A Hard Row to Hoe

Despite near-record soybean stocks, biodiesel producers are being pinched by high feedstock prices while diesel fuel remains relatively affordable. Projected demand from the biodiesel industry is sending the cost of raw materials through the roof.
By Jerry W. Kram | June 21, 2007
Seven is an important number for biodiesel producers. It takes more than seven pounds of soybean oil to make a gallon of biodiesel. So when soybean oil prices jump a penny a pound, that's a seven cent hit to biodiesel producers' feedstock costs. And when soybean oil prices jump nearly a dime a pound in less than a year, it's a major drain on the biodiesel industry's pocketbook. "It's huge," says Ben Robertson, CFO of Fuel:Bio, which operates a 50 MMgy biodiesel plant in Elizabeth, N.J.

The odd thing is that this should be a good time for biodiesel producers. Soybean stocks in the United States are at their highest level in three years. Soybean production in Brazil, Argentina and other South American countries are projected to set records this year. By most measures, oil prices should be dropping like a rock. But at more than 30 cents a pound, prices are higher than any time in the past 10 years and are forecast to go higher.

Combined with stable to lower diesel fuel prices, high soybean oil prices have led to some lean times for biodiesel producers. "We are doing the best we can," Robertson says. "It has definitely hurt our off-take. Biodiesel is not competitive with diesel, ultra-low sulfur diesel, heating oil or any of the other comparable fuels right now."

Fuel:Bio has been producing biodiesel since March. While it has the capability to use other feedstocks, so far the company has been using only soybean oil that it sources from soybean crushers in the northeastern United States. Robertson says the company is coping by limiting its production to current demand and looking for alternatives. "We are looking for ways to diversify our feedstocks," he says. "We're not producing anywhere near our capacity. We're just buying [soybean oil] and producing to demand. So whatever we can do on a regular basis, that's what we are doing."

The high prices are caused more by anticipated demand than current demand. "Right now, we have probably near-record stocks of soybean oil," says Mark Ash, an economist with the USDA's Economic Research Service. "There is a lot of anticipatory demand out there that isn't very worried about how large these stocks have been. They view these stocks as being temporary."

The last time soybean oil prices approached 30 cents a pound was in 2003, but Ash says that was an extraordinary year. "We had some pretty tight soybean markets at that time," he says. "We had a generally poor crop and demand was strong. So we got soybean stocks quite low that year. That also affected soybean oil production. So supplies got pretty tight." The USDA forecasts that soybean oil prices will continue to rise and could average as much as 33.5 cents a pound in 2008.

The market is looking at the number of biodiesel plants set to come on line in 2007, Ash says. According to Biodiesel Magazine's Spring 2007 Plant Map, there are more than 800 million gallons per year of biodiesel capacity on line with another 1.2 billion gallons per year under construction. "Once these biodiesel plants start to have their grand openings, all those [soybean oil] stocks could diminish quite quickly," he says. "We do have some very large stocks at the moment but there is the expectation that a lot of biodiesel capacity is going to come on board over the next few months. So those stocks could be drawn off very quickly."

Typically, soybean production has been driven by the demand for soybean meal. However, with the growth of the biodiesel industry, the demand for oil has outpaced the demand for meal. USDA has forecast that about 3.6 billion pounds of soybean oil will be used to produce 470 million gallons of biodiesel in the 2007-'08 soybean marketing year. That is up from 2.55 billion pounds of soybean oil used during the current season to produce 330 million gallons of biodiesel.

Soybean oil production in the United States is more than 20 billion pounds a year, enough to manufacture about 2.6 billion gallons of biodiesel. In 2006, biodiesel production was about 250 million gallons, less than a third of the industry's current capacity, but the industry used nearly 10 percent of the soybean oil produced. "The size of the industry is going to depend a lot on feedstocks and just how much can be produced," Ash says. "The amount of soybean oil that can be produced is going to be constrained by the acreage we can plant to soybeans in this country. Given the strength of the market for ethanol, it's going to be hard to get a lot of those [corn] acres back to soybeans. We've lost quite a few acres [of soybeans to corn] this year and even next year it may be a challenge to get those back even with rotational considerations. So we could be seeing an era where it may be very rare to see soybean acres top 70 million acres again."

U.S. biodiesel producers will likely be faced with the need to develop new feedstock sources as soybean oil accounts for about three-fourths of the country's supply of vegetable oil. "I think there is probably a pretty good potential for this industry in the long term," Ash says. "There are going to be some growing pains for some companies that don't have access to a secure supply of feedstock."

A Pocketbook Issue
Despite an overall growing consumer attraction to alternative fuels like biodiesel, the fuel market is still mainly price driven, says Robertson. "It's really just a matter of price," he says. "People want it, but it's true that a lot of people aren't willing to pay for it if they have to pay more."

Market development will be one of the keys to overcoming the current difficulties, Robertson says. "We are the largest capacity plant on the East Coast," he says. "Biodiesel really hasn't come to the coast the way it has in the Midwest. So the market is still in the process of developing. You have a lot of people here who are extremely positive about biodiesel. The reception we get from consumers and everybody we talk to is extremely positive. I would say that from the view of how much people want the product, it is great, but when you start talking about what it costs that is more of a difficult sell."

Surveys show only about 5 percent of consumers are truly "green" enough to pay more for alternative fuels such as biodiesel and biodiesel blends, Robertson says. The company is working with distributors who cater to that minority. "People understand energy independence-not having to rely on foreign imports," he says. "They understand lower emissions and environmental quality. But there is a whole set of things you have to put together and then say 'You're also going to have to pay a higher price,' and people don't want to pay for that."

Marketing tools could also help producers hedge some of the risk in the biodiesel market. But the market is so tight right now, there is no profit to preserve, Robertson says. "The biodiesel industry isn't as mature as say, the ethanol market," he says. "If we could have a guaranteed off-take, that would be a big step in the right direction. The situation you run into is that if there is no margin to begin with, there is no reason to hedge. Right now what you are looking at is extremely tight margins. It would have been great to hedge six months or a year ago, but hedging right now just doesn't seem to make all that much sense."

Ultimately, the success or failure of companies like Fuel:Bio could depend on support from state legislatures. "We are talking to our local politicians to put in tax incentives and possibly mandates so we can have some pull through the market that's not solely based on price," Robertson says. "The political people we talk to locally get it. Everybody gets it right away. The question is how to make it work economically."

Editor's Note: Since this article was completed, the upward trend in soybean oil prices has continued. In early June, the price of soybean oil for the July contract on the Chicago Board of Trade reached 36.4 cents a pound, the highest since 1984.

Jerry W. Kram is a Biodiesel Magazine staff writer. Reach him [email protected] or (701) 746-8385.
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