Biodiesel: Potential and Possibilities for the Arkansas Economy

1
Biodiesel Potential and Possibilities for the
Arkansas Economy

• P. Manning, M. Popp, and M. Cochran
• University of Arkansas
• Dept. of Agricultural Economics and Agribusiness

2
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.)

3
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

4
Federal Policies

• Clean Air Act of 1990
• Emission reduction in non-attainment areas
• Energy Policy Act of 1992
• Decrease dependence on foreign fuel supplies
• Energy Policy Act of 2002
• More economic incentives for biofuel use and
  production
• CCC Bioenergy Program
• Payments to ethanol and biodiesel producers for
  reducing stocks of agricultural commodities

5
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 manufacturers
  warranties are still applicable when using B20 or
  lower

6
Average Biodiesel Emissions Compared to
Conventional Diesel
Emission Type B100 B20
Regulated
Total Unburned Hydrocarbons -68 -14
Carbon Monoxide -44 -9
Particulate Matter -40 -8
NOx 6 1
Non-Regulated
Sulfates -100 -20
PAH (Polycyclic Aromatic Hydrocarbons) -80 -13
nPAH (nitrated PAHs) -90 -50
Ozone potential of speciated HC -50 -10
Estimated from B100 result Average reduction
across all compounds measured 2-nitroflourine
results were within test method variability
Source National Biodiesel Board
7
Ethanol By Comparison

• Derived mostly from corn grain
• Used as an oxygen booster in gasoline
• Has an energy ratio of 1.24

8
Ethanol Production

• Grew to 2.2 billion gallons today from
  essentially no production in the mid-1970s
• 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

9
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
• lt3 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

10
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

11
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

12
Biodiesel Production Cost for Alternative Plant
Sizes, Feedstock Prices 15 ROR
13
Capital Investment Cost15 ROR at 3 Plant
Capacities (constant feedstock cost of 0.15/lb)
14
Biodiesel Cost15 ROR at 3 Plant Capacities
(constant feedstock cost of 0.15/lb)
15
Monthly Pre-tax Diesel Prices and Estimated
Unsubsidized Neat Biodiesel Prices
Using Historic Prices of 3 Feedstocks Using an
Average Net Processing Charge of 0.35/gal 15
ROR
16
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

17
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

18
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

19
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

20
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

21
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

22
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

23
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.)

24
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

25
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

26
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

27
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

28
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)

29
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

30
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 (0.950.7990.051.92
  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

31
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

32
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)

33
References

• Doanes 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.g
  ov/daco/bio_daco.htm
• Farm Bureau Commodity Communicator Weekly 6/7/02.
• Johnson, T. the Potential Rural Development
  Impacts of Biodiesel on Virginias Eastern Shore.

34
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