Biodiesel industry dependent upon tax credit

Dec 11, 2009
by DTN

If the $1-per-gallon blenders tax credit for biodiesel is allowed to expire at the end of December, “the biodiesel industry could be expected to collapse,” a new study released last week said.

The study, conducted by John M. Urbanchuk, director of Law and Economics Consulting Group, LLC (LECG), a notable consultant to the U.S. biofuels industry, paints a bleak picture for the industry if the tax credit is not extended.

National Biodiesel Board (NBB) estimates show that biodiesel sales for 2009 will total about 475 million gallons, down by about 31 percent from the 691 million gallons sold in 2008.

According to NBB, 173 companies have invested in a total of about 2.7 billion gallons of biodiesel production capacity.

“However, as a result of weak industry economics, capacity utilization in the biodiesel industry currently hovers around 15 percent,” the LECG study said.

Without the tax credit, Urbanchuk’s study said, there would be a loss of jobs and income, increased demand for petroleum diesel, a “degradation” of energy security, lower demand for soybean oil and soybeans for crushing, lower soybean prices and less farm income, stranded investment as biodiesel capacity is idled, and lost tax revenue for state and local governments.

The study estimates that U.S. biodiesel producers will spend about $1.3 billion in 2009 on raw materials, goods and services, will add about $4.1 billion to the U.S. gross domestic product, and support nearly 23,000 jobs in all sectors of the economy.

“Failure to extend the biodiesel tax credit puts all of these economic impacts at risk,” the study said.

“It is difficult to precisely estimate the number of biodiesel plants that would close and capacity that would be idled in the absence of the tax credit. However, using the experience of the current recession as a guide, it is not unreasonable to expect that under conditions of negative profitability caused by elimination of the tax credit, industry output could cease altogether, resulting in the loss of an additional 23,000 jobs in the entire economy.”

The study does a side-by-side comparison of what industry profit margins would be with and without the tax credit.

With the $1 tax credit, between April 2007 and September 2009, the average premium for biodiesel in the Midwest was about $1.15 per gallon, or slightly more than the tax credit, the study said.

According to information from Iowa State University, a typical 30-million-gallon biodiesel plant was making about 32 cents per gallon in September 2009.

Without the tax credit, Urbanchuk said, that same plant would be losing about 63 cents per gallon.

“In the absence of the tax incentive, marketers of diesel fuel are likely to be unwilling to pay much more than the prevailing price of petroleum diesel,” the study said. — DTN