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Biodiesel: Potential and Possibilities for the Arkansas Economy

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

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Biodiesel: Potential and Possibilities for the Arkansas Economy

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  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 manufacturer’s warranties are still applicable when using B20 or lower

  6. Average Biodiesel Emissions Compared to Conventional Diesel *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-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

  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 • <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

  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 Cost+15% ROR at 3 Plant Capacities (constant feedstock cost of $0.15/lb)

  14. Biodiesel Cost+15% 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. afederal 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 (0.95*$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

  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 • 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.

  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

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