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Will biodiesel help fuel Arkansas ag economy?

At least that’s what some are saying could happen.

Biodiesel potential

Everyone wants to know if biodiesel is really a winner for soybean farmers. Michael Popp, Agricultural Economist with the University of Arkansas, has crunched the numbers and he says it can be.

Biodiesel is generated from cooking oils, animal fat or vegetable oils. One of the best vegetable oils for making the diesel is soybean. Anyone can take biodiesel, blend it with conventional diesel and burn it without modifying an engine. Typically, biodiesel is blended with regular diesel at percentages ranging from 1 percent to 20 percent.

But how much does it cost? Is it being produced in Arkansas? If not, should it be produced here?

“The production costs of biodiesel depend a lot on the capacity and intensity of use of the production facility. It also obviously depends a lot on the cost of feed stock costs or soybean oil. If soybean prices go up, the cost of soybean oil goes up. We must look at the potential cost fluctuations,” says Popp, who spoke at the Arkansas Soybean Research Conference in Brinkley.

For a facility that produces less than 3 million gallons, Popp says investment cost per gallon is something around $2 or $3. As you raise the facility’s production to 30 million gallons, the investment cost for production capacity can dip to as little as 50 cents per gallon.

“If you use a feed price of 15 cents per pound for soybean oil combined with a 3-million-gallon plant, you’re looking at about $1.90 per gallon. If you use a larger plant, the price drops to $1.50 per gallon. What this shows is, that it would make sense to build a bigger rather than smaller plant, as long as biodiesel will sell,” says Popp.

Further benefits

When looking at prices per gallon for conventional diesel and biodiesel over time, they tend to move in opposite directions. What does that mean for farmers?

“Well, if you’re buying a lot of diesel for your operation, you might be able to hedge some price risk with use of biodiesel. That brings up the question of what type of feedstock to use. Compared to soybean oil, animal fat and cooking oils tend to be cheaper. That’s why Tyson has been looking at chicken fat as a potential biodiesel moneymaker.”

In bringing biodiesel to the Delta, there are commodity programs available under USDA bio-energy initiatives that can be brought into play. “The programs say if you go ahead and generate new capacity for biodiesel production anywhere in the U.S., that start-up can be subsidized up to $1.17 per gallon (2001 numbers).”

That means if it costs $1 in investment to generate a gallon of biodiesel, and you can secure a subsidy for $1, “you can essentially build the plant for free.”

Bottom line numbers

The United States doesn’t have the capacity to replace all conventional diesels with biodiesel. And it isn’t cheaper than conventional fuel. In fact, biodiesel – depending on the percentage blended -- generally costs 5 to 20 cents per gallon more than conventional diesel. The rule of thumb is for each percentage of biodiesel you add to the blend costs another cent.

“Biodiesel can be used where it’s mandated (where air quality standards must be improved) but also could be used by soybean growers. After all, if you grow it and can use it, push the market and make money all at the same time, why not?”

Popp says studies indicate that if biodiesel use were increased in the country by 2 billion pounds of soybean oil, it would increase soybean prices about 3 percent. For $5 soybeans, that means a price increase of 15 cents per bushel. Using a second set of assumptions, another study shows soybean prices rising to the tune of 35 cents per bushel if all U.S. on-road diesel was blended at 1 percent biodiesel.

Now, assume that farmers were to go ahead and start using biodiesel at 6 cents per gallon more than conventional diesel. Further assume that, as a result, the soybean price rose a conservative 5 cents per bushel – which is less than the estimates in the earlier studies.

“If you have a 30 bushel per acre soybean yield, you’ll use an average of about 12.5 gallons per acre in growing and harvesting it. To determine if money can be made, we multiply 30 bushels by an extra nickel. We then subtract out the extra cost –12.5 gallons times 6 cents extra. That leaves us a benefit of about 75 cents per acre.”

If all Arkansas soybean acres were grown using biodiesel under the above assumptions, it would mean a direct benefit to Arkansas farmers of $2.1 million annually, says Popp. If all crops in Arkansas were grown using B5, a 5-percent blend, roughly 6.8 million gallons of biodiesel would be demanded.

And if Arkansans don’t build these plants in their home state, they will likely be built elsewhere. If that happens, “we’d lose part of the economic impact that would result from biodiesel processing facilities. For those interested in investing in biodiesel, you need to get busy planning right now,” says Popp.

e-mail: [email protected]

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