July 21, 2004

More Oilseed Production Going Toward Biodiesel

World production of oilseeds and palm oil is forecast to expand in 2004/05 to 379.1 and 29.84 million metric tons, respectively, up 12 percent and 3 percent from 2003/04. The question of where this increase will be consumed is not completely resolved, as world consumption for oilseeds is forecast to increase by 7 percent, and palm oil consumption to increase by 3 percent.  Biodiesel is one component of the increasing demand.  This industry converts approximately one ton of vegetable oil or animal fat into one ton of biodiesel for use mostly in motor vehicles, as well as heating fuel and as an industrial solvent.

World interest in biodiesel production is expanding rapidly. Large-volume production occurs mainly  in Europe, with production there now exceeding 1.4 million tons per year.  However,  projects and proposals are being announced in many countries with a wide variety of oil sources as the input. There is great potential for demand-pull to increase oilseed production if biodiesel production expands. The current high world price for crude oil (light sweet crude for August delivery on the New York Mercantile Exchange settled at US$40.77 on July 15, 2004) makes biodiesel production more attractive.

Biodiesel production in the European Union continued to expand in 2003. Output increased 35 percent, to 1.43 million tons, up from 1.07 million in 2002. The EU Council of Ministers adopted new pan-EU rules for the detaxation of biodiesel and biofuels on October 27, 2003.  Article 16 of the new directive allows--but does not mandate--member states to reduce excise tax rates on biofuels, compared to mineral fuels. Precise levels of taxation and detaxation are set by individual countries.

Output in the 10 new member states is unknown, since few if any biodiesel plants are currently producing. However, the Czech Republic has cut its value-added-tax on biodesel to promote consumption. In Poland, a draft law to increase consumption of biodiesel is under consideration, and in Lithuania, the construction of its first biodiesel plant is being planned.  Industry sources believe that expansion of the biodiesel industry may continue in other countries as well.

Brazil Adopts Policy to Promote Biodiesel

As the world’s leader in alcohol/ethanol (made from sugar in Brazil) production and consumption, Brazil is now eyeing biodiesel. (See annual oilseed report BR4611.)  On October 30, 2002, Brazil launched the Probiodiesel Program, with Portaria MCT Number 702, Directive #702 of the Ministry of Science and Technology (MCT). The program aims to develop technology for the production, industrialization, and use of biodiesel, including its use in mixtures, with diesel using pure and residual vegetable oils. According to the legislation, Brazil wants to reduce its dependence on diesel imports, as it has successfully done with petroleum. Although Brazilian consumption of petroleum has increased, imports have declined due to growing domestic production and use of ethanol. While few vehicles in Brazil operate on 100 percent alcohol fuel, all Brazilian gasoline requires 25 percent alcohol content, which considerably reduces petroleum requirements. However, the situation with biodiesel is quite different. Consumption and imports of mineral diesel have been rising rapidly, and the Brazilian government is concerned with the growing dependence on imports.

Brazil’s soil and climate diversity present mean several base crops can be used for biodiesel production, including soybean, palm, coconut, castor seed, cottonseed and sunflower. Soybean accounts for the vast majority of Brazilian oilseed production, so it presents the most viable option for the biodiesel industry. Furthermore, the soybean processing sector is well developed and Brazilian soybean research is advanced and more easily mobilized. However, other commodities are better options for Brazil’s remote North and Northeast interior. These regions, which are often remote and difficult to reach with imported fuels, aspire to small-scale self sufficiency in fuels.  The semi-arid Northeast is focusing on castor seed, while the Amazon region would likely adopt palm oil. However, the remoteness and isolation of these areas makes it highly unlikely that they could be significant producers or exporters.

Variability of agricultural commodity prices has been more dramatic than that of crude oil, thereby reducing biodiesel's attractiveness as an economic alternative. However, many believe that it is only a matter of time before biodiesel achieves long term profitability, as natural diesel sources dry up. Profitability at any particular time will of course depend on the price ratio between vegetable oil and crude oil.  President Lula's administration views biodiesel as a program for social inclusion and job creation, with hopes that it will generate up to 200,000 jobs. Brazil’s Probiodiesel Program is still in its infancy, but may offer great potential.

Colombia Ventures into Biodiesel Production

A press article in El Tiempo, Colombia's main daily, reported on a biodiesel plant being developed at Gaviotas, Colombia.   The plant is being built at a local agricultural research center in cooperation with the University of Colorado, Boulder, and will be capable of producing 400,000 gallons of biodiesel fuel per year.  The Government of Colombia has not yet developed legislation to provide tax incentives sufficient to encourage widespread new investments, but local universities are engaged in feasiblity studies.

Philippines to Use Coconuts for Biodiesel

On February 9, 2004, the Government of the Philippines  directed all of its departments to incorporate one percent by volume coconut biodiesel (coconut oil methyl ester, CME) in diesel fuel for use in government vehicles.  (See voluntary oilseed report RP4019.)  Oil companies claim that a 1-percent blend of CME will result in a 0.9 US cent per liter increase in diesel fuel price over current retail prices. The purpose of the executive order is to create a new market for coconut farmers and to promote cleaner air. The leading implementing agency will be the Department of Energy, while the Philippine Coconut Authority is the agency that is charged to work with the coconut industry to encourage investments and technology for the production of CME to meet the needs of the domestic market. Test results from the Philippine Coconut Authority, the Technological University of the Philippines, and the Department of Energy showed one percent coconut biodiesel mixture significantly reduced black smoke emissions. The Philippines is the first country to develop the use of coconut oil for motor fuel.

U.S. Biodiesel Depends on Policy Decision

In the United States, some vehicle fleets now use biodiesel; the fuel is available at select service stations in some states. The National Biodiesel Board estimates U.S. sales in 2003 were 80,000 metric tons, up 67 percent from 2002 and up 400 percent from 2001. Private industry experts believe that the industry would expand even more rapidly if a proposed energy bill were passed. This would be helpful to American soybean farmers, because soybean oil is the principal oil being utilized for biodiesel in the United States.  A senate version of the energy bill would offer a tax credit of 50 cents per gallon of biodiesel to be blended with other fuel. One source in the United States estimates the cost of production of biodiesel at $1.50 per gallon. If one adds the cost of distribution and taxes, the retail price is pushed too high to be competitive with mineral diesel, but the proposed tax credit would offset the cost differential for certain ranges of crude oil and vegetable oil prices.

Environmental regulations have brought about the impending removal of most of the sulfur from U.S. mineral diesel, which will reduce the lubricity of diesel fuel.  This will require good lubricating characteristics, which biodiesel gives mineral diesel in concentrations as low as 0.5 percent.  This may give biodiesel access to fuel markets as an additive, if not as a principal energy source.  On the other hand, the coming generation of low emission diesel engines will require closer tolerances in fuel injection systems than ever before.  This will require tighter specifications for fuel, which may make it more difficult for truckers to switch between mineral diesel and biodiesel during the operation of their vehicles.

For more information, contact Paul Provance
with the Production Estimates and Crop Assessment Division, at (202) 720-0881