considered to be highly inelastic, both in domestic and international markets. International markets often are a major influence on the level of domestic soybean oil prices. A highly inelastic demand means that a large price increase is needed to cause consumers to make small reductions in consumption when supplies are short. Conversely, if supplies become more plentiful, large decreases in price are needed in order to encourage consumers to increase use. The inelastic demand sets the stage for very volatile feedstock prices for the biodiesel industry. It also indicates that the biodiesel industry can expect pressure on biodiesel margins as production levels increase and a larger portion of the feedstock supply is used for biodiesel.
|Inelastic demand sets the stage for very volatile feedstock prices for the biodiesel industry.|
Inelasticity of demand for soybean oil may increase in the future, with the development of soybean varieties with low trans-fat oil, as well as low saturated fat, and high oleic content. The higher oleic content gives the oil a longer life-span for such uses as cooking French fries. These new varieties are expected to become widely available in the near future to meet food industry efforts to reduce or eliminate fats in food products and the desire for oil with a longer useable life in fast-food establishments.(7) It is widely expected that the food industry will consider soybean oil a more important and more valuable ingredient when it is widely available in these forms. Improved attractiveness for food uses may also bring modestly higher prices for food-grade soybean oil relative to diesel fuel and feed-grade oil.
Biodiesel Use versus Food Use
Estimated use of soybean oil for biodiesel last year was equivalent to about 15% of domestic food and non-biodiesel soybean oil use. This new surge in demand for soybean oil (vs. markets in 2001) is equivalent to a jump of 117% in the 2006-07 U.S. soybean oil exports. That demand surge was possible because the energy value of soybean oil exceeded what consumers were willing to pay for food use. Thus, because of high crude petroleum prices, biodiesel demand was one of several factors contributing to the 68% increase in average soybean oil prices in the last marketing year. In the current marketing year, with sharply lower crude petroleum prices, soybean oil prices are down sharply. Fuel use of soybean oil currently is much less competitive with food demand than it was a year ago. That in turn has led to the numerous biodiesel plant closings. For the 2008-09, USDA projects that soybean oil use in biodiesel will decline by 26% from the previous marketing year.
Government Blending Mandates
Mandated blending of biodiesel in diesel fuel is scheduled to increase to one billion gallons in 2012, and remain constant through 2022, as shown in Figure 3. Blending at that level, if 80% of the feedstock is soybean oil, would be equivalent to about 37% of recent non-biodiesel domestic use of soybean oil. Viewed from an international perspective, it would be equivalent to approximately 3.7 times the size of current U.S. soybean oil exports. Biodiesel plant management staff, investors in biodiesel plants, and government policy makers need to ask what impact that volume of added demand is likely to have on feedstock costs.
|The one billion gallon blending mandate of biodiesel, if 80 percent of the feedstock is soybean oil, would be equivalent to 37% of recent non-biodiesel domestic use of soybean oil.|
Another important question is whether alternative feedstocks might be available to moderate the upward pressure on prices of soybean oil and other currently available feedstocks. As an answer to that question, corn oil from ethanol plants is a potential alternative as discussed earlier. A few ethanol plants currently extract corn oil as a co-product that provides an additional value stream for the operation. However, at current oil prices and severe financial stresses in the ethanol industry, most ethanol investors are reluctant to provide the additional capital needed to remove corn oil. In the next several years, if crude petroleum prices strengthen, removal of corn oil may become a more attractive alternative. When corn oil is removed, the total tonnage of DDG is modestly reduced. Its nutritional composition changes and it becomes more favorable for use in swine rations. Lower oil content, for some species, can mean other feed sources are needed to compensate for its lower fat content.
EU Biodiesel Import Policy Changes
In the European Union (EU), the majority of vehicles are diesel-powered. The EU government has passed legislation requiring extensive use of biodiesel to reduce carbon dioxide emissions and moderate the climate change impacts. With its fuel tax structure and U.S. biodiesel blending credits, a U.S. “splash and dash” blending industry has developed. This involves moving ocean vessels with diesel fuel into U.S. ports, adding a small percentage of biodiesel to the shipment, collecting the blending tax credit, and exporting the product to the EU. The credit is $1 per gallon for blending biodiesel made from virgin soybean oil or other virgin feedstocks, or $0.50 credit for biodiesel from non-virgin feedstocks.
For obvious reasons, EU biodiesel producers have become very concerned about this activity and have made their concerns known through political processes. In response, the EU government placed a “temporary” import duty of approximately $1.70 per gallon on U.S. biodiesel exports to the EU. The actual rate varies with the exchange rate of the dollar to the euro.(8) The duty is expected to remain in place until at least fall 2009 and possibly longer. The European Biodiesel Board (EBB) indicates that the U.S. exported 1.5 million metric tons (about 450 million gallons) of biodiesel to the EU last year. This number exceeds the amount of U.S. biodiesel produced from soybean oil in 2007-08. Its accuracy is not guaranteed, although it may include significant amounts of palm-oil-based biodiesel imported, blended with petroleum-based diesel fuel, and exported.
Next Month’s Focus
Next month, we will look in more detail at costs of biodiesel production, various government incentives for its production and use, its major co-product (glycerine), and other possible alternative feedstocks.
With current U.S. government mandates, it is clear that biodiesel is intended to be part of a portfolio of motor fuels available to the American public for the foreseeable future. At this writing, the mandates show a much less aggressive intended role in future fuel supplies than that being planned for ethanol. Whether that continues to be the case will depend partly on technological developments in both biodiesel production and feedstock production. The limited role being envisioned versus ethanol likely stems from the limited availability of feedstocks, the impacts that further increases in biodiesel production would have on other uses of the feedstocks, and the cost implications from the relatively inelastic demand for those other uses.
3 Radich, Anthony, Biodiesel Performance, Costs, and Use, Energy Information Administration, U.S. Department of Energy
4 National Biodiesel Board
5 Biodiesel Magazine Web site
6 Iowa Renewable Fuels Web site
7 Piller, Dan, “The Science behind a Possible Low-fat Frenzy”, Des Moines Register, April 12, 2009.
8 Reuters, “EU Slaps Duties on U.S. Biodiesel Imports”, March 3, 2009 and Kris Bevill, “EBB: Europe’s tariff will level playing field”, Biodiesel Magazine, March 3, 2009