Walking a Tightrope

Thin margins have been dogging biodiesel producers for months, causing many to wonder just how much they can endure before profits go south.
By Susanne Retka Schill | February 11, 2008
Sky-high soy oil prices and a lackluster biodiesel market have made for thin or negative margins the past several months. It's difficult to get a firm handle on the biodiesel industry's situation because published data on biodiesel is as slim as the margins. It's widely known that biodiesel production is running at a fraction of capacity but, there's no government entity that officially tracks production numbers and can provide a definitive number. Leeland Tong, who manages the production capacity charts for the National Biodiesel Board's Web site gets his information by calling biodiesel producers. He was updating the information prior to the NBB's conference in Orlando, Fla., in early February. "We have 172 plants with 2.21 billion gallons of production capacity. There are 54 plants under construction and three expansions," he says. "Because of the margins, I've taken 12 plants off the list that are no longer in business. There's another 15 to 20 still in business, but only producing fuel when they get an order." From the NBB's information, Tong says estimated actual production is in the 450 MMgy range, or about 20 percent of capacity. That number is in line with the USDA projections for soybean oil use for methyl esters, a category added to its supply and demand reports this past year. USDA's Jan. 11 report that sent commodity markets to new highs didn't change the projection of 3.8 billion pounds (500 million gallons) of soybean oil to be used for biodiesel from the 2007-'08 crop, which is 18 percent of total estimated U.S. soybean oil production. To make the analysis even more difficult, while industry observers assume many plants are exporting biodiesel into the European market, actual exports are hard to verify because biodiesel export figures are lumped together with other products in the Department of Commerce export codes. In comparison, feedstock markets are much more transparent, although with the current volatility, forecasting future trends is difficult. Even getting a firm handle on biodiesel's break-even cost can be a challenge.

"Being such a small and new industry, everything is a moving target," says Jeff Coombe, a technical analyst for BBI International's project development division. "There's not one break-even price that all agree upon where you can say, this is it, this is the way it's been and what it will be going forward." By Coombe's latest calculations, feedstock cost accounts for 88 percent of the total biodiesel cost of production. A study published by the Center for Agricultural and Rural Development at Iowa State University in May calculated that feedstock costs comprise 85 percent of total operating costs, based on surveys of several 30 MMgy plants in production. Coombe points out that a couple of years ago when biodiesel was selling for $2.50 per gallon, 25 cents per pound was considered the break-even price for feedstocks. At the beginning of this year, biodiesel was selling for $4.25, which Coombe says would translate into a maximum feedstock break-even price of about 43 cents per pound for soy oil. Prices in January were well above that break-even cost, however. Once the USDA adjusted its supply and demand projections in its Jan. 11 report, commodity markets began soaring again with soybean oil futures topping 55 cents per pound in the days that followed, and soybeans pushing through the 35-year-old record of $12.50 per bushel.

"It's a very difficult and challenging environment we're in," says Gary Haer, vice president of sales and marketing for the Renewable Energy Group Inc. As vice president of the NBB governing board executive committee, he was charged with speaking about the industry's prospects at the National Biodiesel Conference in Orlando. "Feedstock costs are high and ever increasing," he says. "Finding markets is challenging and finding profitable markets is very challenging." There are several markets for biodiesel, he adds, although all are dampened by current conditions. "People use biodiesel for a variety of reasons-some for regulatory compliance for renewable fuels standards and some because of air quality benefits and regulations regarding air quality," Haer says. "Some use it for patriotic reasons feeling it is good to keep energy dollars in the United States. Also, there are world markets at play." The biodiesel industry is optimistic that the heating oil market will be good for biodiesel, although that market can't be easily tapped with the current pricing situation. "This is a short-term hiccup," Haer adds. "This is not anything unusual in any business or industry or business cycle. You run into rough spots as an industry moves forward. "

Ralph Groschen, agricultural marketing specialist with the Minnesota Department of Agriculture, agrees new industries have to expect ups and downs, recalling the early days of the ethanol industry. "Minnesota started with ethanol in the mid '80s. There were a lot of bumps in the road, but today most of our farmers are happy with their investments, and ethanol is competitive in the market place," he says. "We started with biodiesel a few years ago and have overcome some problems. I'm sure we will be confronted with others."

Long-Term Break-Even Feedstock Prices ($/lb)


The Iowa State University working paper calculated the break-even feedstock prices for oil over a range of biodiesel prices, assuming a blend of 70 percent soybean oil and 30 percent animal fats. The break-even feedstock cost is reported for the operating margin (OM), earnings before interest and taxes (EBIT), earnings before taxes (EBT) and net income (NI). In the first week of January, prices were quoted at $0.485 cents for soybean oil and $0.2375 for animal fats. A 70-30 blend would give a blended price of $0.4107 per pound.
SOURCE: IOWA STATE UNIVERSITY


Groschen is an advocate for farmer-owned facilities as a strategy to meet the inevitable gyrations of new industries. "A farmer is looking at his own feedstock, his own produce," he says. "He's going into it for the long haul. When crop prices are down, his investment in a biodiesel or ethanol plant gives a return, if crop prices go up, he's making money because his crop is worth more than the year before and he can afford to take a hit on the [biofuels] side."

The farmer-owned strategy is well-known, but in the face of poor returns for biodiesel for many months, Chad Hart, head of the biorenewables policy division of the Center for Agricultural and Rural Development at Iowa State University, wonders what the future holds. "If biodiesel has been riding on narrow margins for some time, why did we build up all this capacity?" he asks. Hart posed the question to several companies and found that the vegetable oil crushers and marketers see biodiesel as an alternative market. "They have biodiesel plants sitting there and if the margins look good, they'll go to biodiesel, if not they'll go to the vegetable oil market," he explains. Not being tied to a single market is a big advantage for a vegetable oil crusher, he points out. "If the [soybean oil] food market goes south on the trans-fat issue, biodiesel might be a market to hold value in the oil, he says," However, he adds that diversification was stressed more than concerns about market erosion from health concerns with soybean oil's trans fatty acid content.

While vertical integration is considered a strategy for enduring tough times, Haer warns that it isn't a guarantee. "There are economic advantages to integrated facilities, but at the end of the day that may not be enough in the highly competitive environment and market that we're in today," he says. "It's important to have a strong business plan and a strong strategy, more important than if you are situated next to a crushing facility or located at a port facility."

Looking ahead, Brad Saville, professor of chemical engineering at the University of Toronto, has examined the feasibility of new biodiesel projects as an associate with BBI International's project development division. "Even though it's a challenging environment, we're seeing various scenarios where biodiesel is still profitable," he says. "If you look at different types of feedstocks, there are more supplies of the oilseeds themselves than of oil. There's a lot of competition for oilseeds among the crushers and a lot of oilseed supplies, particularly in Canada." For some producers it means rethinking proposals to consider adding crushing facilities, which in turn increases the minimum size of an economically feasible plant to a 15 MMgy to 20 MMgy of capacity, Saville says. A crushing facility also adds the need to develop marketing capacity for the protein meal coproduct.

Haer also sees opportunity for the future of biodiesel. "There is increasing and supported demand. Engine manufacturers are supportive and [the NBB is] working to develop specs to enable them to feel comfortable with higher blends. There are a lot of positive developments. There's research on alternative feedstocks. We've had public policy support with the new Energy Bill and the renewable fuels standard for biodiesel. Those are long-term benefits and positives," he says. "Certainly we're feeling some pain right now as an industry, but the future is still bright, and personally I'm very optimistic for biodiesel as a business."

Susanne Retka Schill is a Biodiesel Magazine staff writer. Reach her at sretkaschill@bbibiofuels.com or (701) 738-4962.
 
 
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