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Reuters Edge

Biodiesel profits elusive as costs rise

CHICAGO (Reuters) - Profits for making biodiesel from U.S. soybeans are elusive because capacity to make the renewable fuel has surpassed demand while the costs to make it keep rising.

U.S. biodiesel sales have soared on record oil prices, and as the renewable fuel has been promoted as low in greenhouse gas output. Sales tripled last year to about 250 million gallons and will be higher this year, according to industry group the National Biodiesel Board.

But the sales jumps have had the side effect of helping to spike prices for soyoil, the main U.S. biodiesel feedstock, to nearly 33-year highs. Plants that make biodiesel are running well below capacity because of rising costs.

“As a general rule, margins for making biodiesel are pretty tight now,” Jenna Higgins, a spokeswoman for the NBB, said in an interview.

Higgins said some producers were making negative margins, but that the soyoil boom could be followed by a bust cycle that could help profits in the future.

The percentage of the U.S. soybean crop used to make biodiesel should hit 20 percent this year, up 6 percentage points from last year, said Bill Lapp, the president of Advanced Economic Solutions, a consultant to the food and agriculture industries.

But even that is not enough to keep recently built biodiesel plants running at full steam.

“We’ve produced capacity well beyond the ability of the market to absorb it today,” Lapp told the Soya and Oilfeed Summit 2007 this week.

And any increase in soybean production may not help much because demand for soyoil for food keeps growing as the global population rises, experts said.

Even record oil prices above $90 a barrel are unlikely to boost demand for soy biodiesel as a substitute for diesel made from crude, because the food industry will always outbid the energy industry for soyoil, Lapp said.

“The food industry is always going to be willing to do what it takes to produce that food,” he said.

TRANSPORT WOES

Planting and harvesting soy and transporting biodiesel uses large amounts of petroleum products, which means costs should be pulled up by high crude prices well into the future. The extreme size of the petroleum industry makes things worse.

“Biodiesel is inextricably linked to oil,” said Wallace Tyner, an agricultural economist at Purdue University. “It’s linked to an elephant.”

Problems in transporting biodiesel by rail and pipeline have pushed down prices by keeping supplies high in the Midwest where the product is mainly produced, but low in the East, West and South, where demand is highest.

Scott Susich, a fuel expert at the Energy Management Institute, a consultant to energy companies, said oil pipelines have been reluctant to send biodiesel blends through their ducts because they fear it will contaminate other fuels.

Building new lines could prove difficult. The major U.S. oil product lines were built during World War II for national security reasons. Since then, many more homes have risen around consumption areas and residents would likely fight the building of new lines, he said.

Tyner estimated that stranded capacity can discount biodiesel prices by as much as 85 cents per gallon.

To improve profits, some producers are looking to new biodiesel feedstocks such as non-food crops and algae.

“The positive thing to come out of this is that it is spurring a renaissance that may spur development of new feedstocks,” said Higgins, who added that wide use of new sources could be years away.

Editing by Christian Wiessner

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