CHEAPER BIODIESEL THROUGH A REDUCTION IN TRANSACTIONS COSTS. Donald L. Van Dyne and Melvin G. Blase ABSTRACT

Transcription

1 CHEAPER BIODIESEL THROUGH A REDUCTION IN TRANSACTIONS COSTS Donald L. Van Dyne and Melvin G. Blase ABSTRACT Due to high costs biodiesel produced from soybean oil has difficulty competing with petroleum-based diesel fuel. Some of these costs are defined here-in as transaction costs. These include all the costs associated with soybean marketing and processing from the sale of soybeans at the farm gate through the purchase of high protein soybean meal to feed livestock and poultry on the same farms where the soybeans were originally produced. Historical data and information on Austrian cooperatives are used as a model of how most of these transactions costs can be eliminated. In the U.S. new generation cooperatives (NGC s) are somewhat similar to these cooperatives. Under a realistic scenario the cost of producing biodiesel by such a NGC was estimated at $1.36 per gallon. The cost savings are attributed to the elimination of transactions costs and the processing of the soybeans and their oil fractions in a community-based crushing and transesterification plant. Keywords: biodiesel, transaction costs, Austria, new generation cooperative (NGC), soybean processing, transesterification, retained ownership INTRODUCTION Two myths have plagued soybeans. One is that because of the trypsin inhibitor, which requires that they be subjected to heat before feeding to monogastrics, raw soybeans cannot be fed to ruminant animals. Recent feeding trials have corrected this myth (Kerley, 1998). The other is that because the crushing function can be performed more cheaply in large plants (economies of size) than small ones the former should dominate the soybean processing industry. Recent economic analyses focusing on transaction costs indicate that they may overshadow crushing costs and raise questions about the economics of the processing industry (Weber, 1993). This is especially germane to the biodiesel industry which has been plagued by high costs. Not until Dr. Douglas C. North received the Nobel Prize for economics, were transaction costs given much consideration by economists. His work, in which they are narrowly constrained to include only the costs of changing ownership of factors of production, called attention to these types of costs. When broadly interrupted to include not only Research Associate Professor and Professor, respectively, Department of Agricultural University of Missouri, Columbia, MO 65211, <VanDyneD@aolqm>. Economics, 992

2 these costs, but also conventional marketing charges, such as transportation, in-and-out loading, and storage as is done in this paper they take on added importance. They can be especially important in the biodiesel industry. In the case of soybeans the costs from the farm gate of the grower to that of the livestock feeder who includes the soybean meal (and in some cases some of the oil, also) in his livestock rations are quite significant. The same situation applies for the soybean grower who wants to use biodiesel on his own farm. Ironically, in many cases the grower, feeder and machinery operator are one in the same, i.e., Corn Belt farmers. In these situations the experience of many Austrian farmers is noteworthy. The Austrian Model Several community-based cooperatives in Austria are quite similar to new generation cooperatives in the U.S. These include one near Vienna managed by Dr. Franz Parrer which was visited by a team of scientists including the authors of this paper. In these community-based cooperatives, farmers each make an up-front investment in stock in the cooperative oilseed processing plant. The level of investment by each farmer determines the volume of oilseeds, or quota, that he has raised that can be processed annually. The more stock that is owned by a particular farmer, the larger the volume of oilseeds (canola and sunflowers in Austria) that he can have processed each year. Once the oilseeds are processed, the farmer has high protein meal to feed his livestock and poultry plus biodiesel to power his farm machinery. Transaction costs are conspicuous by their absence. The key feature to be emphasized is that of retained ownership. That is, the farmer grower never relinquishes ownership of the oilseeds or their oil and meal fractions. A fee is paid for having the oilseeds processed but he maintains ownership throughout the system. The following slides show how this operation works. TRANSACTION COSTS IN U.S. BIODIESEL PRODUCTION The total transactions costs involved in marketing a bushel of soybeans in central Missouri, plus processing those beans and returning the meal to the farm where they were produced for feeding to livestock and poultry, are estimated to be as high as $2.29 to $2.47 per bushel, without mixing/grinding and delivery to the farmer/feeder (Table I). This assumes that all of the processing margin is attributed to the meal (none to the oil) and that the estimated costs of moving meal to the farm is for 48 pounds per bushel of soybeans, (that is only the meal portion and not the weight of the oil which was removed during processing and could be sold at the plant). An important factor in the above steps in the traditional soybean marketing and processing chain is the processing plant activity. The reason for highlighting the processing plant activity is that this is the point at which soybean and soybean product prices are discovered. The prices in the marketing chain both before and after 993

3 this point are a reflection of these prices. Prices are discovered not by a single plant or company, but by the complement of plants in a particular geographic region. This is important because the procurement system for soybeans is actually a price discovered at the processing level resulting in a derived demand price back through the supply system to the grain elevator which, in turn, determines the price offered to farmers. Similarly, the price of high protein meal is established by soybean processors interacting with the feed industry. Thus the price paid by farmers for the meal is the price at the plant, plus the cost of changes in ownership and transportation costs to the local feed mill, handling costs at the feed mill, and sale and delivery to the farmer/feeder. Table 1 -- Potential Steps in the Conventional Soybean Marketing and Processing System for a Selected Area in Central Missouri. Task cost ($/hu) Farm to first delivery point 0.00 Change of ownership and in-loading the soybeans into the elevator 0.05 Storage and aggregation of soybeans until adequate quantities are available and/or time is 0.03 available to ship the soybeans to the next step in the marketing chain (storage cost per month per 1 bushel) I I Out load the soybeans from the elevator into rail cars, trailer trucks, or barge for shipment to the 0.05 processing plant (change of ownership usually occurs) I I I I Transportation of soybeans to processing plant (80 miles assuming a back haul, if no back haul, 0.12 then 0.20 to 0.22 per bushel) I Processing plant (price discovery point in the marketing system) Storage of high protein soybean meal and coproducts until shipped to markets (included in gross margin) Transportation of high protein meal and coproducts to feed mills ($6.00 per ton for movement by semi-trailer truck about 80 miles [$O. 14 per bushel equivalent included in the retail margin]) In-loading high protein meal into storage at feed mill ($0.04 per bushel equivalent included in the 0.00 retail margin) Storage of high protein meal until sold at retail or blended with feed and delivered to customer (included with retail margin) 0.00 Retail margin from feed mill to farmer/feeder ($49.50 to $56.50/tori))) with grain, concentrate and premix Delivery to farmer/feeder Estimated total transactions costs ($/bushel of soybeans) *The former is for bulk and the latter for bagged soybean meal. ( Eluded / * 994

4 As mentioned previously, the farmer is a price taker both in selling soybeans as well as purchasing high protein soybean meal. For example, the March 13, 1998 prices at a central Missouri retail cooperative for soybeans and 48 % soybean meal were $6.27 per bushel and $232 per ton (bagged was $256 per ton), respectively. In comparison, published prices for the same date in central Illinois for soybeans were $6.59 per bushel and 48 percent meal ranged from $ to per ton at the crushing plant. Thus, the margin that day - from a major soybean crushing center to central Missouri for soybean sales was $0.325 per bushel and $49.50 to $56.50 per ton for high protein meal. Clearly transactions costs are high in the traditional system at least for central Missouri farmer/feeders. Soybean oil has been the feedstock used in making most biodiesel to date, primarily because the soybean industry has provided the majority of the funding for the major research, development, demonstration and commercialization efforts. Other feedstocks that have also been studied include other vegetable oils, animal fats, waste cooking oils, etc. These have been studied in an effort to identify lower cost feedstocks, with the hope of lowering the overall costs of producing methyl esters. While much research, development and testing have been conducted, the bulk of the biodiesel is still produced using soybean oil. Two additional assumptions are commonly used in estimating the cost of producing methyl esters. The first is that the cost of installing methyl ester production capacity is about $0.50 per gallon of annual production capacity. Since methyl ester production capacity is usually added onto existing plant capacity, some differences will exist depending on specific situations. Secondly, feedstock costs typically account for 80-to- 85 percent of the total costs of methyl ester production. These two assumptions are extremely important in estimating the costs of producing methyl esters in the conventional system described herein. Also, they are very site-specific and may vary depending on actual situations. When plants are operating at full capacity, feedstocks should represent about 85 percent of production costs. Or, if plants are operating at much less than full capacity, feedstocks may be substantially less than 80 percent of total production costs. Using 5-year conventional soybean prices, including a soybean oil price of $0.245 per pound and a conversion rate of 7.6 pounds of soybean oil per gallon, the cost of producing methyl esters in a conventional soybean processing system ranges from $2.19 to $2.33 per gallon. Noteworthy is the fact that the methyl ester production costs do not include a profit margin or transportation costs. The latter is of particular importance because the esters typically have been shipped in containers (5 gallon, or 55 gallon drums) or in truckload or rail car volumes. Regardless of the method of transportation, all are much less efficient and significantly more expensive than shipping number 2 diesel fuel through pipelines. Thus, biodiesel is not only more expensive to produce in the conventional system, but is also much more expensive to market than traditional diesel fuel. This inefficiency and The inputs are: 1) 9 gallons of soybean oil, 2)l gallon of methanol, and 3) a small amount of sodium or potassium hydroxide. The outputs are: 1) 9 gallons of biodiesel; 2) 1 gallon of glycerine, and 3) a small amount of residual alcohol, catalyst, and wash water. 995

5 relatively high transportation cost, plus an allowance for profit, results in the typical price of approximately $4.00 plus per gallon for biodiesel. In contrast, the emphasis of this report is evaluation of processing soybeans locally, then using the high protein meal and biodiesel near the area of production. COSTS OF BIODIESEL PRODUCTION BY A NEW GENERATION COOPERATIVE (NGC) The NGC community-based soybean processing and transesterification plant in this analysis is assumed to be owned and operated by a group of farmers with each having delivery rights to have a specified volume of soybeans processed in the plant each year. This closed loop system -- modeled after similar types of businesses in Austria -- operates by farmers producing soybeans, delivering them to the processing plant, then feeding the high protein meal to livestock and poultry, and using the transesterified oil to operate diesel-powered farm equipment. The combination of the NGC processing plant plus the closed loop system results in the maximum reduction in transactions costs identified in Table 1. The primary reason for considering this scenario is that this concept has been successfully used in Austria for almost a decade, plus the fact that several similar small-scale closed loop systems in the U.S. have been successful. However, most U.S. plants currently do not produce methyl esters from soybean oil. Instead, they sell the oil for use in food, feed and/or industrial applications. One of the cooperatives recently studied does produce methyl esters from soybean oil produced in a small-scale crushing plant. However, this cooperative is not organized as a NGC but rather has a long history of profitable operations, including crushing soybeans in small scale plants since In another instance, a farmer/feeder in Northwest Missouri operates the type of community-based soybean processing equipment described earlier in this report as a private business and not as a new generation cooperative where he trades soybean meal for his neighbor s soybeans on a pound-for-pound basis. The payment for processing soybeans into meal for hog feed is the oil extracted from the soybeans. Thus, the neighbors who have their soybeans processed by the farmer/feeder/processor maintain ownership of their soybeans and meal just as in the NGC form of ownership and operation. As mentioned previously, significant trade-offs exist between economies-of-size of traditional large plants and reductions in transactions costs incurred when marketing soybeans through the traditional marketing system. More specifically, the only transactions costs assumed in this type of NGC processing plant include transporting soybeans from the farm of origin to the local processing plant (which farmers are 996

6 accustomed to doing), and transporting the high protein meal home to their farms for use as a feed ingredient. Also, no changes in ownership occur during this scenario. Data and information regarding cutout values, prices and costs in Tables 2and 3 are used as the basis for estimating costs and returns of a small-scale, community-based processing plant owned and operated as a NGC. Prices indicated are five year U.S. averages for 1993 to Additional important assumptions regarding the small-scale oilseed processing and transesterification plant are identified in Table 3. Both the soybean processing and the transesterification components of this plant occupy a very small footprint such that it is assumed to be integrated into an existing feed business, thus this plant should not be considered a stand alone plant. In Tables 3 through 6 the costs of producing biodiesel by a NGC are estimated. First, the costs (fixed, variable and feedstock) of processing soybeans are estimated. Then, the values of the meal and glycerine are estimated, with the residual cost being attributed to producing methyl esters/biodiesel. This residual cost of biodiesel is one way of portraying a reduced cost of producing biodiesel relative to the traditional marketing system. Table 2 - Assumed Output Fractions and Prices for Soybeans Processed in a Community- Based Processing Plant. Component Output Fraction (pound&u) Price/Unit Soybeans (bu) I I 6.44 High energy meal (#/bu; $/ton) I 51.8 I Oil (#/bu; $/#) Total cutout volume (#) 59.1 Moisture evaporated (#) 0.9 Total (#) I 60.0 I 997

7 Table 3 - Assumptions for a Selected Oilseed Processing and Transesterification Plant Includes purchase of elevator leg, grain storage, scales, rail siding and other items in initial capital Gallons/year (7.6 lbs/gal) 537,895 The initial investment cost for the soybean processing and transesterification components is estimated at $768 thousand (Table 4). The plant is assumed to be depreciated using a straight line method over a 20 year lifetime. Also, one-half the cost is assumed to be equity, with the balance assumed to be debt. A 10 % interest rate is assumed to be paid on the debt. Based on these assumptions, an annual fixed cost of $76,832 is incurred, The estimated annual operating costs are nearly $38 1 thousand, with almost 70 % comprised of soybean processing (Table 5). This was expected since the extruder/expeller uses large electric motors to power the equipment. The remaining 30 % is comprised of variable costs for transesterifying the soybean oil into methyl esters. The estimated cost of producing methyl esters/biodiesel in a community-based soybean processing and transesterification plant when operated as a new generation cooperative is $1.36 per gallon (Table 6). In comparison, biodiesel produced from soybean oil in the conventional system (assuming the same soybean and soybean meal costs and prices) costs between $2.19 and $2.33 to produce, not including marketing, transportation and profit (Table 1). Extremely important in this analysis is that farmers incur only transportation costs in hauling soybeans from their farm to the processing plant and then hauling the high protein meal back to their farms to use in livestock, dairy and/or poultry rations. These are common practices in much of the Corn Belt. The costs do not include any of the transactions costs commonly associated with the traditional marketing system, as identified in Table

8 Table 4 - Estimated Total and Annual Investment Costs for a Community-Based Soybean Processing and Transesterification Plant Owned and Operated as a New Table 5 - Estimated Annual Operating Costs for a Community-Based Soybean Total transesterification 116,644 Total Operating Costs 380,

9 Extremely important to note is that there is no single set of criteria that can be r3rssw& ffs estima$ibg #?r% residual mw4.5~~ J-S%d.i%%l throlus;hout Sk?%/ IJX, R%*%x tmo economics will depend in large part on the relative costs of soybean prices and protein meal prices, i.e., they will be location specific. The closer farmers are to areas of strong soybean demand and higher prices, such as near soybean processing plants, the less feasible will be a community-based soybean processing plant. Thus, an economically viable project in central Missouri may not be at all profitable in a community near Decatur, IL. _,_ I,:;,; _ Secondly, it is important to note that even thl ough in selected instances biodiesel can be produced for a price (cost) that competes with petroleum-based diesel fuel under the new generation cooperative ownership and operation, a farmer/feeder may be better off financially selling the oil and buying regular diesel fuel to power his machinery and equipment. Or, if the choice is made to use the soybean oil in the form of biodiesel, opportunity costs may be incurred resulting from using soybean oil as a fuel rather than selling the oil in higher value markets. Table 6 - Estimated Costs and Returns for a Community-Based Soybean Processing- Transesterification Plant Owned and Operated as a New Generation Coouerative. 1 Annual Income ($9 Product sales $/unit 1 # of units 1 Total 1 High energy 44% meal (tons) , ,163,826 1 I Crude glycerine (pounds) , ,439 I I I Total Annual Income 1 3,333,264 Annual Costs ($) Annual fixed costs Feedstock costs (bushels) Operating Soybean processing Transesterification 76, ,000 3,606, , ,644 Total Annual Costs 1 4,064,026 Net cost attributed to methyl esters ($) I I 730,762 Methyl ester production (gallons) I 537,895 Net cost of methyl ester ($/gal) 1000

10 SUMMARY AND CONCLUSIONS Processing soybeans locally mav provide a profitable alternative in some niche situations to marketing and processing through the conventional system. The greater the number of steps in the conventional soybean marketing system, and the larger the transactions costs, and the more feasible local processing becomes. Farmers who both produce soybeans and feed livestock, dairy and/or poultry could potentially benefit most from a small-scale, community-based oilseed processing and transesterification plant. This results primarily because the farmer/feeder internalizes transactions costs relative to the conventional marketing system by using both the high protein meal and the methyl ester/biodiesel fuel on his farm. Thus, the farmer/feeder retains ownership of the soybeans and soybean products, and is not a price taker in selling soybeans and in purchasing high protein meal. Based on 5-year average soybean and meal prices, the cost of producing biodiesel with conventionally-produced soybean oil ranged from $2.19 to $2.33 per gallon, while the cost of producing in a new generation community-based plant without retained ownership was $1.36, when using comparable prices. NGCs producing methyl esters are likely to be profitable in some areas and not in others. Economic viability will be location specific. The spread between prices received for soybeans sold relative to high protein meal purchased is the most important factor in the potential success of new generation cooperatives as a form of ownership and operation in the processing of soybeans and transesterification of soybean oil into methyl esters for biodiesel. The larger the price spread, the better the opportunity for profitability and financial success. There are niche situations where retained ownership of soybeans processed by a NGC will be marginally profitable under current prices. These are characterized by: 1) widespread production of soybeans and livestock, preferably hogs or dairy cattle, and 2) extensive use of diesel fuel. Farmers in central Missouri incur relatively large transactions costs in the conventional soybean marketing system. The soybean meal from the small-scale plant has unique, documented nutritional advantages for pork and milk production. For hogs it is the high oil content and for dairy cows it is both the high oil content plus the increased levels of bypass protein. By retaining ownership, the farmer/feeder gains the advantage of using these in his livestock enterprise. They add to the attractiveness of the community-based crushing/transesterifying facility. 1001

11 SELECTED REFERENCES Egerstrom, L., (October 1994). The new wave: New co-ops help growers gain larger share of food dollars, Farmer Cooperatives, Pp, 6-9. Harris, A., Stefanson, B., & Fulton, M. (1996). New generation cooperatives and cooperative theory. Journal of Cooperatives, Vol. II, Pp Stefanson, B., Fulton, M., & Harris, A., (September 1995). New generation cooperatives: Rebuilding rural economies, University of Saskatchewan, Saskatoon, Saskatchewan, Canada, Centre for the Study of Co-operatives. Van Dyne, D.L. and M.G. Blase. Marketing Implications of Biotechnologically Engineered, Identity-Preserved Soybeans in the Corn Belt, A report prepared for the Missouri Department of Agriculture, Market Development Division and the USDA, Agricultural Marketing Service, Federal-State Market Improvement Program, June 1998.