Legal Perspective

Four factors that will transform the biodiesel industry
By Pete Moss | September 01, 2006
The biodiesel industry is poised to enter a new era as the nation calls for alternatives to foreign oil. While biodiesel production currently represents only a fraction of the nation's distillate fuel supply, a number of emerging factors may transform biodiesel from a boutique fuel for niche operations into a mainstream fuel used by millions of Americans. Four factors that will have the greatest impact on the industry are:

-New sources of oil
-Penetration of retail channels
-Consumer education
-Conversion of capacity

The most important factor, and one that is seen as the greatest threat to large-scale biodiesel production, is the possibility of feedstock shortages. Biodiesel was initially seen as a remedy for large soybean-oil stocks and low soybean prices. The question now is whether there will be enough feedstock to satisfy demand. Unfortunately, at year's end, nearly 750 million gallons of potential oil will be sitting in storage, never extracted from the soybean. According to the USDA, another 250 million gallons of soybean oil will be sitting in commercial storage. If the industry grows at projected rates, however, a feedstock shortage is a distinct possibility over the next two to four years. To address this risk, project developers are increasingly considering the addition of extraction capacity, along with the development of feedstock sources other than soybean oil, the dominant source of today's most common feedstock.

Secondly, biodiesel will need to enter broader markets to absorb increased supply, which won't happen until biodiesel is absorbed into the mainstream retail market. Biodiesel production has grown over 100 percent per year for the past five years, surpassing expectations. Unlike ethanol, biodiesel can go into virtually any diesel engine. Despite the ubiquitous nature of biodiesel, it has yet to enter broader market channels. Fortunately, evidence suggests that biodiesel is on the cusp of reaching the mass market. At current petroleum prices, biodiesel is certainly capable of competing on price, and that is drawing interest from retail distributors. This trend should accelerate, as the industry better understands the dynamics of the fuel industry and how the price at the pump is calculated. New mechanisms are currently being developed to overcome the dichotomy between agricultural-based price risk management systems and historical fuel industry pricing strategies. This new model should allow increased revenues to flow through to distributors when fuel prices are high, and less revenue when feedstock prices increase. This model will allow biodiesel to maintain more consistent and competitive pricing in the largely untapped retail market.

The third factor is consumer education. The industry must continue its aggressive approach to education on the benefits of biodiesel. Biodiesel is the most versatile biofuel, and it possesses extremely high levels of utility. While industry veterans are familiar with the advantages and disadvantages of biodiesel's natural solvency, new biodiesel users may not know, for example, that regularly changing fuel filters is a necessary and not overly inconvenient step when using biodiesel. Continuing education on storing, handling and using biodiesel will be critical to the industry's long-term development.

Finally, the factor that may have the greatest impact on the industry (in addition to fuel price) is the conversion of existing production capacity. We know that foreign competition continues to negatively impact the chemical and pharmaceutical industries in the United States. Chemical companies closed approximately 70 U.S. facilities in 2004 alone, primarily as a result of inexpensive foreign labor and high domestic natural gas prices. While the past decade has been hard for U.S. industries, a substantial amount of the idled capacity could be transformed into biodiesel production. While there are environmental and other issues that would need to be addressed in converting this existing capacity to biodiesel production, the conversion trend is already beginning.

Kenneth "Pete" Moss is vice president of marketing services for FBA Consulting. With more than 18 years of professional experience in oilseed processing, biodiesel commercialization, marketing, business planning and financial analysis, he has a comprehensive understanding of the biodiesel industry, including feedstock availability, product value analysis and by-product streams.
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