Argentina provides an excellent example of the development of a soybean-based biodiesel industry without benefit of government subsidies.

It has emerged as the world's fifth-largest producer. Total 2008 production amounted to 290 million gallons, a whopping 433% increase over 2007. Nearly all of it was exported to the EU.

“Growing demand for greener fuels and high oil prices created a ready market,” says Cristian Módolo, an economic analyst. “Locally, the introduction of a legal framework for the sector, favorable ex-port tax policies and a daily oilseed crushing capacity of 150,000 tons, which is greater than requirements, were key factors.”

However, to take advantage of such favorable market conditions, Argentina needed to have an edge over its subsidized competitors: a lower cost base than its competitors.

Besides low-cost raw materials, the industry's structure also facilitates competitiveness. “Argentina's a very efficient producer of corn and soybeans,” explains Carlos St. James, CEO of the Argentine Renewable Energies Chamber. “Its crushing industry is clustered near the port of Rosario on the Paraná River. The plants are enormous in scale, very sophisticated and super efficient. Transportation costs are low, as the port is on the doorstep of the main soybean-producing region.”

THE MAIN IMPACT on the U.S. biodiesel sector from Argentina's increasing output is on those producers targeting the export market, according to industry sources. Due to tariffs imposed by the EU on U.S. biodiesel, Argentina is displacing U.S. exports to EU countries, which have high biodiesel requirements by law. With Argentina also seeking to diversify its markets outside the EU, the U.S. may face a challenge from Argentina in these markets, too.

Although the established oilseed crushers are the most prominent players in the biodiesel sector, many new companies have taken advantage of the excess crushing capacity by entering into contracts with the crushers. That these new entrants can operate profitably further highlights the sector's efficiency.

Many of these new players are innovators. “Some new entrants have a distinct vision; they seek not only to transform soybean oil into bio-diesel, but to create a sustainable business long term,” says Federico Pucciariello, president and CEO of Rosario Bioenergy S.A, the first refinery in the country not to use fossil fuels in its production processes.

But challenges lie ahead for the sector. Argentina's main export market, the EU, requires that biofuels must reduce greenhouse gas emissions by 35% over regular diesel. But soybean oil biodiesel feedstock has only been assigned a rating of 31%. The sector feels that this is wholly unfair and ignores the evidence.

“Scientific studies indicate that the reduction in greenhouse emissions from soybean-oil-based biodiesel in Argentina is between 73.6% and 74.9%, thanks in part to direct sowing, and it's superior to that of other oilseed biodiesels,” says Pucciariello.

Regardless of potential problems with export markets, the outlook for the sector looks very favorable. “Argentina's government has mandated that all domestic diesel fuel should have a 5% mix of biodiesel by 2010, creating an internal demand of 181 million gallons,” says Módolo.

Not putting all its eggs in one basket, Argentina is now experimenting with other feedstocks. “We're well positioned to develop a second-generation industry based on jatropha since we have a lot of land which can be used to grow these crops,” says St. James.

This is part of a series on agriculture in Argentina by John Kennedy, a writer and economic consultant. You can contact him at [email protected].