Biodiesel article
CNN published an article on biodiesel yesterday (thanks Dave and Andy). Essentially, the article is cheerleading for biodiesel as it ought not impact food prices the same way ethanol has. It’s an ok article, but it misses several subtleties.
Here’s an excerpt:
The U.S. market for [biodiesel] has more than doubled every year since 2004 and will hit $1 billion this year. The number of retail pumps nationwide has grown from 350 in 2005 to more than 1,000 today. A couple of biodiesel IPOs are in the offing - and opportunities abound.
Biodiesel is 30 percent more fuel-efficient than gasoline, which in turn is 30 percent more efficient than ethanol. And while most ethanol produced in the United States comes from a single feedstock - corn - biodiesel has many sources: the oil of seed plants, such as soy and canola, french-fry grease and animal fat. That means the market can weather a price increase in any one raw material.
These are true statements, but it misses some key points.
Feedstocks
It’s true that you can make biodiesel from a number of different feedstocks. What’s not mentioned is that the yields - more specifically the costs associated with low yields - are not all the same.
A “good” grown feedstock tends to be a very “juicy” vegetable or nut. Algae is being investigated as well due to its ability to convert CO2 into relatively large amounts of oils suitable for biodiesel.
So knowing this, there are clear front-runners for biodiesel feedstocks in terms of current production scale and energy density (amount of oil you can get for an acre of land). Soy beans, Canola, and palm oil lead the list. And that’s essentially how the industry has developed throughout the world: Soy beans in the US and South America, Canola in Europe, and Palm Oil in SE Asia. Jatropha is also coming on strong in a couple different places (UK, Mali), but is biggest in India.
The problems here are that all of these commodities have relatively high prices. They’re actually on par (from a $/gal standpoint) with diesel fuel. For there really to be a lot of money to be made, then you need a very cheap feedstock. It’s not terribly expensive to process this stuff. And transportation isn’t that easy either. So a cheap feedstock allows for more margin to be attained given the mandatory transportation and processing costs). Right now, none of the ag plays provide this. Jatropha is compelling because it’s essentially a worthless weed. Algae has an energy density orders of magnitude higher than other sources, but doesn’t scale well in terms of growing large quantities of it.
The end result is that economics don’t really work out for biodiesel alone. If you can keep your costs low on all fronts, then you have some opportunities. But just like with ethanol, most of the money comes from the government subsidies.
Market dynamics
Biodiesel has kind of stalled out at the moment. REG is still the largest player by volume (with 300+Million gallons of capacity). Imperium Renewables just opened a 100Gal/yr plant in Washington. But that’s about it for that story. Imperium is going to Argentina next (a good move given their great soy bean industry and their spot in the economic development cycle). Minnesota has a 2% biodiesel mandate in all of its diesel fuel. But that’s about all the news there is. There aren’t dozens of companies building 100Mil Gal/yr plants. There aren’t huge hedge funds buying up dozens of smaller players. The feedstock issue - mixed with reservations over impacts to food prices sparked by the ethanol…unpleasantness - seems to be keeping things at bay.
It’s interesting to note, too, that much of the ethanol industry is driven by the need to replace MTBE - an additive that is suspected to be harmful to humans and the environment. Ethanol is a good substitute for it. One could argue that the ethanol industry up until earlier last year was driven by creating enough capacity to replace MTBE altogether. From here on out, I think it will be a bigger push to try and get higher ethanol % in gasoline (like E85).
Biodiesel, by comparison lacks such a non-market driving force. I don’t think you’ll get wide spread.
So while this article is all true, it’s trying to paint a picture that just isn’t coming to fruition. There are a lot of things that need to fall into place with biodiesel. It’s a compelling choice because it’s so accessible to the common man. But for it to be really made into a big enterprise, there needs to be some different economics associated with it - mainly cheaper and easy to manage feedstocks. We have some options, but they’re coming along slowly.
One has to wonder from what planet the writer of the CNN piece just landed. The current biodiesel industry, or at least that based on the transesterification of virgin vegetable oils, is not viable at current feedstock (and by-product glycerin) prices, period. As you say in your blog, its existence depends totally on U.S. government subsidies — not only the $1.00 per gallon federal one, but generous state incentives also — like the additional $1.00 per gallon that the State of Kentucky provides.
The CNN article is technically correct, also, when it says that “biodiesel has many sources: the oil of seed plants, such as soy and canola, french-fry grease and animal fat. That means the market can weather a price increase in any one raw material.” What it fails to mention is that the prices for all of those sources are rising steadily, and indeed converging. Back in 2005, the international price of palm oil (historically the cheapest) was less than 2/3 that of canola oil. Since that time, its price has risen 70% and it is now 85% the price of canola oil (the price of which has also risen). Prices for tallow, having fallen steadily for decades, have shot up as well — so much so that the soap makers are screaming for the end of subsidies and mandates for biodiesel.