When the tax incentive was reinstated retroactively for 2010 and extended through 2011, the industry had a reason to feel cautiously optimistic. Only a month later, in February, biodiesel RIN prices hit an all-time high at $1.15 adding to that early 2011 optimism. Now, RIN prices are still high and the tax incentive is still here, so all signs should point to profitable times for the industry. Many producers know that isn’t the case, however, and they realized that the dollar tax incentive that seemed to save the day didn’t come without a catch—higher feedstock prices.

Jon Van Gerpen, professor and department head of biological and agricultural engineering at the University of Idaho, tells Biodiesel Magazine he has identified the various costs associated with the process today, and feedstock prices are once again dominating any margin created by the tax incentive.

Van Gerpen, who is currently teaching a class on bioenergy, said he  has worked in his class to model the biodiesel production process. “It sure looks to me that with current feedstock prices that is where most of the money is going,” he says. Around this time last year, crude soybean oil was about 35 to 37 cents per pound according to figures by the Agricultural Marketing Service of the USDA. At the end of March, crude soybean oil was going for 52 to 54 cents a pound. And for nearly every other feedstock, the price rise is the same. A year ago, yellow grease was going for $25 to $37 per cwt and today, it has risen from $40 to $48 per cwt. The reason for the rise?

As Van Gerpen points out, the simple economics of supply and demand are taking effect. When the tax incentive came back and producers were able to resume production under more favorable economics, the demand for feedstock rose once again. “You could argue about the role that speculators play in the process,” he says about the possibility of feedstock speculation driving up the price. Adding that those speculators aren’t dumb, “they realize that when that tax credit came back,” he says, there would be a big demand for feedstock.

Fortunately, there is an answer to the dilemma, however broad it may seem. “I think it is an important point to be made,” he says, “that the biodiesel guys are not that different than the petroleum industry. If you look at the petroleum industry, you have people that do exploration and then petroleum recovery, and then people that do the refining.” A company like ExxonMobil, he explains, which does exploration and refining, isn’t refining because it boosts their profit. “They do refining simply to allow them to market their petroleum product. The money is made on the petroleum recovery side.”

The same applies to biodiesel. “You have to have control of the exploration and the production of the feedstock, and then the refining is what gives you the opportunity to sell a product into the market.” Most importantly, there is a reason to “explore” for feedstock. The diesel market is “essentially unlimited,” and there is no risk of flooding the market. “The diesel market in this country is so huge compared to our ability to provide biodiesel that it is like we are trying to supply saltwater to the ocean.”