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Blog by Scott Irwin, Department of Agricultural and Consumer Economics, University of Illinois

Despite the effects of the COVID pandemic and associated severe economic contraction, biodiesel plants basically broke even in 2020 (farmdoc daily, February 3, 2021). However, storm clouds were gathering as returns went into the red starting in late summer of 2020. Losses by the end of the year were among the worst since 2007.

In fact, the losses were severe enough to drive the representative biodiesel plant into shutdown territory for an extended period of time. The driving force behind the historic losses late in 2020 was skyrocketing soybean oil prices that outpaced gains in biodiesel prices. The purpose of this article is to estimate biodiesel production profits for 2021 and determine whether the red ink continued.

Biodiesel Plant Model
As in earlier farmdoc daily articles (e.g., March 27, 2019, February 5, 2020, February 3, 2021), a model of a representative Iowa plant is used to assess biodiesel production profitability. The model is a modified version of the representative plant model developed by Don Hofstrand at Iowa State University. It is important to note that this is a model of a FAME (fatty acid methyl ester) biodiesel plant, where the FAME acronym refers to the transesterification chemical process used to convert fats and oils feedstock into renewable biodiesel.

In particular, this method of biodiesel production should not be confused with renewable diesel production, which is growing rapidly. A good description of the differences can be found here at the Alternative Fuels Data Center from the U.S. Department of Energy.

The version of the representative biodiesel model used here 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.
25 percent interest on 10-year loan for debt financing, with the loan paid off in 2017.
Plant operates at 100 percent of nameplate capacity.
Plant only processes soybean oil into biodiesel.
9 pounds of glycerin co-product per gallon of biodiesel.
7 cubic feet of natural gas 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 through 2017 and 20 cents per gallon thereafter.

This model is meant to be representative of an "average" plant constructed in 2007 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 about half of the feedstock used to produce biodiesel in the U.S. and feedstock prices tend to be highly correlated.

In previous versions of the representative biodiesel plant model, a conversion factor of 7.55 pounds of soybean oil per gallon of biodiesel was assumed. Data on biodiesel production and feedstock use from the EIA's Monthly Biodiesel Production Report were examined to determine whether biodiesel production efficiency has improved in recent years. Across all types of production feedstock (e.g., soybean oil, canola oil, animal fats) the average conversion rate was 7.50 over January 2017 through November 2020, slightly below the 7.55 conversion factor assumed in the original version of the model.

The conversion efficiency did improve over this period, averaging 7.57 in 2017 compared to 7.51 in 2020. Based on this analysis of EIA data, the feedstock conversion rate in the model was dropped from 7.55 to 7.50 pounds starting in 2018.

In previous versions of the representative biodiesel plant model, it was assumed that 0.71 pounds of methanol were used per gallon biodiesel produced. The actual alcohol use per gallon reported by the EIA has been higher and increasing over time, rising from 0.77 pounds in 2017 to 0.83 pounds in 2020. Consequently, the methanol usage per pound of biodiesel production was increased for recent years. It was increased to 0.75 pounds in 2017, 0.80 pounds in 2018, and 0.84 pounds in 2019 through 2021. While the representative biodiesel plant has had some modest gains in feedstock efficiency in recent years, this has come at the cost of added methanol expenses.

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 over 2007 through March 2014 are based on monthly industrial prices for Iowa available from the EIA. Due to a change in the behavior of the industrial price series, starting in April 2014 natural gas costs are based on monthly electric power consumer prices for Iowa, also from the EIA. Glycerin and methanol prices are obtained from OPIS.

Figure 1 presents the price of biodiesel-the main revenue component-on a weekly basis from January 26, 2007 through January 21, 2022. The figure reveals that biodiesel prices skyrocketed in the first half of 2021, reaching an all-time high (since 2007) of $6.11 per gallon in mid-June. Prices then slid back towards $5 per gallon the remainder of the year, which was still a very high price by historical standards.

Glycerin is the other biodiesel revenue component and Figure 2 shows that its price truly went linear in 2021. Glycerin prices reached the historically unprecedented level of $0.65 per pound in November. Traditionally, by-product revenue from glycerin was only a few cents, but prices in 2021 reached such a high level that it became a meaningful component of revenue for part of the year.

To view the complete report, click here.

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