Biodiesel lags behind corn ethanol as alternative fuel

Biodiesel, the alternative fuel additive, 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 the 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 the university'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 pushes up the price of soybeans, 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, Iowa.

The Iowa State 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 million 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% 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.

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.

• A recent Bush administration ruling means 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 already has announced a deal to make diesel from fats generated by Tyson Foods' many slaughterhouses.