The rising price of soybeans is putting the squeeze on biodiesel producers, leading some to close down operations.
The prices of soybeans and soybean oil have more than doubled in the last two years, according to the National Biodiesel Board.
For producers, that sharp uptick in price is forcing them to either close down or go to different sources of oil, such as animal fats or fry grease from restaurants.
Most biodiesel in the United States is made from soy. Soybean oil is around 60 cents a pound, while at the beginning of 2007 it was under 30 cents a pound.
Producers need 7.5 pounds to make one gallon of biodiesel, according to one industry estimate, so even with a federal subsidy, biodiesel manufacturers are seeing their profit shrunk or eliminated.
"The numbers are impossible," said Fred Tennant, vice president of business development at PetroAlgae, which intends to make biodiesel from algae.
The situation is puzzling to people in the industry because the stock of soy is at an all-time high.
One explanation is that biodiesel is becoming more closely linked to the rising price of petroleum-based diesel oil. When sold commercially, biodiesel is usually blended with diesel.
"It's not following any linear economic path," said Amber Pearson, a spokesperson for the National Biodiesel Board. "Maybe some of the (price increases) are due to speculations and futures markets."
Despite the squeeze on biodiesel feedstocks, the demand is there. That's been aided by federal mandates to increase the amount of biodiesel consumed in the U.S. from a minimum of 500 million gallons next year to 1 billion gallons a year by 2012.
In 2007, consumption of biodiesel was already up to 500 million gallons, more than double the amount in 2006.
Pearson said there are 170 biodiesel plants in the U.S. and said there are a small number that have gone offline, at least temporarily.
"The plants that are built to be multi-feedstock, meaning they can produce with more than just soybean oil are faring better," she said.
New tech to the rescue?
In one case, SoyMor Biodiesel in Glennville, Minn., stopped producing biodiesel last month because of high soy prices and the low dollar.
Gary Pestorious, the chairman of the SoyMor Board of Governors, told the Albert Lea Tribune newspaper that soybean oil prices are about 10 cents too high for the plant to operate viably. It is looking into making biodiesel from corn oil or animal fat.
The growing challenges in biodiesel come during an economic boom in biofuels, but one that is being more closely scrutinized by policy makers and consumers.
The World Bank earlier this month said that demand for ethanol made from corn is one factor in rising food prices, a situation that is causing social unrest in poor countries.
Corn-based ethanol is also under fire from environmentalists who argue that it does not improve greenhouse gas emissions substantially compared to gasoline, while consuming a lot of water. Meanwhile, the rising price over the past few years has made crimped profit margins for ethanol producers.
In biodiesel, there are great hopes for making oil from algae because it not a food crop.
Although commercial-grade biodiesel has been made from algae, there are a number of technical and production challenges before it can be done at commercial scale.
Higher soy prices aren't good news for venture capitalists who have invested in biodiesel.
Imperium Renewables, which shelved plans to go public last year, is a high-profile new entrant into biodiesel which funded its technology development and part of its production facility through clean tech venture capitalists. Traditionally, refineries and other energy-related plants are funded from project finance and private equity, rather than venture capital.
The National Biodiesel Board expects there to be a "price correction" at some point, although where the price will settle is hard to predict. "Every biodiesel producer using soybean is definitely feeling the pinch," Pearson said.