Margin pressure blunts production

Feedstock prices are putting pressure on biodiesel producers' profit margins. Spot prices for soybean oil are near 31 cents per pound in some parts of the United States, up about 8 cents from the past two years.

It takes more than seven pounds of vegetable oil or fat to make a gallon of biodiesel, so an 8-cent increase in the price of soy oil amounts to a more than 50-cent increase in the cost to produce a gallon of biodiesel. The hike in feedstock prices coincided with petroleum diesel fuel prices tumbling about 50 cents per gallon, catching biodiesel manufacturers in a classic cost-price squeeze, according to Joe Jobe, president of the National Biodiesel Board (NBB). "It is painful right now," he said. "A lot of biodiesel companies are suffering."

Companies are reacting to the price squeeze in different ways. Illinois biodiesel manufacturer Stepan Corporation said in its 2006 annual financial report that the company is investigating using animal fat as an alternative feedstock to soybean oil. Some companies have cut their production and are waiting for soybean oil prices to moderate. Clinton County Bio Energy in Iowa states on its Web site that the company has cut production to 40 percent "due to current crush margin economics."

According to Jobe, there are still places where producers can move product. State fleets with biodiesel mandates, states like Illinois with solid tax incentives and the Bioheat heating oil market are some examples. "There is still demand out there and markets that work," he said. "Those are some less price-sensitive markets.

Markets should work themselves out soon, said Leland Tong, a consultant to the NBB. He said there are plenty of soybeans out there, but there is speculation about fewer acres being planted next year due to high corn prices. "The last time ending stocks of soybean oil was this high, the price was 14 cents a pound," he said. "You have soybean oil prices that are pretty high. That doesn't make any money for the biodiesel industry. It's squeezed out all the margins, and as a result, I think you see people not demanding soybean oil like we used to. Essentially, soybean oil has priced itself out of the market."

Jobe said it is essential for Congress to implement some energy policies to help smooth out the biodiesel industry's economic roller coaster. The NBB is recommending that Congress adopt a biodiesel incentive program based on feedstock costs. Such a program was included in the 2002 Farm Bill, but it expired in 2006. The NBB is also recommending that the program be limited to domestic production and domestic feedstocks, so tropical oils such as palm oil wouldn't be included. This limitation would act much like the offsetting tariff on imported ethanol, Jobe said. "The door is open for all the world's biodiesel to come in and take advantage of our tax credit in our market," he said.

The NBB is also calling for increased research into alternative feedstocks-algae, jatropha and camelina-as well as agricultural research to improve the oil content and yields of soybeans. "The plant breeders have not put as much research into the yield and oil content for soybeans like they have for corn," Jobe said. "For the foreseeable future, our major oilseed crop in the United States is going to be soybeans."