Five months after US' President George Bush announced a goal of increasing renewable fuel use within a decade, a casual observer might assume business would be booming for alternative fuel producers. But for some biodiesel manufacturers, current economics are rocky.
That's because the price of corn, which is used to make ethanol, has skyrocketed in recent months. As a result, many farmers have switched to growing that commodity instead of soybeans, which in the US are widely used to make biodiesel. And since feedstock comprises up to 80% of the cost of making the fuel, some companies have been forced to trim output in recent months, producers told the Platts Biodiesel Investor 2007 conference June 28.
For example, one presenter, the president of a Texas-based biodiesel plant whose capacity is 6 million gallons/year, said his facility is now running at 25% capacity after selling his total output in 2005 and 2006. Other biodiesel producers say they hope just to break even.
According to one conference presenter, soy-growing acreage in the US dropped 15% this year, while corn-growing acreage doubled in the last 12 months. During the same period, soy prices have jumped 15% while corn prices shot up 100%.
Unfortunately, lower soy prices come at a time when many biodiesel facilities are just coming online this year or expanding. And feedstocks are not only expensive, they are limited. One source claims that supplying the nearly 250 plants that the National Biodiesel Board says will be online by the end of 2008 would require about 18 billion pounds of feedstock – which would total the entire soybean market.
But the National Biodiesel Board said the ability of US farmers to respond to demand should not be underestimated, and this is also true for science. Research projects are underway aimed at increasing the oil content of soybeans and other crops. Even a small jump in the current oil content of around 20% could result in more available oil feedstocks, NBB claims.
Even so, producers say for the biodiesel industry to really thrive, governments may have to stay in the game, at least for awhile. The US’ federal government now allows a $1/gallon tax incentive which the industry is pressing to extend. Some states, Texas among them, have subsidies for biodiesel. Producers elsewhere may lobby for more of these.
Meanwhile, many producers believe consolidation of the industry is inevitable. Like the broader energy industry itself, small biodiesel producers may be taken over by larger ones which can realize logistical and purchasing economies of scale. And some small producers may find themselves forced out of business by feedstock price volatility or a location which locks them into a single supply source.
Producers say ultimately, successful plants will be located near suppliers, distributors, blenders, oil terminals or refineries, and sited on the Gulf or Pacific coasts to capitalize on the cost advantages of barge transportation.
Some producers see the biodiesel industry shaping up like the LNG industry in the next several years, becoming globalized and able to buy feedstock and sell product anywhere in the world based on the most favorable economics of the moment. One thing is certain: after a sleepy start in the 1990s, biodiesel producers certainly have an interesting journey ahead.
Starr, I remember when Platts colleague Robert Sharp and I traveled through southern Illinois to visit Archer Daniel Midland several years ago, and the landscape was either all corn, all soybeans or half and half as we drove along. Obviously, farmers growing those crops back then would have considered the relative prices of the crops as they made their decision; that's not new. But who could have imagined that as we traveled with the two different crops facing each other on each side of the road that what we were looking at was the groundwork for an agricultural version of the price wars that occasionally erupt on street corners as two gasoline retailers square off against each other?
Starr, another speaker at the Platts biodiesel conference made a statement that was even more alarming. This was Rahul Kale, the managing director of kemOleo, a division of Wilmar and one of the world's major palm oil and biodiesel producers.
Mr. Kale gave a global perspective on the outlook for feedstocks.
The numbers were complicated, but his message was that we are bumping up against the limits to available feedstock supply on a world scale, and including multiple feedstocks. He described it as a "capacity crunch."
Other speakers at the conference also mentioned that multiple feedstocks are rising dramatically in price, not just soy, as biodiesel producers scramble to find supply.
Speakers were warning about this last year at the same conference but the market has "matured at warp speed" to paraphrase Mr. Kale!