Transcript mark_cochran

Biodiesel: Potential and
Possibilities for the
Arkansas Economy
P. Manning, M. Popp, and M. Cochran
University of Arkansas
Dept. of Agricultural Economics and
Agribusiness
Biodiesel






Mono-alkyl esters (chemical name)
An “alternative fuel”
A substitute for conventional diesel fuel
An additive to conventional diesel fuel
Made primarily from soybean oil
Other possible feed stocks



Animal fats
Used cooking oil
Other virgin vegetable oils (corn, sunflower, canola,
rice bran, cottonseed, etc.)
Benefits of Alternative Fuels
 Less
U.S. dependence on foreign
petroleum
 Increased demand for agricultural
commodities

Stimulated economic activity in rural
communities
 More
pollution reduction benefits
Federal Policies

Clean Air Act of 1990


Energy Policy Act of 1992


Decrease dependence on foreign fuel supplies
Energy Policy Act of 2002


Emission reduction in “non-attainment areas”
More economic incentives for biofuel use and
production
CCC Bioenergy Program

Payments to ethanol and biodiesel producers for
reducing stocks of agricultural commodities
Biodiesel Benefits






Can be used in existing diesel engines with no
modifications
Has a net energy ratio of 3.24 to 1
Requires no special storage requirements if
blended, but unknown if not blended
Is non-toxic and biodegradable
Is a better lubricant than conventional diesel
Provides a “fuel standard” where manufacturer’s
warranties are still applicable when using B20 or
lower
Average Biodiesel Emissions Compared to Conventional
Diesel
Emission Type
B100
B20
Total Unburned Hydrocarbons
-68%
-14%
Carbon Monoxide
-44%
-9%
Particulate Matter
-40%
-8%
NOx
+6%
+1%
Sulfates
-100%
-20%
PAH (Polycyclic Aromatic Hydrocarbons)**
-80%
-13%
nPAH (nitrated PAH’s)
-90%
-50%***
Ozone potential of speciated HC
-50%
-10%
Regulated
Non-Regulated
*Estimated from B100 result
**Average reduction across all compounds measured
***2-nitroflourine results were within test method variability
Source: National Biodiesel Board
Ethanol By Comparison
 Derived
mostly from corn grain
 Used as an oxygen booster in gasoline
 Has an energy ratio of 1.24
Ethanol Production
 Grew
to ~2.2 billion gallons today from
essentially no production in the mid-1970’s
 Consumption of ~80.8 million bushels or ~
7% of U.S. corn production
 A 40 mil. gal/year plant increases local
corn price by an est. $0.05-$0.10 /bu
Biodiesel Production Cost and
Capacity

Production cost depends primarily on:



Capacity and intensity of use of production facility
Feedstock cost (soybean oil, etc.)
Value of co-product (glycerine)

Economies of size definitely exist in biodiesel production

Facility Investment



<3 million gallon plant: As high as $2-3 per gallon of capacity
5-10 million gallon plant: $1 per gallon
30 million gallon plant: As low as $0.50 per gallon
Biodiesel Production Cost and
Capacity

Net Processing Charges




This is the cost of production independent of feedstock cost
Somewhat dependent on the price of the by-product (glycerine)
Range from $0.15 to $0.50 per gallon depending on facility
investment and annual operating intensity
In order to be most cost-competitive, a facility should be
designed as “flexible feedstock” in order to limit input
price risk due to market fluctuations of the various
feedstocks
Currently, the least-cost feedstocks are:


Recycled cooking oil
Animal fats
Biodiesel Production Cost and
Capacity

Production costs range from $1.39 to $2.50 per
gallon (without subsidies)
 Feedstock prices would have to rise above
$0.22/lb to result in a biodiesel price of above
$2/gallon
 As it is a “thin” market, prices received for
biodiesel vary widely.
 In the near term, all but the most efficient
producers are likely to be dependent on
subsidies to be profitable
Neat Biodiesel Cost ($/gal)
Biodiesel Production Cost for Alternative
Plant Sizes, Feedstock Prices & 15% ROR
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
3 million gallon plant
$0.50
30 million gallon plant
10 million gallon plant
$0.00
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Feedstock Prices (cents/lb)
Capital Investment Cost+15% ROR at 3
Plant Capacities (constant feedstock cost of
$0.15/lb)
16
Cost (million $)
14
12
10
8
6
4
2
0
3 mil gal
5 to 10 mil gal
Plant Capacity
30 mil gal
$ per gallon
Biodiesel Cost+15% ROR at 3 Plant
Capacities (constant feedstock cost of
$0.15/lb)
$2.00
$1.90
$1.80
$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
$1.00
3 mil gal
5 to 10 mil gal
Plant Capacity
30 mil gal
Monthly Pre-tax Diesel Prices and Estimated
Unsubsidized Neat Biodiesel Prices**
$ Biodiesel (Lard)
$ per gallon
3.50
$ Biodiesel (Tallow)
3.00
$ Biodiesel (SB Oil)
2.50
$ Pre-Tax Diesel
2.00
1.50
3
1.00
0.50
M-01
J-01
N-00
S-00
J-00
M-00
M-00
J-00
N-99
S-99
J-99
M-99
M-99
J-99
N-98
S-98
J-98
M-98
M-98
J-98
N-97
0.00
Date
**Using Historic Prices of 3 Feedstocks Using an Average Net Processing Charge of $0.35/gal +
15% ROR
USDA Bioenergy Program







CCC pays ethanol and biodiesel producers for
commodities
Smaller producers receive higher subsidies than
larger producers
Subsidies dependent on feedstock commodity
price
Subsidy only applies to an increase from
previous year
Average subsidy per gallon for using soybeans
was $1.17 (1st qtr of 2002)
$7.5 million per year payment cap to producer
$150 million available funding for FY 2002
Proposed Federal Policies
Promoting Biodiesel Production
 Senate

Energy Bill, S.517
Biodiesel Excise Tax Incentive
• Provide blenders of biodiesel with a $0.01
reduction in the diesel excise tax for every 1% of
biodiesel made from virgin vegetable oil (blended
with 20% diesel or less)

Blenders Tax Credit
• Offers ½ cent per gallon tax credit per 1% content
(up to 20%) for biodiesel made from recycled oils
and animal fats
Individual State Incentives for
Biodiesel Production/Use

Minnesota – legislation mandating on-road
diesel contain 2% biodiesel starting in 2005.




Stimulate state economy
Create demand for ~16 million gallons annually
Would result in a 6/10th of a cent increase in the retail
price of diesel
Arkansas – currently, no incentives
Examples of State Initiatives
 Preferential
sales tax rates for Biodiesel
(0-85% of tax for diesel)
 Mandated use of Biodiesel and/or
alternative fuel vehicles (AFVs) in public
fleets
 Special financing for use of Biodiesel in
AFVs
 Recommendations or mandates for private
use of Biodiesel
Examples of State Initiatives (cont.)
 Production


incentives
Subsidies of production $0.05 to 0.30/gallon
Cost share of infrastructure construction
 AFV
use high volume traffic lanes
 Fund research and/or feasibility studies
Examples of Pending State Initiatives
 Tax
credits for AFV purchase or Biodiesel
production
 Preferential parking for AFV
 Grant monies for AFV purchase
 Tax credit low emission vehicles
 Purchasing preference of Biodiesel
Examples of Pending State Initiatives
(cont.)
 Designate
use of special license plate fees
to promote ethanol and Biodiesel
 Exemptions from property tax and ad
valorem taxes for all property used to
generate electricity from renewable energy
Biodiesel Usage

U.S. does not have the capacity to replace all
petroleum diesel with biodiesel
 B100 is not economically viable for most users
 Prices for biodiesel vary by location


B5 to B20 blends average $0.05 to $0.10 more than
conventional diesel
Biodiesel is currently used by:


Users who are mandated to use an alternative fuel
Users who have an interest in supporting their own
product (soybean growers and processors, farm
organizations, etc.)
Benefits to the U.S. Agricultural
Economy

If biodiesel use increased such that 2 billion lbs
more soybean oil was demanded, soybean
prices would increase by 3% or ~$0.15/bu.
(FAPRI)
 If U.S. on-road diesel fuel contained 1%
biodiesel this would:



Utilize 250 million bushels of soybeans
Increase the value of soybeans by at least $0.35 per
bushel
Add more than $900 million to gross farm income
Regional Economic Benefits of
Biodiesel

A study of a vertically integrated soybean
crushing-biodiesel production plant with 250
ton/day crushing capacity (investment of $8.5
million) in Buchanan County, MO estimates
benefits including:




Creation of 81 direct jobs, 243 total
Increase in real personal income of $25 million
Increase retail sales by $9 million
County governmental revenues and expenditures to
increase $12 million
Regional Economic Benefits of
Biodiesel (cont.)
 Using
the same plant capacity as the
previously mentioned study, estimates of
the benefits for the Eastern Shore of
Virginia are:




Creation of 81 direct jobs, 135 total new jobs
New industrial and commercial sales of $36
million
Increase income by more than $7 million/year
Generate fiscal benefits for the county of
$365,000/year
Example: Farmer Benefits of
Biodiesel Use

Assumptions:




A farmer wants to support biodiesel prod./use, so he/she
uses B5 on-farm at $0.06 more per gal.
Soybean increases $0.05/bu because of biodiesel use
30 bu/ac average soybean yield
Average of 12.5 gallons of diesel used per acre
Gain or Loss = Additional Revenue – Additional
Cost
 Per Acre:



30 bu/ac * $0.05/bu – 12.5 gal/ac * $0.06/gal = $0.75
On All Arkansas Soybean Acres with B5:

$2.1 million increase in net returns for AR farmers
Example: Farmer Benefits of
Biodiesel Use (cont.)

The break-even soybean price increase is 2.5
cents/bu

A less than 1% increase in soybean prices
justifies the use of a biodiesel blend fuel.

This price increase depends on growth of the
biodiesel industry from


Voluntary use (e.g. farmers using their own product)
Mandatory use (e.g. a federal renewable fuels
standard)
Example: Farmer Benefits of
Biodiesel Use (cont.)

If all soybean acreage in AR was grown using
B5, over 2 million gallons of biodiesel would be
demanded


Would increase soybean demand 1.45 million
bushels.
The total amount of diesel used on-farm in AR
2001 was 136.1 million gallons. If B5 was used
this would require 6.8 mil gal of biodiesel

Would increase soybean demand 4.86 mil. bushels
Biodiesel Availability in Arkansas

Morrilton Agri Coop Supply



Neat (100%) biodiesel sells for $1.92/gallon
Conventional off-road diesel sells for $0.799
B5 (5% biodiesel) costs $0.056 more per gallon than
conventional diesel (0.95*$0.799+0.05*$1.92 = 0.855)

World Energy Alternatives will ship to a customer
or through existing fuel suppliers
 Some premium diesel contains small amounts of
biodiesel


CENEX Ruby Fieldmaster, Roadmaster, and
Wintermaster
No current biodiesel production in AR
Production of Biodiesel in AR
would:
 Allow



more value-added benefits for:
Growers
Industry
Users
 Spur
economic activity through profits,
income and tax revenues
 Promote self-sufficiency
 Possibly provide an outlet for other oilseed
crops in the state
Further Research

Willingness of AR citizens and government to
promote biodiesel production and use




Cost
Economic stimulus to rural economy
Reduction of dependence on foreign petroleum
Feasibility of biodiesel production in AR

Ownership structures
• Cooperative
• Other producer outlets

Location(s)
References





Doane’s Agricultural Report. 5/3/02.
Duffield, J. and H. Shapouri. U.S. Biodiesel
Development: New Markets for Conventional and
Genetically Modified Agricultural Products. Office of
Energy. ERS. USDA at NC State Univ. Ag. Econ.
Report no. 770.
Farm Service Agency Website:
http://www.fsa.usda.gov/daco/bio_daco.htm
Farm Bureau Commodity Communicator Weekly
6/7/02.
Johnson, T. the Potential Rural Development
Impacts of Biodiesel on Virginia’s Eastern Shore.
References (cont.)





Ma, J., Scott, J., and T. Johnson. Soy Diesel
Processing in Buchanan County, Missouri: Potential
Impacts
National Biodiesel Board. http://www.biodiesel.org/
Tiffany, Douglas, D. A Policy Choice for Minnesota.
Dept. of Applied Econ. Univ of Minnesota.
Tyson, Shaine. Department of Energy Alternative
fuels expert. Personal communication.
Urbanchuk, J.M. and Kapell, J. Ethanol and the
Local Community. AUS Consultants and SJH &
Company