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Statement of Soap and Detergent Association
The Soap and Detergent Association (SDA) appreciates the
opportunity to submit comments on the destructive consequences of biofuel tax
incentives on the United States oleochemical industry. SDA is a 110 member
national trade association representing the formulators of soaps, detergents,
general household and institutional cleaning products as well as the suppliers
of ingredients and finished packaging for those products. Among these
suppliers are the manufacturers of oleochemicals made from animal fats and
oils.
The primary raw material of the United States oleochemical
industry is tallow, an animal fat. The industry’s economic viability is, in fact,
based on the competitive price advantage of tallow vis a vis foreign palm oil.
However, because of the substitutability of palm oil for tallow, if tallow’s
advantageous price differential is lost, the future of a United States based oleochemical industry, and its customers, becomes tenuous.
Unlike corn and soybeans for which plantings can be expanded
to accommodate new biofuel applications, tallow production is relatively fixed,
usually fluctuating less than 2% from year to year. There is no real
elasticity in the tallow supply. Cattle herds are not expanded to produce
tallow. It is a by-product, not a crop.
Biofuel subsidies for animal fats undermine the oleochemical
industry in two ways. First, they create upward price pressures on the non-expandable,
finite tallow raw material pool. Second, particularly as a result of the
recent IRS decision expanding the “renewable diesel” tax credit to so-called
“coproduction,” they now pose the issue of supply availability per se, not just
price. This is an untenable and undeserved position for the oleochemical
industry and is wholly caused by biofuel subsidies.
Existing biofuel subsidies, including those for ethanol,
have created a series of damaging economic incentives favoring the diversion of
tallow from long standing traditional uses to fuels. The cascade of incentives
began with the tax credits for tallow-based biodiesel in the VEETEC provisions
of the American Jobs Creation Act of 2004. These were followed by a subsidy
for the direct burning of tallow as a fuel and finally the “renewable diesel”
incentives found in Section 1346 of the “Energy Policy Act of 2005.”
The inherent impact of the renewable diesel provision was
compounded in guidance issued earlier this month wherein the Internal Revenue
Service held that so-called “coproduced fuel,” where animal and other fats are
mixed directly with crude oil going to a cracking tower, was considered to be
“renewable diesel” produced by the thermal depolymerization (TDP) process and
therefore eligible for the $1.00/gal subsidy.
Tyson Foods, Inc. and ConocoPhillips have already announced
a joint venture to produce such a “renewable diesel” via a “coproduction”
process. This type of operation now poses the greatest threat to the continued
viability of the tallow raw material pool and, in turn, the domestic oleochemical
industry, its customers and the companies which depend on their products.
The renewable diesel subsidies that will be paid to the Tyson/ConocoPhillips
enterprise serve to highlight the unthinking, irrational nature of the current biofuel
subsidization policy. There is no process for calibrating the subsidy to
process costs, no apparent limits on the amount of the subsidy that can be
collected by a producer, and no consideration of the impact on other
industries. Coproduction renewable diesel is nothing more than a subsidy to
large oil companies.
Based on our understanding of the renewable diesel “coproduction
process,” it involves little more than commingling the animal fats with the
crude oil being fed to a cracking tower.
Taken together, these three subsidy credits create a manifold
of incentives capable of diverting tallow away from oleochemical production. For
its part, the oleochemical industry receives no subsidies. It has historically
purchased its tallow in a classic free market, supply and demand environment.
Those traditional conditions have, however, been destroyed by the government’s
economic intervention.
The situation is further complicated by the fact that
ethanol incentives are diverting corn from traditional livestock feeding
operations. This has caused an additional draw down of the tallow pool since tallow,
in part, is substituted for the diverted corn in animal feed. Currently,
tallow prices are in the $0.25 -$0.26 range. Traditionally, tallow prices have
been in the low to mid teens. This represents a nearly 60% increase and has
every indication of being a sustainable price given the current subsidy
structure.
The conditions in the corn market which have led to this new
tallow price level are generally viewed as attributable to the confluence of
the long standing ethanol subsidy combined with an enhanced renewable fuels
standard. This was the perfect biofuels storm, the effects of which have been
widely felt and publicized. We must learn from this.
In Illinois, SDA estimates the loss of the oleochemical
industry would result in the loss of 1,000 jobs. Illinois is estimated to
produce 45 – 50% of U.S. oleochemicals. Consequently, on a national basis we
estimate that 2,000 jobs are at stake. Oleochemicals are, by their very nature
bio-based, and always have been.
The true irony of the current situation is that a quiet,
traditional, economically sound, Middle American, bio-based industry which
never asked government for a thing, stands to be destroyed by a rush to
subsidize the economically challenged and technologically unsettled biofuels
industry. In SDA’s view, there is no doubt that they can coexist, but not
under the current economic conditions created by the biofuels incentives
currently in place where by oleochemicals lose.
SDA recognizes that the potential benefit of biofuels to the
nation is significant. However, that benefit should not be purchased at the
cost of driving a well established, traditional industry out of business.
There must be a balance and the impacts on related
industries must be considered before current programs are extended
unthinkingly. Biofuel tax subsidies have their victims as well as their
beneficiaries. It is essential that the current biofuels tax policy be redesigned
to consider its destructive and deleterious impacts on related industries.
Respectfully submitted,
Dennis Griesing
Vice President, Government Affairs
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