Inaction on biodiesel tax credit extension creates uncertainty for industry04/25/2019 | Policy, Soybean News, Economics
By Bethany Baratta, ISA senior writer
Biodiesel plants stand to lose millions of dollars this year and could shutter with further inaction to retroactively extend the biodiesel tax credit.
The federal biodiesel tax credit has been issued previously to provide a $1-per-gallon credit to blenders which blend biodiesel with petroleum. But the tax credit has expired, leaving blenders, petroleum marketers and farmers wondering if they’ll get it back.
“We’ve gone 16 months, the longest we’ve ever gone without the credit. And companies’ working capitals are stretched to the limits,” said Tom Brooks, chair of the Iowa Biodiesel Board and general manager of Western Dubuque Biodiesel.
The company and its employees have worked hard to build up production at the plant, which produced 30 million gallons of biodiesel last year for the first time since production began Aug. 1, 2007. Like other biodiesel producers in the state, the plant supports not only the farmers from which it buys feedstock for biodiesel production but also employs about 100 people directly and indirectly.
That’s good for Farley, a town of about 1,400 people. But without the assurance of the tax credit, it threatens all of that, Brooks said.
“The uncertainty of the tax credit is like me having to go wager all of our company’s money at playing roulette, betting on black but in the red in hopes that the credit will come back,” Brooks said. “And if they really want certainty for us to continue, they should bet on green because renewable fuels are green for the environment, green for the company blending the fuels, green for the people at the pump and that would hopefully blend us, the producers, some green.”
The biodiesel tax credit has an on-again, off-again history — being reinstated, then allowed to expire, then retroactively reinstated, said Grant Kimberley, executive director of the Iowa Biodiesel Board.
“It creates a nightmare for everybody in the industry — all the way from the farmers to the petroleum marketers and the biodiesel plants — and it’s slowing down production and impacting jobs in these rural communities,” Kimberley said.
It’s a huge concern in Iowa, which lead the nation in biodiesel production last year, producing 365 million gallons in 11 plants, Kimberley said.
“Plants and petroleum marketers cannot make long-term infrastructure improvements and investments in their facilities which would help make the industry more efficient, which is the goal in the first place,” he continued. “You can’t do that when you have this on-again, off-again process.”
With the history of the credit expiring and then coming back, input costs haven’t readjusted; companies are counting on the credit coming back. That makes it difficult for plants to buy inputs to feed their biodiesel plants, said Scott Hedderich, executive director of corporate affairs for Renewable Energy Group (REG).
“Input costs are high because people are anticipating a different amount of liquidity being in the market, you don’t have any access to capital right now because the credit is not there, and you have global [petroleum] prices at a price point where it’s very difficult to be profitable right now. The industry is struggling,” Hedderich said.
All of this — now 16 months later — is happening at a time when biodiesel plants should be ramping up production, he said.
“Now demand is starting to pick up but it’s going to be difficult for some plants to continue operating if that capital access is not there,” he said. “If the credit doesn’t come back and the markets don’t adjust, there’s going to be a capital crunch and businesses will have to decide whether they keep operating or shut their doors for a while.”
REG, the nation’s largest biodiesel producer by volume, has three, 30-million-gallon production facilities in Mason City, Newton and Ralston. Hedderich said the company is well-capitalized, but the uncertainty of the extension affects every biodiesel plant in the nation.
“We’ve got the ability to keep running, but at some point, if markets don’t adjust and you’re not making any money, we’ll find ourselves in a situation like 2008 or 2009 where you can run, but every day you run you lose more money and it becomes more economical to shut down,” he said.
The lack of an extension to the biodiesel tax credit is not only stifling production as plants run at half production, it’s also slowing progress on improvements to infrastructure, said Brad Wilson, president of Western Iowa Energy.
“We kind of count on it [the tax credit] because Congress told us it would be there. They said, ‘You build the industry and build the infrastructure and we’ll do everything we can to make sure it’s supported so we can grow that industry and help lessen our dependence on foreign oil.’ And now they’re toying around with the incentive,” Wilson said.
The company had planned a $5 million rail improvement project, along with other projects to improve its operations in Wall Lake, Iowa, and Watsonville, California. Those plans are on hold.
“Any capital project that we have planned is on hold right now just until we find out if this [credit] is going to come back,” Wilson said. The 45-million-gallon production facility is running at half capacity, all due to the uncertainty of the market and the future of the tax credit.
There’s never a good time for a lapse in the credit, but especially now with trade uncertainty, slower demand for soybeans due to African swine fever, and other factors beyond farmers’ control, said Kimberley, who is also the director of market development for the Iowa Soybean Association.
“Getting the credit back in place or not having the credit will be the difference between plants losing a lot of money or making a little bit and making those investments and creating jobs and providing a more consistent demand for soybean oil, corn oil, animals fats and other agriculture feedstocks,” he said.
An Informa study shows that biodiesel adds 63 cents a bushel to the price of soybeans. Soybean oil is a main ingredient in biodiesel making up over 50 percent of the total feedstock mix, but other agricultural byproducts and co-products like recycled cooking grease, inedible corn oil, canola oil, beef tallow, choice white grease (pork fat), and poultry fat are also used.
Bringing the message to Washington
Iowa farmers, petroleum marketers and blenders have been taking bringing their message to Washington, D.C. for several months, urging Congress to reinstate the extension.
On April 4, Rep. Abby Finkenauer (D-IA), Rep. Mike Kelly (R-PA), Rep. Ron Kind (D-WI) and Rep. Adrian Smith (R-NE) introduced The Biodiesel Tax Credit Extension Act of 2019 (HR 2089), according to the National Biodiesel Board (NBB). The U.S. House of Representatives’ Ways and Means Committee, the chief tax-writing committee, must bring it up, Brooks said.
NBB will be hosting a press event in Washington, D.C., next week, again explaining the urgency of the situation.
“If they don’t do something soon they’re going to lose several advanced biodiesel plants that won’t be able to operate because they don’t have the working capital to continue. And the lack of the credit doesn’t incentivize the certainty of a bank lending them money to give them working capital,” Brooks, said. “Time is of the essence.”
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