The State of BioDiesel

December 2, 2008 | 1 Comment

Today’s near $50 crude oil is wreaking havoc on some if not all alternatives. Biodiesel is no exception even if retail diesel is still way higher than gasoline. One example is Pensacola Florida-based Agri-Source Fuels who turns rendered chicken fat – the castoff of poultry processors across the Southeast – into near middle distillate that supporters hope will help wean the United States off foreign oil.

During the summer Agri-Source cranked out about 3 million gallons of the tea-colored, low-pollution fuel. Then a Georgia-based oil company blended Agri-Source’s product with petroleum diesel to make B20 – a diesel product that’s 20 percent biodiesel – and sold it to bulk users. Agri-Source said they were limited only by how much $3-a-gallon chicken fat they could truck into the plant.

Now Agri-Source has slashed its production by half as plummeting oil prices and its fixed cost for raw materials have turned the company’s bottom line from black to red. You see, they signed up those chicken fat producers with a fixed $3 a gallon price.

On the other hand the vegetable oil seed pricing that is market driven, especially soybean oil, has collapsed. Those forms of biodiesel are still much more viable. As you may have learned though, some business tried to use the futures market to lock supply in the coming months with what seemed at the time to be an ever increasing price that has since decreased by as much as ½ leaving them obligated to buy at a vastly higher raw material price. The trap has sprung.

The escalating price of soybeans forced the owner of a Lakeland Florida biodiesel plant to stop production last summer. The factory has spent this year processing glycerin – a biodiesel byproduct – and retooling to use other raw materials.

Now lets not be hasty, some intensely smart people from Southwest Airlines who also used the futures market to weather the crude oil price run up with big profits with seemingly dirt cheap jet fuel while other airlines were getting killed to many farmers who mostly held their crop back in storage until the price and the oncoming crop forced sales at coincidentally record prices. That has backfired too, with Southwest now in for a few months of big fuel prices while crude is cheap and the farmers are coping with seed, fertilizer and pesticide prices made while those inputs prices were very high.

The keys to the industry’s future will be developing new sources of raw materials, writing supply contracts with pricing flexibility and getting much smarter in using the futures market to lock margins rather than insure a price.

The market has begun to exploit its native resources. The biodiesel industry used only 4 percent of the 173 million pounds of animal fats and greases produced in 2007; the rest went to other uses, from road paving to cosmetics. There is a lot of growth available in fats alone.

State and Federal support is now in place. A federal $1-per-gallon tax credit was renewed last year to support biodiesel production. The same legislation sets a goal of blending 1 billion gallons of biodiesel into the nation’s fuel supply by 2012. So far, the entire industry produces about 600 million gallons, according to the National Biodiesel Board. Last year’s Federal Energy and Security Act, which mandates that oil refineries mix an increasing amount of renewable fuels into the national supply in the coming years. The plan aims to reduce pollution and the amount of oil the United States imports. The mandate kicks in next year at 500 million gallons.

The last leg is the consumer. While Europe has dived into biodiesel with enthusiasm U.S. consumers are still slow to take up biodiesel blends. Manufacturers are gradually issuing warrantee support for biodiesel and more pumps are being seen. Some markets, especially farm operators are way ahead. In some areas it’s almost not possible to buy off road diesel without it being a biodiesel blend.

There are a few issues, such as high percentage blends experiencing problems in very cold areas. But these are problems with solutions that the farm community and distributors have already fashioned fixes for.

The volatility of energy markets remains both a prize and a problem. The lessons learned over the past year have gone far to assure that producers and processors get flexibility into the raw material cost arrangements. Which as history shows, tends to clam the volatility.

In any assessment, the economy will rebound and prices will go back up. The target will be to moderate the high prices and buffer the sure to follow low prices that follow.

One thing is certain, oil will be volatile, and it doesn’t look like oil discovery is going to keep up with consumption or even with projected growth. Biofuels look good, if the companies can harness the skills to manage pricing more adroitly, there is likely a 5 to 10 million barrel a day world market coming over then next decade that could grow to beyond 50 million barrels of daily demand sooner than anyone has thought.

The guide might be the suspected measure that the major oil companies use, its got to make money at or below $50 a barrel to get an investment. Even that can be managed with sound raw material price management. One just has to live with the reality that seeking to stabilize a profit is better than making a killing at high prices and losing big when they fall.

It’s just a maturation process in the business model. The lessons are given, we’ll see who gets them.


1 Comment so far

  1. Al Fin on December 2, 2008 10:31 AM

    In any assessment, the economy will rebound and prices will go back up. The target will be to moderate the high prices and buffer the sure to follow low prices that follow.

    Unfortunately, if the new US President and the Pelosi Congress deliver on all of their promises to big unions, trial lawyers, wealthy environmental lobbies, and overseas interests, the economy may not rebound at all.

    The US economy depends upon the freedom of capital to seek out the most productive investments. It also depends upon a free flow of energy. The US Constitution has helped maintain the rights of citizens and the rule of law in the US for over 200 years, but that same Constitution is viewed as an obstacle by Obama, Pelosi, and a host of acting and would-be Federal Judges who cannot wait to begin pulling at the frays.

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