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Biodiesel: What It Means for Sunflower

Saturday, November 1, 2008
filed under: Utilization/Trade

Just eight years ago — 2000/01 — the national average sunflower seed price was $6.89/cwt and that of sunflower oil was $15.89/cwt. Vegetable oil was in great surplus and all commodity prices were in the tank.

During that year, several major corporations started to burn refined soybean and corn oil in their boilers as a replacement for higher-cost petroleum products. It happened without any kind of government subsidies or mandates. That was exciting news as the dream of a biodiesel industry using vegetable oil was just beginning to take shape.

In the years since 2000, the biodiesel industry has grown dramatically in size and infrastructure. But this fledgling industry has already gone through some distinct growing pains. What does this industry mean to vegetable oil prices now and in the future?

First of all, the pioneers of the biodiesel industry have battled all of the usual problems of introducing a new concept and product. Issues such as product performance, engine warranties and fuel standards are basically completed and off the table.

A great deal of work was also done on the legislative side, including obtaining “use” mandates in the Energy Independence and Security Act of 2007. In addition, a $1.00 per gallon “Blenders Tax Credit” has been available for the last several years, breathing real life into the industry. That sparked a great deal of “bricks and mortar” — to the point where the industry is well over capacity.

Biodiesel plants literally sprang up overnight, with estimates of about 170 processing plants of various sizes currently in existence and more in the pipeline. John Baize, an oilseed consultant headquartered in Alexandria Va., estimates that only 30% of the capacity was being utilized in the second quarter of 2008. High vegetable oil prices beginning in September 2007 slowed the industry down despite high petroleum prices. Biodiesel processors scrambled to look for alternative fat sources, including spent restaurant oils, chicken fat and tallow. Demand quickly placed pressure on those sources as well. The use of oils and fats for biodiesel peaked in August 2007 and then declined until recovering in June and July of 2008 (see Figure 1 in PDF below).

This low-capacity utilization is not unique to the United States. A similar situation exists in Europe, the “godfather’”of the biodiesel movement. World vegetable oil prices simply got too high too quickly for this fledgling industry to adapt and compete. About 80% of a biodiesel plant’s operating cost is the feed stock, so any fluctuation in the vegetable oil price has a significant impact on margins.

At the end of the day, government subsidies are required to make this industry competitive. There is an assortment of incentives and mandates in most countries. In the United States, individual states often have programs as well.

The primary driver in this country is the Blender’s Tax Credit. This $1.00 per gallon credit literally drives the biodiesel market in the United States. The tax credit was set to expire at the end of 2008. Tom Hance of Gordley & Associates in Washington DC has been working diligently along with others on legislation to extend the tax credit. The extension was passed by the House earlier this year and overwhelmingly in the Senate; but differences between the two chambers over larger tax and budget policy issues delayed passage. Then came the economic crises and the so called “Wall Street Bailout” bill. The biodiesel industry was able to attach the tax credit to that legislation, and it is now in place for another year. Hance calls the tax credit legislation “vital to the industry.” He states that the combination of the high cost of feed stocks and uncertainty over the extension of the tax credit from one year to the next has the U.S. biodiesel industry in a “delicate and tenuous” state.

Because of its quality and price, very little sunflower oil is used in biodiesel. So why is this discussion important for sunflower growers? Well, for many years oilseed prices have been impacted by large volumes of surplus soybean oil. That has been accentuated recently with the trans fat issue, causing soybean oil to lose domestic food market share to other oils — including sunflower. Having another demand outlet for soybean oil is important for the price health of all oils. According to the U.S. Census Bureau, 1.3 million metric tons of soybean oil were used for biodiesel in calendar 2007. That represents 14% of total U.S. soybean oil production.

So could vegetable oil prices go back to the depressed levels in 2000/01? John Baize doesn’t think so. “As long as biodiesel is an option, that industry can consume a great deal of soybean oil. If vegetable oil prices get cheap enough, the industry would not need incentives to operate. A lot of soybean and corn oil was used in boilers eight years ago because it was cheaper than petroleum.” Baize sees the biodiesel industry as a “price backstop’”for oilseeds — especially the high-oil content oilseeds.

There is an intrinsic energy value in vegetable oil. “Vegetable oil has a fuel value of $903 per metric ton (41 cents/lb) when a barrel of petroleum is priced at $137,” according to Baize. The relationship between Chicago soybean oil futures and the price of a barrel of oil have closely tracked for the last 15 months as shown in Figure 2 in the PDF below.

Does the food versus fuel debate enter into biodiesel? Absolutely, Baize states. “Vegetable oil buyers closely watch this price relationship and will move vegetable oil prices higher to keep it from going into biodiesel when stocks get tight,” he says. This is new ground for the major food users, Baize adds — and at the end of the day, food will always out-bid fuel. — Larry Kleingartner

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