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Biodiesel Economics

The primary cost of biodiesel is the oil feedstock. It takes about 7.3 pounds of soybean oil to produce one gallon of biodiesel. The price of soybean oil varies widely but over the last few years has tended to stay in the range of $0.15 to $0.25/lb. This means the feedstock cost will be between $1.10 and $1.83/gallon. Most estimates of biodiesel production costs are $0.20 to $0.50 per gallon, with large plants on the low end of the range and small plants on the high end. Prices for new construction of a biodiesel plant are approximately $1.00 per gallon of annual capacity.

One of the co-products of the transesterification process is glycerin which can have a high value if it is refined. The value of the glycerin essentially cancels the cost of the alcohol and catalyst. The price of glycerin is currently stable but if a large biodiesel market develops, there is likely to be a glut of glycerin with much lower prices. The selling price of biodiesel must exceed the feedstock cost to cover processing, packaging, transportation, distribution and profit. Subsidies through the USDA Commodity Credit Corp. (CCC) have been available since 2000. The Federal Government has authorized the U.S. Department of Agriculture to make direct payments to producers of ethanol and biodiesel to offset part of their cost to buy commodities to produce these fuels. The current authorization level is $150 million per year through 2006. The program is described in the following website:

The CCC program will pay biodiesel producers for 40% of the cost of purchasing soybeans (or other oil seeds such as corn, grain sorghum, sunflower seeds, rapeseed, canola, cottonseed, and others), if the beans are processed to produce biodiesel. In the case of soybeans, the producer can still sell the soybean meal and the 40% CCC payment may actually be greater than the value of the oil in the beans. Current versions of the CCC program also include greases from rendered animal fats and recycled restaurant frying oils. However, the subsidy rate on these products depends on their price relative to soybean oil.

The high price of biodiesel is the major obstacle to market development. The most promising approach to lowering the price is to use other, less expensive, feedstocks to provide a portion of the biodiesel supply. These other feedstocks could include spoiled soybeans, beef and pork tallow, waste restaurant frying grease (yellow grease), and by-products from other processes involving soybean oil, such as soapstock. While the quantities of these feedstocks are not sufficient to supply a large market, they can be used as blending agents to lower the overall costs. Some of these alternate feedstocks are considered to be disposal problems and can be obtained at very low cost.

While not lowering the price of biodiesel, another government program has provided incentive for some groups to purchase and use biodiesel. The Energy Policy Act (EPAct) is a law that requires government fleets to purchase alternatively fueled vehicles. While biodiesel can be considered to be an alternative fuel, its use in blends was not initially allowed. More recently, the Dept. of Energy allows 20% biodiesel blends (B20) to be used in heavy duty vehicles in order to satisfy EPACT alternatively fueled vehicle purchase mandates. If a fleet uses 450 gallons of biodiesel in blends of 20% or higher, they can get credit for one alternatively fueled vehicle.

All biodiesel producers who make fuel for sale to the on-highway vehicle market must be registered with the Environmental Protection Agency. To become registered, producers are required to submit detailed data about the health effects of their products. Collecting these data is very expensive. Instead of collecting their own data the producer can join the National Biodiesel Board who make the data available to all of their dues-paying members at no charge.