Biodiesel Economics and Clinton Plant

This week the City of Camanche and Clinton County met with officials from Hawkeye Bio Energy to consider a tax increment financing plan to assist in the building of a soybean biodiesel plant. The Hawkeye Bio Diesel plant has been in the works for more than two years now and construction is underway on the plant business and administrative offices on the plant site. Estimated cost of construction is $90m. According the an article in the Clinton Herald,, Hawkeye Bio Energy is requesting $5m in TIF financing for the project.

I have written extensively on this blog about the macroeconomics of ethanol production. But we have paid little attention to soy (and vegetable oil-based)
diesel. A September, 2006 article by the Minneapolis Federal Reserve Bank outlines some of the economic factors. One of the most attractive things about biodiesel is that it can be made from post-consumer waste. A major input in smaller biodiesel plants is recycled grease and frying oil.

Most important for producers of biodiesel, the 2005 Energy Act provides a $1.00 per gallon subsidy for biodiesel produced from virgin oilseed. The Act only provides a 50-cent subsidy for diesel made from recycled product, an effective $ .50 subsidy for oilseed farmers. Although the tax-credit portion for seed producers is scheduled to sunset in 2008 there will certainly be efforts to extend it by farm state members of Congress. In addition to the direct subsidies to biodiesel producers and indirect subsidies to seed stock farmers, one needs to also factor in the additional multimillion dollar annual direct federal subsidies to soy and canola farmers.

Biodiesel or blended diesel (regular petroleum diesel with biodiesel added) is technically and chemically an attractive substitute for petroleum-based diesel. One factor is because of recent regulations that require diesel fuel to include substantially less sulfur, a major ingredient in smog and acid rain. Sulfur is however a key ingredient in diesel fuel that allows it to lubricate engines. So reducing the sulfur content in petroleum-based fuel requires additives. However, adding just 1 or 2 percent biodiesel will restore the lubricity of the fuel.

According to the Minneapolis Fed, biodiesel from seed stock will remain price competitive (with or without the Energy Act subsidies) as long as crude oil prices remain in the $50/barrel range. Regardless of subsidies however, the Fed goes on to state:

The National Biodiesel Board estimates that if all the current and proposed projects in the country get built, they would be capable of producing 1 billion gallons of the fuel a year. A federal biodiesel mandate (some members of Congress have proposed requiring U.S. vehicles to burn 2 billion gallons annually by 2015) would certainly stimulate demand for that much biodiesel.

But Tiffany, at the University of Minnesota, believes that a lower production ceiling is more realistic. “If we just had a low-blend strategy for the whole country, maybe we could use about 500 million gallons of biodiesel [annually],” he said. Pushing production beyond that level risks driving up prices for soy and canola, thereby raising production costs and making biodiesel derived from fresh oil less competitive, even if the federal tax credit is renewed two years from now.

It is worth noting here that the increased demand for corn for ethanol production is the driving factor behind the recent run up in corn prices and also in farm land.

If demand for biodiesel takes off, producers are likely to turn to yellow grease [post-consumer and industrial waste] as their preferred feedstock. Most recycled grease goes unused, and prices are lower and more stable. So grease renderers, not farmers, are in a better position to capitalize on any long-term growth in biodiesel usage.

The same economic constraints will likely prevent biodiesel from weaning the country of its dependence on imported oil. Even if nationwide biodiesel production rises to 1 billion gallons annually, that represents only 2 percent of diesel consumption in 2005.

Biodiesel's limited horizons raise the question of whether the fuel is worth subsidizing. Compared with other energy and agricultural subsidies, the cost of the federal biodiesel tax credit is a drop in the bucket, but because it's indexed to consumption, the subsidy will grow with biodiesel output.

All of this is not to say that biodiesel doesn't have a bright future in the district. Fundamentally, biodiesel is an effective, environmentally beneficial motor fuel that many consumers want to use. It provides farmers buffeted by low commodity prices with an additional market for their crops. Equally important, it gives those with an entrepreneurial bent the opportunity to add value to their produce, as in the case of the Minnesota Soybean Processors cooperative in Brewster.

Even if biodiesel won't eventually provide a market for all the soy and canola farmers can grow, or displace regular diesel from the nation's gas tanks, it's likely to continue to grow, with or without subsidies.

Bottom line here is that biodiesel, like ethanol, is no panacea to petroleum dependency. It's role should be understood, like ethanol's, to be a regional one and also one of many alternative fuels that will in combination help lower but not eliminate dependence on petroleum. Only drastically reduced demand for petroleum fuel can truly help accomplish that.

Biodiesel shows a slightly more sustainable market case than ethanol with or without subisied It is attractive for the following reasons; it can be made from post-consumer waste, diesel fuel can give a mileage/performance ratio that is better than gasoline powered vehicles making it attractive as an auto fuel substitute.

Being a bit lower-risk than an ethanol plant the Hawkeye Bio Diesel facility should be in a better position to raise the capital for construction. This then begs the question of whether TIF financing to the tune of 18% of construction costs, in order to produce 50 jobs is a good deal for the taxpayers of the City of Camanche and Clinton County. This in light of the already overextended TIF financing in this region that I have documented here. I’ll take that up in a subsequent post.