Iowa Biodiesel Looks to Regain Lost Tax Credits

By Dave DeWitte, Reporter

In this photo taken Nov. 2009, central Illinois corn farmers harvest their crops near Waverly, Ill. While a Senate vote to end a tax credit that's helped build the ethanol industry in the United States signals that the subsidy's days may be numbered, corn farmers and ethanol makers hope they can convince Congress to compromise and agree to preserve but reduce subsidies. But agricultural economists say the ethanol industry has grown up over the last few years and doesn't need the help, and they doubt farmers or their customers in the ethanol industry would be hurt much if the subsidy dies. (AP Photo/Seth Perlman)

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By Adam Carros

CEDAR RAPIDS, Iowa -- Iowa’s ailing biodiesel industry is on the mend, leaders say, and hoping to make strong gains with a higher state tax incentive set to take effect for 5 percent biodiesel blends in January.

The Iowa Renewable Energy plant in Washington is one of the 10 biodiesel plants that have reopened since federal tax credits were restored last December, according to Mark Cobb, vice president of the plant’s board of directors. He said the plant resumed production in May, and has brought back 19 employees for a total of 21.

The federal blender’s credit of $1 per gallon for biodiesel expired on Dec. 31, 2009, causing much of the demand for biodiesel to cease due to the reduced profitability of selling it. Biodiesel plants across the country closed or slashed production. The credit was finally reinstated effective Jan. 1, 2010, and remains in effect through Dec. 31, 2011 unless renewed.

“It (2010) was a tough year,” Cobb said. “There weren’t a lot of profitable sales, so the plant decided to shutter itself and hunker down until the Congress decided to renew the blender’s credit, which it finally did in December.”

A new state law taking effect Jan. 1 will provide a 4.5-cent-per-gallon tax credit to retailers selling diesel fuel containing 5 percent biodiesel. It will replace a current law providing a 3 centper-gallon credit for retailers selling blends of 2 percent biodiesel or greater.

Cobb said Iowa Renewable Energy plant could rehire four or five employees in the near future, bringing it back to its employment level before the blender’s credit expired.

One other biodiesel plant in Washington, which last operated as Riksch Biofuels, remains closed. A group of investors that acquired the assets of the plant are working to get it back in operation, however, according to Randy Olson, executive director of the Iowa Biodiesel Board.

Olson said Iowa’s biodiesel industry has produced twice as much biodiesel this year as it did last year. Its output for the year is expected to exceed 150 million gallons, and could reach 200 million gallons.

Profitability remains challenging for facilities that have gone through tough financial times the last couple years, Olson said, but the good news is “there’s demand for the product.”

The big demand generator for biodiesel nationally is the Renewable Fuel Standard 2, which was finalized by the EPA in December 2010, Orr said. It requires that 800 million gallons of biodiesel this year be used this year and 1 billion gallons next year. The number could rise to 1.3 billion in 2013.

Olson said “RFS2) gives the industry a boost because lenders being asked to finance biodiesel ventures have certainty that there will be a specific base level of demand for the product.

Biodiesel is refined from a variety of feedstocks, including processed soybean oil, raw soybean oil, chicken fat, beef tallow, pork fat, and waste fryer grease from restaurants.

Olson said the corn oil extracted during production of ethanol is seen as a promising feedstock to fill a growing share of the plants’ needs. He said some ethanol refineries are modifying their plants to extract the corn oil, which currently goes into a livestock feed byproduct of the ethanol process – distillers dried grains – in most cases.

Corn oil is not widely available yet in Iowa. Olson said it not only has to be extracted but the corn, but most also be further processed to remove wax that can causing plugging in biodiesel facilities.

Soybean oil is a feedstock that can be efficiently converted to biodiesel, enabling some plants to produce 10 percent more than their namplant production capacity, Orr said. High soybean prices have been a headwind for the biodiesel industry, although they have been declining lately.

Many plants, like Iowa Renewable Energy, are designed so that they can change feedstocks to adjust to the shifting prices of commodities.

Iowa Renewable Energy has taken advantage of its ability to use various fuels, Orr said. In recent months, its feedstocks have included chicken fat, hot fat and beef tallow.

Olson said gaining more retail outlets for biodiesel is a major goal for the group. He said Iowa’s agriculture community strongly supports biodiesel because it reduces reliance on foreign oil, helps the farm economy, and improves air quality. He said many farmers use biodiesel blends of B20 and higher in the warm weather months.

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