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Ethanol production Biodiesel production. U.S. biodiesel production remained very small and flat until USDA created the Bioenergy Program in Fiscal Year (FY) 2000 that encouraged biodiesel production through cash payments to producers. Mostly as a result of this program, biodiesel production jumped from 500,000 gallons in 1999 to 28 million gallons in 2004. In 2005, 91 million gallons of biodiesel were funded by this program. However, the Bioenergy Program authorization ends in FY 2006. Even so, with high diesel prices and new tax incentives, USDA forecasts biodiesel production will reach 245 million gallons in 2006, a 170 percent increase year over year and a 490-fold increase since 1999. When assessing the cost of producing biodiesel, soybean oil has a higher cost than other feedstocks, but other feedstocks, such as yellow grease and beef tallow, cost more to process. The cost of building a biodiesel plant depends on many factors, including plant capacity, location, plant design, and equipment cost, which varies by the type of feedstock used. A general rule of thumb for estimating the cost of installing a small biodiesel plant is about $1.00 per gallon of annual capacity, thus a 5-million-gallon capacity plant has an estimated installation cost of $5 million. However, due to economies of scale, the installation costs begin to decrease as plant size exceeds about 5 million gallons per year. The processing cost per gallon of biodiesel, including the cost of materials, labor, energy, plant depreciation, and interest is about $0.50 per gallon for a 5 million gallon per year plant. The cost of the feedstock is by far the largest expense for a biodiesel producer. For example, soybean oil at current prices would cost about $1.95 to produce one gallon of biodiesel, resulting in a total production cost (excluding capital costs) of about $2.45 per gallon. Adding the expected return to investment and the costs for transportation, blending, and marketing would push the expected retail price of 100 percent biodiesel (B100) well over $3.00 per gallon. Until recently, the high cost of biodiesel has made it very difficult for biodiesel to compete in the diesel fuel market. However, with the recent surge in oil prices, diesel fuel prices have risen to historical highs, and biodiesel has become more cost competitive. Moreover, recent legislation has granted biodiesel a $1.00 per gallon excise tax credit and a $0.10 gallon small producer tax credit. Government incentives along with higher diesel fuel prices have made biodiesel production profitable and the industry is now expanding rapidly, much like ethanol. The biodiesel industry is still in its infancy, so as it grows to a larger scale and when an infrastructure is developed, the costs of producing and marketing biodiesel may decline. New cost-saving technologies will likely be developed to help producers use energy more efficiently, increase conversion yields, and convert cheaper feedstocks into high-quality biodiesel. However, in the longer term, the biggest challenge may be the ability of feedstock supply to keep up with growing demand. The supply of soybeans and other feedstocks available for biodiesel production will be limited by competition from other uses and land constraints. |