CHICAGO Biodiesel, still a money-losing proposition in the United States compared to oil-based diesel, is about to have its best year ever thanks to government tax credits and usage mandates.
But it will take months for the biodiesel industry to bounce back after being stranded last year, when the government let its six-year subsidy expire. Biodiesel production fell 20 percent in 2010 and was only half of 2008 output as plants across the country closed or slashed production.
"It's not like the industry flipped on the switch and we're all running at capacity now. It takes time for the markets to adjust," said Gary Haer, vice president, sales and marketing with the Renewable Energy Group in Ames, Iowa.
Plants that remained open in 2010 usually ran at about 20 to 25 percent of capacity, he said.
"We are still in the mode of ramping back up and getting our feet back on the ground from the disruption in the tax incentive," said Haer, who also serves as chairman of the National Biodiesel Board, an industry trade group.
The fuel is made from animal fats, grease and vegetable oils such as soyoil -- 8 percent of the soybean crop is projected to be turned into biodiesel this marketing year.
Biodiesel remains about $2 a gallon more expensive at the pump than the traditional petroleum fuel used in heavy machinery from trains to tractors, trucks to ships.
But a U.S. government mandate by the Environmental Protection Agency in mid-2010 has ordered refiners in 2011 to blend 800 million gallons (3.1 billion liters) of biodiesel -- less than 2 percent of the U.S. diesel market -- or face stiff daily fines.
To sweeten the mandate to blend biodiesel with petroleum diesel, Congress passed a tax credit of $1 a gallon for refiners.
"At today's price relationship it doesn't get you back into the black from a discretionary blend perspective, but it does help," said Dustin Haaland, director of renewable fuels supply for CHS Inc, a Midwest fuel refiner and distributor.
"We are hopeful that this will allow our current suppliers to ramp up their plant capacity, become more efficient, and help make biodiesel more competitive," Haaland said.
Both those moves underscore a determination to back the administration's push to use renewable fuels, a campaign usually led by the massive use of Midwestern corn to make a distilled alcohol fuel, ethanol, for cars and wean the United States off its dependence on hydrocarbons.
"With more research and incentives, we can break our dependence on oil with biofuels," U.S. President Barack Obama said in his State of the Union address last week.
"I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies -- instead of subsidizing yesterday's energy, let's invest in tomorrow's."
The Renewable Fuel Standard mandates U.S. biofuels usage reach 14 billion gallons in 2011, rising to 36 billion gallons by 2022. That includes a 1-billion-gallon biodiesel mandate for next year.
MORE BUMPS IN THE ROAD?
Biodiesel is a clean-burning fuel, cutting greenhouse gas emissions from petroleum-based diesel in half.
But if this year looks brighter with government support, the young industry still has a tough road ahead.
The biggest expense of running a biodiesel plant is the feedstock, accounting for up to 85 percent of the cost. In the Midwest, that's soybeans -- or, specifically, soybean oil.
The U.S. Agriculture Department estimates 2.9 billion pounds (1.3 billion kg) of soyoil will be used this season to produce 390 million gallons of biodiesel.
It takes about 7.5 lbs of soyoil to produce a gallon of biodiesel. With the price of soyoil on the Chicago Board of Trade now at 58 cents a lb, that equates to about $4.50 a gallon for biodiesel. In contrast, diesel is $2.70 a gallon.
"That sounds like a money-losing proposition to me. Why is that good for our country?" said agricultural economist Bruce Babcock at Iowa State University.
NOT TOO BIG TO FAIL
So even with competing crude oil at $90 a barrel, the basic economics remain a basis for skepticism. Then there is the food-versus-fuel debate, in which critics say using crops for fuel in a hungry world is either immoral or inflationary for food costs.
"Looking at ethanol versus biodiesel -- the support for biodiesel against the backdrop of deficits and mounting debt is on shakier, less-confident ground," said Rich Feltes, vice president of commodity research with RJ O'Brien in Chicago.
Corn-based ethanol is a bigger, older industry with broader support, especially from farmers. Nearly 40 percent of the 2010 U.S. corn crop is projected to be made into ethanol this marketing year, versus 8 percent of the soy crop seen becoming biodiesel.
"The biodiesel industry is not too big to fail right now, and with the food-versus-fuel argument, given the high price of soybeans I think the policy wisdom of directing tax dollars to that is really questionable," Feltes added.
Nevertheless, the EPA mandate of blending 800 million gallons of biodiesel into the petroleum fuel supply is law.
There is a complicated set of rules that allow refiners to defer mandate obligations but the EPA has made it clear the law will be enforced with a hefty fine of $37,500 a day.
"While I am a firm believer in market capitalism, it is abundantly clear that our system of capitalism would be decidedly strengthened by reducing our economy's dependence on this exclusive source of transportation energy," Joe Jobe, chief executive of the National Biodiesel Board lobbying group, said of petroleum fuels.
"It will take bold and stable energy policy to do that."
(Editing by Dale Hudson)