Economists foresee bleak growth in biodiese

Willie Nelson may want to stick to his music. Biodiesel, the fuel additive that the singer has tried to make famous, is eating the dust of corn ethanol.

Biodiesel is made primarily from soybean oil, and the price of soybeans is up as farmers put more and more land into production of corn, the more lucrative crop of the two.

That is cutting the profit out of biodiesel production and could stunt the industry's growth for a long time to come.

A new study by economists at Iowa State University suggests the biodiesel market won't grow substantially unless the government requires its usage or adds more subsidies.

"In our projections, we can't see why anyone would build a biodiesel plant right now unless you are speculating on a biodiesel mandate," says Bruce Babcock, director of Iowa State's Center for Agricultural and Rural Development.

Even an increase in petroleum prices, which raises the price of gasoline and conventional diesel, wouldn't help much. Farmers would plant still more corn and fewer soybeans. And that shift, from corn to soybeans, pushes up the price of soybeans further, making biodiesel production even dicier.

Biodiesel producers are finding it harder to raise money for new plants, and some planned refineries may not be built, said Jeff Stroburg, chief executive of Renewable Energy Group Inc. of Ralston.

His company operates five biodiesel plants, and they are still making a profit, he said. Three more plants are under construction in Washington, Farley and Algona.

Development leaders hope Renewable Energy Group's newest plant, in Newton, will help cushion the blow as Maytag winds down operations there.

"If we're going to continue to grow this industry and benefit society in the way it will, certainly additional (government) incentives would help," he said.

Renewable Energy Group's plants are now running nearly at capacity. Production typically slows down in the winter because there is less demand for biodiesel then, he said.

The ISU study sees U.S. corn ethanol production growing over the next 10 years to 15 billion gallons a year, triple last year's production, under current economic projections. Ethanol production could double, to 30 billion gallons, if oil prices are $10 a barrel higher than projected, the economists say.

Biodiesel production would reach just 500 million gallons a year, twice last year's sales and about 1 percent of U.S. diesel consumption, even with the higher petroleum prices.

The study was funded by the U.S. Agriculture Department as well as agribusiness and food interests.

The economics of biodiesel are heavily dependent on the price of the feedstock, whether it is vegetable oil, animal fats or waste restaurant grease, which accounts for 80 percent of the cost of production.

Producers are struggling to break even at the current cost of soybean oil, more than 30 cents a pound, economists say.

The U.S. industry also is being squeezed from other directions:

- Europe is moving as aggressively in biodiesel production as the United States is in ethanol, another factor in rising global prices for vegetable oil. (Germany alone produced nearly 700 million gallons of biodiesel last year.)

- A recent Bush administration ruling means that U.S. refiners can use vegetable oil or animal fats in their diesel production and qualify for the $1-a-gallon tax credit that had exclusively gone to biodiesel. ConocoPhillips has already announced a deal to make diesel from fats generated by Tyson Foods' many slaughterhouses.

Monte Shaw, executive director of the Iowa Renewable Fuels Association, acknowledges that the profit margins are thin in biodiesel, but he's more bullish about its future.

"There is the belief that the world market has the capacity of freeing up a lot of feedstock for biodiesel when the demand hits," he said.

Iowa has 10 biodiesel plants with a production capacity of 167.5 million gallons a year, according to Shaw's group. Four additional plants now under construction can produce 150 million gallons annually.

Biodiesel producers are asking Congress to authorize a 43-cent-a-gallon subsidy to go with the $1-a-gallon tax credit for biodiesel that lawmakers enacted in 2004.

Additionally, two Republican congressmen, Tim Walberg of Michigan and Phil Gingrey of Georgia, have introduced legislation that would require U.S. diesel to contain 2 percent biodiesel.

But the prospects in Congress for new biodiesel incentives are not clear. Both the Bush administration and lawmakers are focused on targeting additional subsides and usage mandates to cellulosic ethanol, which would be made from crop residue, forestry waste and perennial grasses, not biodiesel.

"Hopefully, we will be successful by the end of the day," said Larry Schafer, who advises the National Biodiesel Board.

Nelson, who markets his own brand of biodiesel called BioWillie, likes to call the fuel a "light at the end of the tunnel" for farmers.

If the economists are right it will be a long tunnel.