March 4, Contacts: Randy Olson at Executive Director Gary Dickey at Government Relations

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1 B O A R D PUBLIC March 4, 2011 POLICY REPORT Contacts: Randy Olson at randy@iowabiodiesel.org, Executive Director Gary Dickey at gary@dickeycampbell.com, Government Relations IN THIS ISSUE: Iowa Biodiesel Board Legislative Priorities State Update House Agriculture Committee Passes Biodiesel Measures Senate Agriculture Committee Approves Biodiesel Bills Before Funnel 2011 Biodiesel Bill Tracking 2011 State Legislative Districts for Iowa Biodiesel Plants Other News Iowa Biodiesel Plants Bounce Back New Economic Study Affirms that Livestock Producers Benefit from Biodiesel Southeast Iowa Biodiesel Plant to Be Auctioned IOWA BIODIESEL BOARD LEGISLATIVE PRIORITIES Biodiesel Blended Fuel Credit Through December 31, 2011, motor fuel retailers whose diesel sales are at least 50% biodiesel (with a minimum content of 2% biodiesel) are eligible for a $0.03 per gallon tax credit on each gallon of biodiesel sold. IBB supports an extension of incentives that would include higher blends of biodiesel. Renewable Fuel Infrastructure Program The Renewable Fuels Infrastructure Program provides cost-share grants to biodiesel and ethanol retail distributors for infrastructure improvements. IBB supports additional funding for the Renewable Fuel Infrastructure Program on the condition that biodiesel projects receive fair treatment. STATE UPDATE House Agriculture Committee Passes Biodiesel Measures In the last ten days before the first legislative funnel, the House Agriculture Committee has considered and passed three bills dealing with biodiesel tax credits, House File 452 ( HF293) and HF545 ( HSB112), and House File 451 ( HSB113). All three measures will be referred to the House Committee for deliberation as they each in some degree propose to either change the method of how taxes are calculated, extend expiring biodiesel tax credits, or propose a new in-state biodiesel producer tax credit. The Iowa Biodiesel Board is registered in favor of House File 545, which proposes to change the qualifying biodiesel blend for the retailer tax credit from B2 to B10 and increase the tax credit from 3-cent per gallon to 10-cents per gallon. 1

2 House File 545 proposes to modify the current biodiesel tax credit by lifting the minimum amount of from B2 to B5, and eliminate the requirement that a retail station must sell at least 50% of its diesel fuel as a biodiesel blend. HF545 further creates a two-tier tax credit of 2- cents for B5 < B10 and 4-cents per gallon for B10 and greater fuels. As in HF 293, HF545 extends the expiring biodiesel tax credit 3 additional years ( ) and proposes a shortterm new biodiesel producer payment incentive for Iowa biodiesel producers for 2012 through 2014 with payment per gallon of biodiesel of 3-cents the first two years and 2-cents in The final bill is House File 451, which proposed a number of modifications and modernization of renewable fuels provisions. This bill would add a heat adjustment calculation for biodiesel to eliminate a so-call phantom tax on heated biodiesel and end the double taxation of biodiesel incurred by biodiesel blenders. Senate Agriculture Committee Approves Biodiesel Bills Before Funnel Yesterday, the Senate Agriculture Committee took action to approve two bills related biodiesel, Senate Study Bill 1148 and Senate Study Bill Both bills will be referred to the House Committee. SSB1148 is the companion bill to House File 545 and SSB1174 is the companion bill to House File 451 with the exception of creating a new infrastructure program specifically for blender pumps. IBB is working with legislators to make sure this new program does not affect continuing funding for biodiesel infrastructure projects BIODIESEL BILL TRACKING Bill Number HF452 HF293 HF545 HSB 112 HF451 HSB 113 SF164 SSB 1148 SSB 1174 Summary Extends biodiesel retailer credit through 2015 at $.10/gallon of B10. Removes 50% threshold and site by site calculation Biodiesel retailer credit at $.02/gallon of B5 & $.04/gallon of B10. Adds producer subsidy of $.03/gallon in and $.02/gallon in Adjusts excise tax calculation for biodiesel to eliminate variability for temperature changes. Refunds excise taxes paid for diesel used to blend with biodiesel Biodiesel fuel quality standard which requires all gallons sold contain at least 5% biodiesel Biodiesel retailer credit at $.02/gallon of B5 and $.04/gallon of B10. Adds producer subsidy of $.03/gallon in and $.02/gallon in Ethanol/Biodiesel Bill: Retailer limitation of liability, suspends current infrastructure programs in favor of blender pumps, Ethanol tax credit, biodiesel excise tax credit adjustments Status Not voted out of Ag committee Voted out of Senate Ag committee Voted out of Senate Ag committee IBB Position Support 2

3 2011 STATE LEGISLATIVE DISTRICTS FOR IOWA BIODIESEL PLANTS Biodiesel Plant City County S Dist AGP Sergant Bluff Woodbury 27 Sioux Biochemical Sioux Center Sioux 2 Soy Solutions Milford Dickinson 3 East Fork Biodiesel Algona Kossuth 4 Western Iowa Energy Wall Lake Buena Vista 26 REG Ralston Ralston Carroll 26 Cerro Soy Energy Mason City Gordo 7 Cargill Iowa Falls Hardin 22 REG Newton Newton Jasper 21 Western Dubuque Biodiesel Farley Dubuque 16 Clinton County Clinton Clinton 13 Iowa Renewable Energy Washington Washington 45 Riksch Biofuels Crawfordsville Washington 45 Tri City Energy Keokuk Lee 46 Maple River Energy Galva Crawford 28 State Senator Party H Dist State Representative Party Bill Anderson R 54 Ron Jorgensen R Randy Feenstra R 4 Dwayne Alons R David Johnson R 6 Jeff Smith R Jack Kibbie D 8 Tom Shaw R Steve Kettering R 52 Gary Worthan R Steve Kettering R 51 Dan Muhlbauer D Amanda Sharon Ragan D 13 Steckman D Steven Annette Sodders D 44 Sweeney R Dennis Black D 41 Dan Kelley D Tom Hancock D 31 Lee Hein R Tod Bowman D 26 Mary Wolfe D Sandra Greiner R 89 Jared Klein R Sandra Greiner R 89 Jared Klein R Gene Fraise D 92 Jerry Kearns D James Seymour R 55 Jason Schultz R OTHER NEWS Iowa Biodiesel Plants Bounce Back Des Moines Register, Sunday February 27, 2011 Wall Lake, Ia. - Jeff Johannesmeyer's decision to leave a cushy investment banking position in Omaha last fall to run a biodiesel plant was certainly open to question. Like most other biodiesel plants, Western Iowa Energy was idled last year after Congress refused to extend the $1-pergallon biodiesel credit. The plant had laid off all but seven of its 40 production workers. Statewide, production at Iowa's 15 biodiesel plants was just 15 percent of the 780 million gallons produced a year earlier. 3

4 But Johannesmeyer, the general manager, saw that for the first time, biodiesel would get the same kind of federal renewable fuels mandate that its cousin ethanol has enjoyed for years. "A demand-driven business is always better than a subsidy-driven business," Johannesmeyer said. "I was quite comfortable with the future of the biodiesel industry." Iowa's biodiesel business is back, with plants reopening and production increasing. In December, the lame-duck Congress renewed the $1-per-gallon tax credit for biodiesel. In January, Western Iowa Energy began rehiring and now has 28 workers and is back up to about 80 percent of its capacity production. The plant's workers make an average of about $16 per hour, making it an economic giant in a town of about 800 people. "Our workers come from all over, but many of them are kids of farmers who want to stay and farm, but need the second income for the family," said plant manager Joe Reed. The renewal of the tax credit was a plus, but the real punch comes from the new mandate, which requires 800 million gallons this year and 1.2 billion gallons in The mandate essentially end-runs biodiesel's problem with truckers who believed that animal-fat biodiesel gels in cold weather and impairs truck engines. The volatility of soybean oil prices caused plants to switch to animal fats as their feedstock. The move makes economic sense: Last week soybean oil sold for 60 cents per pound while the hog fat used by biodiesel sold in the low 40 cents-per-pound range. But fat-fed biodiesel has spent the last two years losing favor with truckers who have contended that the fuel is unreliable in their engines. "That talk has come about because biodiesel was handled improperly in early tests," said Western Iowa Energy board chairman Bill Horan, who farms near Fort Dodge and was the prime organizer of the 690-member investment group that built the biodiesel plant in Horan notes that neighboring Minnesota, unlike Iowa, has a state mandate for biodiesel use and animal fat fuel is running through trucks without incident. "Minnesota should put the gelling argument to rest," Horan said. In the marketplace, the price of a tradable Renewable Identification Number (RIN), which is the tax credit to oil companies to blend biodiesel at the rate of at least 5 percent with regular diesel, has climbed to $1.65 per gallon since Jan. 1, one indication of demand by oil companies who need to meet the renewable fuel standard. RINs are currency within the biofuels industry that fuel producers can use to meet the Environmental Protection Agency's renewable fuels mandate. The biodiesel RIN compares with RIN values of little more than a nickel per gallon or less for ethanol, which at a national production average of 13 billion gallons annually has far outstripped biodiesel in the last half-decade. "The RIN numbers show that the mandate is working," said Gary Haer, vice president of marketing for Renewable Energy Group in Ames, which operates plants in Iowa, Illinois and Texas. REG managed Western Iowa Energy's plant until last summer, when Horan and his directors made what Horan calls "the hardest decision we've had to make" and switched its management and marketing from REG to Archer Daniels Midland, the grain processing giant based in Decatur, Ill. ADM, which owns its own biodiesel plants in Missouri and North Dakota, didn't take an equity position in Western Iowa Energy but helps the plant with feedstock acquisition and sales of the finished biodiesel. 4

5 The small surge in the first weeks of this year has given biodiesel new hope, but the future for the biofuel is far from assured. The $1 tax credit must be renewed again by Congress this year. The vote a week ago by the new U.S. House of Representatives to void the E15 decision on ethanol suggests that all biofuels tax credits - ethanol's 45-cents-per-gallon subsidy included - will face an even harder climb this year. Biofuels took another hit last week when U.S. Sen. Chuck Grassley, the Iowa Republican who has been a dependable defender of biofuels subsidies and tax credits, said cutting the deficit probably would trump further biofuels subsidies in his Senate vote. Horan thinks the politicians will find a middle ground. "We might see the biodiesel credit reduced, but with the upheavals in the Middle East I still think it will be difficult for Congress to completely turn away from domestic biofuels," Horan said. New Economic Study Affirms that Livestock Producers Benefit from Biodiesel Thanks to biodiesel, soybean oil and meal economics favor the livestock industry concludes a study released yesterday. In addition without America s advanced biofuel in the marketplace higher soybean meal prices could have cost the livestock industry $4.8 billion from market years 2005 through The basic rule of thumb is when demand for soybean oil increases, the price of the other soybean component (soybean meal) decreases, says the U.S. Department of Agriculture funded study by CENTREC Consulting Group, LLC. Increasing demand for soybean oil benefits livestock feeders through lower meal prices. Illinois farmer and former economics and statistics professor Pat Dumoulin has seen biodiesel s benefits from every side of the equation. She and her family raise corn and soybeans as well as run a 2,100 sow operation. No matter whether you are feeding pigs or people, biodiesel is helping meet the world s growing demand for protein," Dumoulin said. "With these economics, we would all win if the trucks that brought our soybean meal ran on America s advanced biofuel, biodiesel. Since 2007, the National Pork Producers Council has had a resolution stating that NPPC should promote the increased use of biodiesel as a renewable fuel source. For a complete copy of the report, go to the National Biodiesel Board web site. Southeast Iowa Biodiesel Plant to Be Auctioned Associated Press, Chicago Tribune, March 3, 2011 A southeast Iowa biodiesel plant that hasn't supplied any soybean-based fuel in years will be auctioned next month. The former Riksch Biofuels in Crawfordsville is going on the block on April 12. Vice President Brad Ray of Midwest Bank of Western Illinois told The Gazette in Cedar Rapids that Riksch Biofuels didn't have much working capital when it began operating in March He says that like other soybean-based biofuels plants, the Riksch plant had a hard time with high soybean prices and eventually closed. His bank had provided a construction loan and later received an 80 percent U.S. Department of Agriculture loan guarantee. Ray says the plant can produce biodiesel from animal fat or used cooking oil. 5