Biodiesel Fuel and U.S. Agriculture

CRS Report for Congress
Received through the CRS W eb
Biodiesel Fuel a nd U.S. Agriculture
Analys t i n Agricultural Policy
Resources, Science, and Industry Division
Increased concerns about energy security, greenhouse gas emissions, and pollution,
plus the d esire t o s upport farm i ncomes, h ave l ed to an increase i n congressional i nterest
i n renewabl e, agri cul t u re-based fuel s o r b i o fuel s (i n cl udi ng et hanol and b i odi esel ).
Bi ofuels are generally more ex pensive t han gasol i n e, di esel fuel , and ot her p et rol eum -
based counterparts. However, a growing body of environmental regulations and energy
security provisions have evolved s ince the C lean Air Act Amendments of 1990 that have
created economic opportunities for producers and users o f b i o f u els and biofuel
feedstocks. In addition, supporters maintain that biodiesel — a major b iofuel — o ffers
several environmental and heal t h benefi t s over p et rol eum -based di esel fuel .
Recent p rovisions in the 2002 U.S . Farm Bill (P .L. 107-171) offer s ome i ncentives
for p roduction o f b iodiesel. In addition, provi sions affecting renewable energy sources
such as biodies el are i ncluded i n t he omnibus energy bills passed by t he House (H.R.

6) and b eing considered by the S enate (S. 14). This report will be updated as n eeded.

Statistics s uggest a s ignificant U.S. m arket potential for biodiesel. In 2001 total U.S.
diesel fuel use was estimated at 39.5 billion gallons; i ncluding 33.2 billi o n o f o n - road
(highway) u se, 3.4 billion o f farm u se, 2.5 billion o f o ff-road use, and 3 4 6 million o f
military use. 1 Bi odiesel can substitute directly for pet roleum-based diesel fu el with2
generally no engi ne modification. A n estimated 34.3 million gallons of biodiesel were
produced in the United S t a t e s i n 2001 from an i ndustry-projected biodiesel production3
capacity of between 60 and 80 million gallons per year. Currently, t hen, biodiesel accounts
for l ess t han 0.1% of diesel fuel consumption i n t o t he United S tates.

1 DOE, Energy Informatio n Administratio n (EIA), Form EIA-821,Annua l F ue l O i l a nd K e r o s e ne S a l e s
Report, for 1997-2001 and P etroleum Supply Annua l , V o l . 1 , 1997-2001.
2 N a t i o n a l B i o d i e s e l B o a r d ( N B B ) , [ h t t p : / / www. b i o d i e s e l . o r g / p d f _ f i l e s / C o mmo n l y A s k e d . p d f ]
3 T he b io d iesel p r o d uctio n e stimate is fr o m a Fo o d and Agr icultur a l P o l icy Resear ch I nstitute ( FAP RI )
stud y c ited in fo o tno te 1 0 o f this r e p o r t. T he p r o d uctio n cap acity estimate is fr o m N B B ,
[ h t t p : / / www. b i o d i e s e l . o r g / p d f _ f i l e s / C a p a c i t y . P D F ] .
Congressional Research Service ˜ The Library of Congress

Commonly- cited Advantages of Biodiesel
Renew a ble fuel s ource. Bi odi esel c a n b e p roduced from s everal agri cul t u ral
fe e d s t o c k s (aka “energy crops”) i n cl udi ng soyb eans, sunfl o wers, canol a, peanut s, corn,
cottonseed, and animal fats s uch as t allow, yellow grease (used restaurant deep-fry grease),
and l ard. Unl i k e fossi l -fuel s wh i c h have a fi x ed resource base t h at decl i n es wi t h use,
agri cul t u ral feedst ocks m ay b e p roduced anew every year.
Health, s a fety, and e nvironmenta l benefits. Proponents o f b iodiesel contend
t h at i t o f f e r s s everal h eal t h and envi ronm ent al b enefi t s rel at i v e t o p et rol eum -based di esel :
biodegradable; l ess carbon monox ide (CO) and sulfur ox ides (SO2) emissions; l ess odor; l ess4
particulate or s oot emissions in some engi nes; and s afer handling due to a h igher flash point.
In addition, biodiesel use m ay reduce C O 2 (a greenhouse gas), oral and d ermal t ox icity,
oz one precurso r s , and m utagenic and carci nogenic compounds associated with diesel
ex haust. 5 From thei r perspective, increas ed substitution of biodies el for pet roleu m -bas ed
di esel fuel m ay o ffer t he broader publ i c great er access t o cl eaner ai r and wat er, safer fuel s ,
and a l o wer ri s k o f cancer, respi rat o r y, a nd ot her h eal t h probl em s associ at ed wi t h ai r and
water pollution, ozone depletion, and climate change.
Energy security effect. A widely t outed virtue of increased production and use o f
renewabl e, agri cul t u re-based bi ofuel s i s l ess dependence o n foreign sources for p etroleum
and pot ent i al i m p rovem ent s i n t he U.S . t rade b al ance.
Farm income effect. Growi n g d e m and for biodiesel and o ther biofuel p roducts
i n creases t h e d em and for t h ei r feedst ocks — v eget abl e oi l s and ani m al fat s — and o ffers t h e
potential for high er prices a n d i ncomes for t he farmers and ranchers that produce t hose
feedst ocks. R ecent s t udi es offer evi dence i n s upport o f these assertions. In 2001 FAPRI
completed a study of the effect s of i ncreased use o f both b iodiesel and ethanol. 6 In t h e
FAPRI s tudy, dem and for soybean oil for biodies el hypothetically increas es from 264 million
pounds in 2001 to almost 2.5 billion pounds in 2010 (an average annual increas e o f about

4 Flash point measur es the temperature to which a fuel must be heated so that the mixture of vapor and air
above the fuel can ignite. T he highe r the flash point, the less likely a fuel will ignite accidentally.
E nvi r o nme nt a l P r o t e c t i o n Age nc y ( E P A) a na l ys i s sugge st s t ha t S O 2 emissio ns a r e fully eliminated with
100% biodiesel since it contains no sulfur. A 20% biodiesel blend may reduce emissions o f CO b y about
12% and p articulates by 12%, while 100% biodiesel may r educe emissions o f CO b y 47% and p articulates
by 48%. EPA, A Comprehensive Analysis of Biodiese l I m p a cts o n Exhaust Emissions, Draft T echnical
Report, EPA420-P-02-001, Oct. 2002.
5 According to EPA, 20% biodiesel blend may red u c e e missions o f air to xicity by about 12-20% and
mutagenic i t y b y 2 0 %, while 100% biodiesel may reduce emissions o f air to xicity by 60-90% and
mutagenicity by 80-90%. EPA, Draft T echnical Report, EPA420-P-02-001, Oct. 2002.
Fo r more informatio n see: U.S. Biodiesel Development: New Markets for Conventional and Genetically
Modified A g r i c u l t u r a l P roducts, by James Duffield, Ho sein Shapouri, Michael Graboski, Robert
McCo rmick, and Richard Wilson; USDA, Economic Research Service ( ERS) , Office of Energy, AER 770,
Sept. 1998, p. 11. [http://www. e r s . u s d a . g o v / p u b l i c a t i o n s / a e r 770/aer770.pdf].
6 FAP RI was establishe d b y a gr ant from Congr ess a nd fr e q ue nt l y c o nd uc t s r e se a r c h i n r e sp o nse t o
Co ngr essional inquiries. FAP RI,I mp acts o f I ncreased Ethano l and B iodiesel Demand ,” FAP RI-UMC,
Oct. 2001. [http://www. b i o d i e s e l . o r g / r e s o u r c e s / r e p o r t s d a t a b a s e / r e p o r t s / g e n / 20011001_gen-311.pdf]
No econo mic study fo cusing strictly on biodiesel was available. Fo r more informatio n o n ethanol see:
CRS Report RL30369,Fuel Ethanol: B ackgr ound and P ub lic Policy I ssues,” by Brent D. Yacobucci and
Jasp er Womach, J une 6, 2003; and DOE,Alternative Fue l s D a ta Center,” info rmatio n website.
[ h t t p : / / www. a f d c . d o e . g o v / ]

200 million pounds), substan t i a lly above the baseline projection of 200 million pounds in
2001 growing t o 380 million b y 2010. The s tudy’s hypothetical scenario is equivalent to a
renewable fuels standard (RFS ) o f a b o ut 1.2% in 2002 growing t o 2.8% by 2010.7 No
mandated R FS currently ex ists. However, an R FS similar t o t his s cenario is proposed in the
omnibus energy policy bills in the 108th Congress and i n o ther legi slative p roposals. 8 FAP R I
also projected substantial growth i n u se of co rn for ethanol as part of the s tudy. Key study
projections concerning the economic impact of the i ncreased demand for both b iodiesel and
Biodiesel use i ncreases to 320 million gallons (up from 34.3 million gallons in 2001)
and requires an additional 2 billion pounds of soyb ean oil b y 2010.
S oybean oil p rices increase gradually to about 14% over b aseline l evels b y 2010 due to
the i ncreased demand for b iodiesel.
T he increased crush d emand for soyb eans t o p roduce o il for b iodiesel results in lower
average ending stocks and h igher s oybean prices through 2010.
Li v est o ck and poul t ry s ect ors are onl y m odest l y affect ed as hi gh er corn pri ces (due t o
l arger et hanol dem and) are p art i al l y offset by l o wer p ri ces for k ey feedst uffs t h at are b y-
products of biofuels — s oybean meal, and corn gl uten feed and gluten m eal.
Farm crop cash receipts ex ceed baseline l evels b y $3.8 billion b y 2010.
Higher farm prices result in lower government program outlays .
A s ep a r a t e s t u dy (Urbanchuk, 2001) also ex amined the potential economic effects o f
increased demand for b iofuels due to a h ypot hetical renewable fuels conte n t m andate
(encompass ing both ethanol and biodiesel) of 1.2% in 2002 rising to 4% in 2016.9 Study
resul t s i n cl uded an i ndi rect energy securi t y effect — renewabl e fuel s w oul d d i s pl ace 2.9
billion barrels of imported crude oil over t he nex t 15 years, lowering the U.S. t rade defici t
by $63.4 billion (1996 constant dollars). Other results were similar t o t he FAPRI s tudy.
Disadva ntages of biodiesel
Higher c ost relative to petroleum diesel. Bi odiesel’s high er costs o f p roduction
rel at i v e t o p et rol eum di esel have been a b arri er to its development. Table 1 provides a cost
comparison of the wholesale p rice of petroleu m d iesel with the cost o f b iodiesel production.
Bi odiesel costs are broken out as the cost o f feedstock p l u s t he costs o f converting t he
feedstock i nto b iodiesel less the v alue of the b yp roduct glycerol.
Fo r ex ample, t he 1997 to 2001 average annu a l w h o l e s ale p rice for s oybean oil was
reported as 18.38 cents per pound or $1.38 per gallon. Including the cost of converting i t
to biodiesel, t he wholesale p rice is $1.90 per gallon for biodiesel. This compares with the
average wholesale p rice for N o. 2, diesel fuel for t he same period of $0.84 per gallon. The
prices of biodies el feedstocks, as wel l as pet roleum-bas ed dies el fuel , vary over time

7 An RFS sets the minimum p ercentage by vo lume of the b iofuel share o f total fuel consumption. T he study
d o e s no t exp licitly d e scr ib e the p o licy to o l used to o b tain the incr ease in b io fuel use; ho we ve r , an RFS, tax
incentives, o r p o ssib ly o ther sub sid ies c o uld p r o d uce similar inc r eases in b io fue l use. A tax incentive is
currently in place fo r ethanol production.
8 See d etails in the later sectio n o n P ub lic La ws.
9 P r e p a r e d b y J o hn M . U r b a nc huk o f AU S C o nsul t a nt s, An Economic Analysis of Le g i sl a t io n for a
Renewable Fuels Requirement fo r Highway Mo to r Fuels, November 7 , 2001. T his stud y is wid ely cited
by the Am. Soyb ean Asso c. and the United Soybean B o ard, and is posted to the U S D A, AR S ,B iofuels
i n f o r m a t i o n we b s i t e , a t : [ h t t p : / / www. n c g a . c o m / e t h a n o l / p d f s / U r b a n c huk_ Fi na l _ Re p o r t . p d f]

based o n domestic and i nternational s upply and demand conditions. As a result, the p rice
relations pres ented i n Table 1 m ay change substantially from year to year.
Tab l e 1 . W h o lesale Cost Comp arison of Diesel Fu el f rom Variou s S ou rces, 1997-2001
Di e s e l T ype Wholesale Wholesale Production Total
price1 price1 cost s3 wholesale cost
Cents/pound ——————— $/gallon ——————
Bi odiesel feedstocks
Soybean oil 18.38 1.38 0.52 1.90
Corn oil 19.21 1.44 0.52 1.96
Cottonseed oil 22.33 1.67 0.52 2.19
Sunflower oil 20.58 1.54 0.52 2.06
Peanut oil 38.29 2.87 0.52 3.39
T a llow 15.18 1.14 0.52 1.66
Lard 15.27 1.15 0.52 1.67
Yellow grease 11.60 0.87 0.52 1.27
No.2,diesel(petroleum)2 — — — 0.84
Cha r t p r e p a r e d b y C RS usi ng d a t a fr o m U SD A a nd D O E so ur c e s a s c i t e d i n t he fo l l o wi ng fo o t no t e s.1
Annua l a ve r a ge s fo r 1997 2001; USDA, ERS, Oil Crops Outlook, OCS-0603/June 12, 2003; table 9, p.11.
Yello w grease p rice is a 1993-95 average from USDA, ERS, AER 770, Sept. 1998, p. 9.2
Annua l a ve . fo r 1997 2001; U.S. DOE, EIA, Petroleum Marketin g Monthly, J une 2003, table 16, p. 33.
3 T he b io d iesel p r o d uctio n c o st e stimate is b ased o n o p e r a ting c o sts fo r a 2 . 3 -millio n-ga llo n-p e r -year b io d iesel
plant. It inc lud es $0.58/gallo n cost o f converting vegetable oil o r animal fat to biodiesel, p lus $0.33/gallo n
fo r general overhead; less $ 0 . 3 9 / gallo n for the sale o f the byproduct glycerol. USDA, ERS, AER 770,
Sept. 1998, p.11.
At t h e n at i onal l evel , ret ai l d i esel p ri ces are s i gni fi cant l y hi gh er t h an whol esal e p ri ces,
averaging b etween $1.15 and $1.75 per gallon from J uly o f 2001 through M ay of 2003. The
price difference i ncludes Federal and S tate tax es as wel l as a marketing m argi n. In the
absence o f any tax ex emptions, both p etroleum - and biofuel-based s ources are s ubject to the
same tax es and marketing m argi ns.
Thes e price data indicat e t hat biodies el is not competitive with petroleum-based diesel
at current market prices. E ither its production c osts must drop substantially, or petroleum
prices must nearly double b efore i t b ecomes economical. Alternately, some combination
of federal and/or state s ubsidies (such as fuel tax ex emptions) o r s ome t yp e o f federal and/or
st at e regul at i o n (such a s a renewabl e fuel m andat e) coul d p rovi de great er econom i c
incentive for biodiesel fuels. While the potential positive consequences of thes e government
p o l i c y options are outlined in the FAPRI study, t here are also potential negat i v e
consequences i n cl udi ng: m arket d i s t o rt i ons and econom i c i n effi ci enci es associated wit h any
market price i ntervention; 10 increased budgetary outlay b y government to finance a subsidy
must either add t o t he deficit o r t ake funding away from another p rogram; and increased fuel
costs t o consumers i n response t o a biofuels RFS. Also, t here i s a n egative feedback
problem related t o t he economics o f b iodies el . A ny dem and-rel at ed p ri ce i n crease for

10 Fo r e xa mp le, see C. P e ter T imme r , Gettin g P rices Rig h t,” Co rnell University P r ess, Ithaca, NY, 1986.

vegetable oils that results from i ncreas ed demand for biodies el will, in turn, rai se the cost
of producing t he biodiesel.
Performance a nd Envi ronmental i ssues. Bi odi es e l s, especi al l y t hose m ade
from h ighly s a t urated feedstocks, m ay cause cold-weather engine p roblems, although
blending can help alleviate t his p roblem. Biodiesels o fte n e m i t h i gher l evels o f n itrous11
ox i d e, a regul at ed em i ssi on. Fi nally, fuel o x i dation h appens more quickly with biodiesel
fuel, t hereby reducing its storage life. Ge netic engi neering research has b een proposed or
is underway intended t o allevi ate m any o f t hese problems.
Other c oncerns. Some environmentalists argue against government intervention i n
t h e b i o fuel s area b ecause t h ey cl ai m t hat o t h er energy sources — s uch as s ol ar or geot herm al
— o ffer cleaner, m ore bountiful alternatives . S ome i n t he petroleum i ndustry a r g u e that
technological advances, s uch as i n s eismography, d rilling, and ex t raction, co n t i n u e to
ex pand the fossil-fuel resource base which r em ai ns far cheaper and m ore a c cessi bl e t han
biofuel s upplies. Some question whether the n e t e n v i ronmental b enefit of biodiesel is
positive when accounting for farm machinery u sed p roduce feedstocks and for trucks used
to move biodiesel to market.
Publ i c Law s that Suppor t Bi odi esel Pr oducti on and Use
Clean Air Act Amendments of 1990 (CAAA; P . L . 101-549). The C AAA
requires t he EPA t o i dentify and regu la te ai r em i ssi ons from al l si gn i fi cant s ources,
including on- and o ff-road vehicl es, u rban buses, m arine engi n e s , s tationary equipment,
recreat i onal v ehi cl es, and s m al l engi nes u sed for l awn and garden equi pm ent . Al l o f t hese
sources are candidates fo r biodiesel use. Bi odiesel has b een approved b y t he EPA, DOE,
and Dept. of Transportation as an environmentally p o s i t i ve or “cl ean” alternative fuel.
However, biodiesel does not qualify for the fed eral fuel t ax ex em p t i o n t hat i s appl i ed t o12
ethanol-blended fuels.
Energy Policy Act of 1992 (EPACT; P .L. 102-486). Energy security provisions
of EPA C T f a v o r the ex p anded p roduction o f ren ewable fuels. EPACT’s alternative-fuel
motor fleet program implemented by the DOE requires federal , s t ate, and alternative fuel
provi ders t o i n crease purchases of al t ernative-fueled vehicles. Under t his p rogram, DOE has
design ated neat (100%) b iodiesel as an altern ative fue l . Bi o d i e s el is increasingl y b eing
adopted by major fleets n ationwide. The U.S . P ostal S ervice, the U.S. military and m any
state governm e n t s are directing t heir bus and t ruck fl eet s t o i ncorporat e b i odi esel fuel s as
part of their fuel b ase. Currently over 300 fleets u se the fuel.13
U.S. Department of Agriculture (USDA). In December 2000, US DA launched a
Bi oenergy P rogram that provides cost i n centives for t he production o f b iodiesel. 14 Initially
t h e el i gi b l e feedst ocks i n cl uded b arl ey, corn, grai n sorghum , o at s , r i c e, wheat , s oybeans,

11 A 20% biodiesel blend may raise nitrous o xide emissions b y about 2 %, while 100% biodiesel may raise
emissions b y 10%. Source: EPA, A Comprehensive Analysis of Biodiesel Impacts on Exhaust Emissions,
Draft T echnical Report, EPA420-P-02-001, October 2002.
12 B lenders of ga s o hol (with 10% ethano l) receive a $0.052 per gallon federal tax exemp tion. T he tax
exemptio n is $0.52 per gallo n o f p ur e ethanol. T he tax exemp tio n is p er 26 U.S.C. 40.
13 NB B , ”B iodiesel 2002 B ackgr ound er.” [http://www. b i o d i e s e l . o r g / p d f _ f i l e s / b a c k g r o u n d e r . P D F ]
14 T he initial p r o g r a m s fina l r ule is a t: Fed e ra l R eg ister, Nov. 13, 2000 (Vol. 65, No . 219), pp. 67608-

sunfl o wer s eed, canol a, cram be, rapeseed, s affl ower, fl ax s eed, m ust ard seed, and cel l u l o si c
crops such as swi t chgrass and s hort rot at i o n t rees.15 The 2002 Farm Bill (P .L. 107- 171)
reau t h o r ized the program and broadened the list of eligible feedstocks to incl ude animal
byproducts and fats, oils and greases.16 Mandatory spending of up to $150 million i s
provided annually for FY2003 through FY2006.17 In effect , t hi s p rogram reduces t h e p ri ce
of biodiesel feedstocks by lowering the m anufacturing cost.
Under t he Bi oenergy P rogram, USDA m akes incentive p a ym e nts t hrough t he
Commodity Credit Corporation t o eligible biofuel p roducers t o encourage i ncreased
p u rchas es of eligible commodities (energy feedstocks) for the purpose of ex pand i n g
p roduction o f b ioenergy and s upporting n ew production capacity. To b e eligible f o r
paym ents, a bioenergy p roducer with a n ew plant m u s t e n r o l l t hat p lant in the p rogram
during t he annou n ced sign -up p eriod. 18 The 2002 Farm Bill also contains provisions for
biobased p roduct d evelopment. Annual m andatory spending of $1 million i s authorized for
FY2003 through FY2006 in the form o f grants t o nonprofit organiz ations that educate fleet
operators and t he public about the b enefits of biodiesel.19
State law s. In 2001, 15 states enacted legi sla t i o n favorable to biodiesel. In 2002,
Mi nnesot a enact ed t h e fi rst ever st at ewi d e l aw requi ri ng t h at al l d i esel fuel s ol d i n t he st at e
contain at l east 2 % b iodiesel. In J une 2003, Illinois announced a t ax incentive for biodiesel
as well as grants for construction o r improvements o f renewable fuels p roduction facilities
in the state.20
Legislation proposed in 108th Congress. P rovi si ons affecti n g renewabl e energy
sources , particul arly agricultural feedstocks, are incl uded i n t he omnibus energy bills as
passed b y t he House (H.R. 6) and considered by the S enate (S. 14). S ection 17101 of H.R.
6 would require that a minimum volume of vehic l e fuel be deri ved from renewabl e energy
sources, i ncluding various forms o f ethanol and b iodiesel. An R FS would s tart in 2005 at

2.7 billion gallons per year and grow t o 5.0 billion b y 2015. 21

Several other bills (H.R. 130, H.R. 318, H.R. 837, H.R. 1279, H.R. 1447, H.R. 1942,
S. 154, S . 355, S. 356, S. 385, S. 791) supporting t he use of renewable fuel s s uch as
biodiesel and ethanol have been introduced in 2003. Several of t hese bills (H.R. 1279, H.R.
1942, and S 154) would give b iodiesel a p artial fuel ex cise t ax ex emption. S. 791 (Section
101) would s et an RFS — of 2.6 billion gallons in 2005, rising to 5.0 billion gallons in 2012
— and it is ex pected to be added t o S . 14.

15 USDA, Farm Service Agency,USDA B ioenergy P rogr am website,” Fact Sheet, B ioenergy P r o g r a m:
7CFR 1424, Nov. 2000. [http://www. f s a . u s d a . g o v / d a c o / b i o_daco.htm]
16 USDA News Release No. 0146.03, May 7 , 2003.
17 T he Farm Security and Rur al Investment (FAI R) Act o f 2002 (Sectio n 9010) is the autho rity fo r making
payments on increased bioenergy p roductio n.
18 Fed e ra l R eg ister, May 7, 2003 (Vol. 68, No . 88), pp. 24596-24603.
19 FAIR Act o f 2002 (Sectio n 9004).
20 NB B , online p ress releases, J une 12, 2003 [http://www. b i o d i e s e l . o r g / ]
21 Fo r more informatio n see: CRS I ss ue Brief, IB10041,Renewable Energy: T ax Cr edit, Budget, and
Electricity Productio n I ssues,” by Fr ed Sissine, May 12, 2003.