Recent trends in the profitability of biodiesel production
As documented in a farmdoc daily post last week, ethanol producers over the last year have enjoyed one of their best periods of profitability ever. This has been driven by a drop in corn prices that substantially exceeded the declines in ethanol and DDGS prices. This has put the ethanol production industry on a much sounder financial footing after being ravaged by drought-related losses in 2012. Today's post on biodiesel production profits is the second in a two-part series that examines recent trends in biofuel production profits.
In order to assess biodiesel production profitability over time, a model of a representative Iowa plant is used. This model was used in several earlier farmdoc daily posts that analyzed biodiesel profits and supply response (for example, see the posts here, here, and here). The model incorporates several key assumptions:
- 30 million gallon annual biodiesel production capacity
- Plant construction cost of $1.57 per gallon of nameplate capacity
- 50 percent debt and 50 percent equity financing
- 8.25 percent interest on 10-year loan for debt financing
- Plant operates at 100 percent of nameplate capacity
- Plant only processes soybean oil into biodiesel
- Conversion factor of 7.55 pounds of soybean oil per gallon of biodiesel
- 0.9 pounds of glycerin co-product per gallon of biodiesel
- 7 cubic feet of natural gas per gallon of biodiesel
- 0.71 pounds of methanol per gallon of biodiesel
- Other variable input costs of 25 cents per gallon of biodiesel
- Total fixed costs of 26 cents per gallon of biodiesel
This model is meant to be representative of an "average" plant constructed since 2006 to process soybean oil into biodiesel. There is certainly substantial variation in capacity, production efficiency, and feedstock across the industry and this should be kept in mind when viewing profit estimates from the model. However, limiting the feedstock to soybean oil is reasonable since it represents over 50 percent of all feedstock used to produce biodiesel in the U.S. and feedstock prices tend to be highly correlated (see Figure 5 in this earlier farmdoc daily post).
click image to zoom To track plant profitability over time, weekly biodiesel and soybean oil prices at Iowa plants from the Agricultural Marketing Service (AMS) were collected starting in 2007. Natural gas costs are estimated based on monthly data from the Energy Information Agency (EIA). Glycerin and methanol prices were obtained from OPIS. Figure 1 presents the (pre-tax) estimates of biodiesel profits based on the prices and model assumptions. There have been basically three sub-periods in terms of positive profits, with losses generally occurring outside of these periods: i) March - December 2008, ii) March - December 2011, and iii) March - December 2013. The difference in returns during the profitable and unprofitable periods is striking. When returns are in the black the average is $0.35 per gallon compared to -$0.16 per gallon when returns are in the red. The two largest spikes in profitability can be traced to the effects of biofuels policies. The first major spike in 2011 was directly attributable to the race by diesel blenders to take advantage of the blender tax credit that was set to expire at the end of 2011. The second major spike in 2013 was also directly attributable to the race by diesel blenders to take advantage of the blender tax credit that was set to expire at the end of 2013 (the credit has yet to be reinstated for 2014). In addition, obligated parties under the RFS needed to incentivize expanded biodiesel production in order to meet the increased biodiesel mandate for 2013 and build up the stock of biodiesel RINs that could be used to fill the "renewable gap" in future years (see the post here).
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