Legal Perspective

Determining CCC Biodiesel Payments
By Mark Hanson & Todd Guerrero | March 01, 2004
QUESTION:
The USDA's Commodity Credit Corporation (CCC) adopted several changes in 2003 for biodiesel. This included modifying the conversion factor related to the price of soy oil, increasing eligible feedstocks and making reimbursement payments on base production through 2005 in addition to payments on increased production. How are these payments determined?

ANSWER:

While the purpose of the program is straightforward-to reimburse bioenergy producers for part of their eligible feedstock costs-the payment formula can be confusing.

Payment varies depending on feedstock used, including soy oil, animal fats and greases, and other vegetable-based feedstocks. All CCC biodiesel payments are based on a soybean conversion factor and the price of soy oil, adjusted by comparing the applicable oil or grease price of non-soybean feedstock to the market price of soy oil.

Assume a plant has full capacity of 10 mmgy. In 2003, the plant's first year of operation, it produced 5 million gallons. In 2004, it increased to 6 million gallons. Determine the plant's gross payable units (GPU) for all biodiesel production. This has two components:

1) Additional production payments
(APP), made on increased production.

2) Base production payments (BPP), made
on production that doesn't represent an
increase from the previous year.

APP is measured by dividing the gallons of increased biodiesel production by a "conversion factor" of 1.4. This factor is used to convert fuel gallons into commodity units, such as bushels. A conversion factor of 1.4 means one bushel of soybeans produces 1.4 gallons of biodiesel.

In 2003, the plant produced 5 million gallons and the APP is 3,571,428 (5,000,000/1.4). (In 2003, the plant's APP is also its GPU, as our hypothetical had no 2002 production.)

To determine the plant's CCC payment, convert the GPU (3,571,428) to a net payable unit (NPU) dividing by a "plant capacity conversion factor"-2.5 if the plant is under 65 million gallons annual capacity, and 3.5 if capacity exceeds that. For our plant, the NPU is 1,428,571.

Convert NPU to a "gross payment" by multiplying the net payable unit by the posted county price where the plant is located. If the quarterly price for soybeans is $5.95, the gross payment formula for the plant is: 3,571,428 2.5 = 1,428,571; 1,428,571 x $5.95 = $8,499,998.

As producers can't receive more than 5 percent of the program's available $150 million annual funding, the plant was entitled to the maximum CCC payment of $7,500,000 (Payments are quarterly, our example is annual).

If the feedstock is not soybeans or soy oil, more calculation is needed. For eligible commodities with corresponding oil or grease market prices, such as animal fats, the program uses the posted soybean price for Macon County, Ill. For our example, in 2003 that was $6 per bushel.

Divide the animal fat or yellow grease market price by the soy oil price (cents per pound) published in The Agricultural Marketing Services' Weekly "Soybean Crush Report" for Central Illinois on the applicable date.

Multiply that ratio, or "feedstock factor," by the "soybean gross payment" (the NPU multiplied by the soybean posted price for Macon County) to determine the producer's gross payment. For eligible commodities lacking corresponding oil or grease markets, a formula will be developed "in a manner as determined by CCC."

So, if the same plant used animal oil at $.095 a pound as its feedstock instead of soy oil at 24.5 cents a pound, the gross payment in 2003 is $3,257,141 ($.095/$.245 = 0.38; 0.38 x 8,571,426 = $3,257,141).

To determine the gross program payment for the plant in 2004, when production increased by 1 million gallons, the formula includes a provision for both increased production and base production.
Again, first determine the plant's APP. This APP is 714,285 (1,000,000 gallons 1.4 conversion factor). Determine the plant's BPP by dividing base production (5 million gallons) by 1.4, then multiplying the result by 0.3 (5,000,000 1.4 x 0.3) for a BPP of 1,071,428. Adding APP to BPP gives you the GPU, or 1,785,713 (714,285 + 1,071,428).

To determine the gross payment, the formula simply starts again, this time using 2004 prices, and the applicable discount factor-15 percent in 2005, 0 in 2006.

Mark Hanson and Todd Guerrero are members of the agribusiness and alternative energy practice group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. They can be reached at (612) 371-3211.
 
 
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