The Economics of Biodiesel Production and the Effect on Food Prices

Are new rules mandated by the federal government to increase biofuels production causing food prices to rise?

U.S. biodiesel has a very small impact on food costs. In the past year, food prices have risen 5.1 percent. Only an estimated 0.2 – 0.6 percent of that total increase has been contributed to biofuels (biodiesel, ethanol, Cellulosic ethanol) production, according to the U.S. Department of Agriculture (USDA). The leading factor to higher food costs is the rising cost of crude oil, which over a four-year period, more than tripled from $40 a barrel to nearly $150 in July of 2008. Food often travels through multiple states, making it highly susceptible to fuel costs.

Is soybean meal meant for livestock feed being diverted to make biodiesel?

To recognize how little the production of biodiesel affects the food supply – for both consumers and livestock – it helps to understand the relationship between soybean oil and soybean meal. During processing for biodiesel, about 18 percent of a bushel of soy is extracted to create a natural oil. It’s that natural oil that is used in biodiesel and the remaining 80 percent is left to make protein rich soybean meal. As a result, when demand is increased for soybean oil for use in biodiesel, the supply of soybean meal is actually increased. In fact, biodiesel produced from America’s soybean farmers used less than 12 % of the nation’s soybean harvest in 2007, and 81% of each soybean still went into protein markets to feed livestock and people.

While soy is the most common feedstock used today, biodiesel is truly a sustainable fuel that can be produced from various non-food crops and waste – even used kitchen grease.

How much of the inflation in food commodities is attributed to the production of biodiesel?

The primary factors responsible for global grain price inflation are: (1) higher crude oil prices – which have more than tripled from $40/barell to $150/barell (July 2008) – leading to increased costs to farmers for fertilizer, harvest and transportation; (2) increased demand as developing countries grow and people improve their diets; (3) two years of bad weather and drought leading to poor harvests in parts of the world; and, (4) export restrictions imposed by some countries.

Despite the higher energy costs, technological advances are allowing America’s family farmers to produce much more efficient harvests. Before oil and gas prices hit new highs this year, 1974 held the dubious record for highest petroleum prices. And, like today, food prices naturally increased with the higher energy costs. However, despite the fact that gasoline and diesel prices are 30 percent higher now than they were in 1974 (after adjusting for inflation) the price for grains used in most biofuels are actually significantly lower in 2008 than they were in the 70s, according to U.S. Labor Department statistics. Thus demonstrating that it is the high price of energy and other factors that drive higher food prices, not greater demand for soy and other grains.

Speculation that spring floods would lessen the fall harvest also played a role. Now, ideal weather conditions in the Midwest have helped farmers recover and crop yields are up, which will eventually lead to lower wholesale prices for corn, soybeans and wheat.

Is the agriculture industry profiting on the rise of commodities prices at the expense of American consumers?

Cutting-edge techniques producing record crop yields, combined with a weak dollar improving export opportunities, are the primary reason many family farmers hope to turn a profit this year. However, like all families and businesses, the volatile price of energy continues to drive up their expenses and their potential for profits could erode.

On the other hand, many of the corporate food manufacturers like Campbell’s, Kraft and Jimmy Dean, who compete for farmers’ harvests, have announced huge profits this year. For example, Sara Lee announced an astounding $242 million profit during the third quarter of this year and a net increase in sales of more than 10%. The company acknowledges that their own higher product prices have driven those profits. More examples are illustrated in the following analysis: http://www.foodpricetruth.org/pdf/analysis.pdf

Many of the international food giants are members of the Grocery Manufacturers Association (GMA), which has been criticized for leading a heavily-funded campaign against biodiesel and other biofuels. Senator Chuck Grassley was forced to cancel a June meeting with GMA members after only one of 15 CEOs invited to explain the trade association’s arguments against biofuels agreed to attend the discussion.

Are government mandates driving farmers to plant more soybean crops for use in biodiesel on land that is traditionally used for crops used in everyday groceries? And are farmers clearing more land for soybean crops, diminishing the positive effect natural plant life plays in climate control?

Despite a 52% increase in global consumption of soybean crops in the past decade, the growth in the world crop area harvested has only increased 6% over the same period. The fact is new technologies are allowing farmers to produce far greater yields on the same number of acres.

Furthermore, of the land that could be used for agriculture today, the United Nations Food and Agriculture Organization calculates that only 3.7 billion acres of the 10.4 billion acres are used. And of that total, only 1% of that farmland is used for crops that are utilized in the production of biofuels. Total land used for agriculture in the United States is predicted to remain constant or potentially be reduced through increases in farm production efficiency.

U.S. biodiesel industry initiatives have the potential to recycle commercial and agricultural wastes, bring sustainable agriculture to marginal lands, increase crop yields, and further lower pesticide and fertilizer applications. The National Biodiesel Board’s Feedstock Development program is addressing production of arid variety crops, algae, waste greases, and other feedstocks on the horizon which have great potential to expand available materials for biodiesel in a sustainable manner.

Why are tax incentives for biodiesel necessary?

The additional tax revenues generated by a profitable U.S. biodiesel industry will be significantly larger than the value of the federal tax incentives currently provided to the industry. Assuming the reinstated volumetric biodiesel tax incentive is extended past 2011, this program would cost a total of $3.5 billion by 2015. The industry will generate $8.3 billion of new revenue for the Federal Treasury for a positive net balance of $4.8 billion.

The most compelling case for the biodiesel tax incentive is that the reinstated credit is already working. Despite the weak economy, the biodiesel industry is on track to produce at least 800 million gallons in 2011, more than double biodiesel production of 315 million gallons last year, when Congress allowed the biodiesel tax incentive to temporarily lapse. When it was enacted in 2004, the U.S. biodiesel industry produced only 25 million gallons of fuel.According to a recent economic study, this year’s rejuvenated production will support more than 31,000 U.S. jobs and generate income of nearly $1.7 billion to be circulated throughout the economy. It also is expected to generate an estimated $345 million in federal tax revenue and $283 million in state and local tax revenues.

Would a rollback of the mandates from the Renewable Fuel Standard (RFS) save American consumers money?

No. First, energy costs would be higher without biodiesel currently supplementing supply. In fact, biodiesel helps reduce energy costs that escalate food costs. Merrill Lynch commodities experts said in March that oil and gasoline prices would be about 15% higher if biofuels producers were not increasing their output. That would put oil at nearly $170 per barrel and U.S. gasoline prices could have surged to $4.73 per gallon, based upon July 2008 highs. As previously discussed, a leading factor in increased food costs is the rising cost of crude oil.

The bipartisan Energy Independence and Security Act of 2007 (EISA), enacted in December, 2007, significantly improved the Renewable Fuels Standard (RFS) and included a requirement to use 500 million gallons of biomass-based diesel in the United States in 2009. This requirement gradually increases to 1 billion gallons by 2012. Biodiesel is the first and currently only commercial-scale fuel used across the U.S. that meets the EPA’s definition of an Advanced Biofuel.

Since the vast majority of car owners in the United States don’t own a diesel engine vehicle, how does biodiesel production help the average consumer?

Without biodiesel, gas prices would increase $.20 to $.35 per gallon, the U.S. Department of Energy estimates. For a typical household, that means biodiesel helps them save of about $150 to $300 per year. For the U.S. overall, this saves gas expenditures of $28 billion to $49 billion based on annual gasoline consumption of roughly 140 billion gallons.

Does biodiesel use more energy to make than it gives back, thus eliminating any gains from lower emissions?

No. Biodiesel actually has the highest “energy balance” of any transportation fuel. A new analysis shows that the energy balance of biodiesel is a positive ratio of 5.54-to-1. For every unit of fossil energy needed to produce the fuel over its life cycle, the return is 5.54 units of energy, according to the research conducted at the University of Idaho in cooperation with the U.S. Department of Agriculture. The “energy balance” takes into account the planting, harvesting, fuel production and fuel transportation to the end user.