Biodiesel Reaches Defining Moment

Tax incentives included in corporate tax bill will make biodiesel more competitive and in turn increase soybean prices. Jacqui Fatka

Published on: Oct 11, 2004

It's one step for soybeans, one giant step for biodiesel.

Only 3.5% of the annual soybean crop will be processed into biodiesel, but increased demand can put an extra 10 cents per bushel in the pockets of producers.

Identified as a "defining moment" for the future growth of biodiesel, soybean leaders celebrated the biggest legislative achievement on Monday when the Senate approved the first biodiesel tax incentive. Congress passed the incentive as part of the H.R. 4520, legislation concerning the Foreign Sales Corporation/Extraterritorial Income Tax (FSC/ETI).

The biodiesel tax incentive, which is structured as a federal excise tax credit, amounts to a penny per percentage point of biodiesel blended with petroleum diesel. National Biodiesel Board (NBB) Executive Director Joe Jobe explains that a blend of 20% would provide a 20-cent credit accessed to the 24.4% excise tax placed on all petroleum products, requiring only 4.4% of the tax to be paid. As written, the law will go into effect Jan. 1, 2005. The bill still needs to be signed by President George Bush, and is expected sometime this week.

Mike Noll, president of Alternative Liquid Fuels (ALF) in Lancaster, Ohio, is gathering investors to start up the first biodiesel plant in Ohio. Many biodiesel plants are ready to roll, giving the extra boost to get remaining investors after this commitment from policymakers. "This is a major step in making it possible to produce biodiesel. It makes sense to reduce the excise tax at the blender level rather than the manufacturers level because it will increase demand for the product," he says. "With the price of oil we have more blenders calling us and asking us to fill their demand than we will be able to fill for the next 4-5 years."

Better than the farm bill

If producers are able to produce 50 bushels of soybean per acre, they can generate 75 gallons of biodiesel and a ton of high protein feed, says South Dakota farmer and NBB Chairman Bob Metz. By giving more value to oil, soybean meal becomes slightly more reasonably priced, lowering the cost of livestock production.

Metz believes this legislation provides more benefits than the farm bill, which is designed to provide the safety net if prices drop. As a father of future generations that are looking to enter farming, this provides an opportunity to have more than a minimum wage from government payments. The growth of biodiesel keeps the prices up at the farm market level, then the government doesn't have to step in and make that market. "Every farmer would rather get that check from the elevator than the government," Metz says.

Jobe adds that the congressional budget office estimates that the biodiesel tax incentive will save money under the current farm bill programs. The U.S. also becomes less dependent on foreign petroleum sources. Cleaner air resulting from burning biodiesel is another benefit.

Based on the USDA baseline estimates for future soybean production, over a five-year time period, the biodiesel tax provisions could add almost $1 billion directly to the bottom line of U.S. farm income. In addition, the provisions could increase U.S. gross output by almost $7 billion.

Sen. Chuck Grassley, R-Iowa, authored the Volumetric Ethanol Excise Tax Credit (VEETC) which includes the biodiesel incentive. He doesn't think "it will take very long for biodiesel to be on par with ethanol as far as demand use." Ethanol was a benefactor of legislation that allowed the renewable fuel to be cost competitive. Soybean leaders are positive this can do the same.