Biodiesel Growth Opportunities
For more than 25 years, Dave Elsenbast has been a leader in agricultural business development, supply chain management, operations and purchasing. Prior to joining Renewable Energy Group Inc., the largest U.S. biodiesel producing company with more than 225 MMgy of operational productive capacity to date, Elsenbast served as the vice president of business development for Milk Specialties Co. Elsenbast earned a Black Belt in Six Sigma accreditation, and he currently serves on the board for the American Fats and Oils Association. Elsenbast, who says he does “a little bit of farming in Northwest Iowa,” is considered one of the industry’s foremost experts in biodiesel feedstock, as he manages procurement of fats, oils and grease for REG’s seven large operating biodiesel plants centered in the Midwest with two outposts in Texas (REG Houston and REG New Boston, formerly North Texas Bio Energy), as well as gauging and analyzing feedstock markets in regions where the firm has plants under construction in the Southeast (REG Atlanta, formerly Bulldog Biodiesel), the Southwest (REG Clovis in New Mexico, also an operational terminal), Louisiana (REG New Orleans) and Kansas (REG Emporia).
Q: REG just last week announced its gaining new positions at four New York City metro area fuel terminals. From what I could see, those biodiesel terminals were established by Ultra Green Energy Services. REG also hired Daniel Falcone and Michael Cooper from UGES. Can you share some details behind that deal?
A: It was a good opportunity for us to really move into the great [Northeast] biodiesel market both for heating oil as well as over-the-road, ultra-low sulfur diesel. The Ultra Green group had been working that market quite well, Danny and Michael, and the distribution assets, their relationships with the terminals and the transloads, were really brands for us to start utilizing to be able to get some of our biodiesel into those markets, especially some of the higher-cloud material into that during the winter months. So it’s helped us expand our goal of a very strong nationwide distribution, and we’re starting to ship quite a bit of biodiesel out there now in servicing that market. And we’re really excited about that.
Q: Are those terminals serviced by both REG and UGES now, or did REG buy out UGES?
A: It was not an acquisition. We acquired, or had some of the assets, contracts and relationships, assigned to REG.
Q: REG has been buying distressed plants at a fast clip, including the acquisition North Texas Bio Energy in New Boston, Texas, and Bulldog Biodiesel near Atlanta in three weeks’ time. How does REG ensure consistent, quality feedstock procurement for these acquisition plants that are outside of REG’s Midwest biodiesel production hub?
A: Quality and consistent supply of feedstock near any one of our plants is a critical hurdle that we have to pass whenever we start to consider where we may want to locate a plant or look at an acquisition. Many times we’re already working with many of the suppliers that are in those areas because they are companies that have many plants regionally or across the country. So many times it’s expanding already great vendor relationships into more of their locations. But also when we go into an area, we investigate all the suppliers that we’ve not had the opportunity to do business with mainly through logistics, but then we establish relationships, we look at samples from the suppliers, we test the quality of their product in our lab in Ames, Iowa, and as we approve those samples, then we work toward establishing a new vendor relationship in the areas around the plant we’re looking at acquiring.
Q: Tell me about how biodiesel feedstocks differ per region, and how does the same feedstock differ in quality and price per region?
A: When you think about different feedstocks around the country, it’s best to first look at livestock production maps. You can look at different production numbers of poultry, swine and cattle around the country to get a feel for what types of feedstocks you’re going to acquire in those regions, and the second area you look at is population maps, and you can make some extrapolations as to how much recycled waste restaurant grease could be available in those markets. Pricing between markets is something that, historically, companies such as the Jacobson report, would cover different fat markets around the country―we track them, and we watch the spread between the different markets. But also one of the positives is we have people on our purchasing teams who are trading in all the different markets on a daily basis so we’re watching the spreads in the different regions and trying to react to what the markets are doing.
Q: What advantages does REG have over its competitors, outside of sheer volume, when it comes to feedstock supply?
A: A few things that come to mind there is, we do have a full-time team of people in our procurement area; we have seven people on our team who are actively trading in the marketplace every day. That gives us good coverage throughout the country every day. We have a great plant information system that keys us into all of the production activity at all of our plants in a real-time fashion, so we’re watching receipts, production, consumption and forecasting future needs off that in a real-time basis. And also we have a very extensive vendor list. Our objective is always to do business with everyone who can meet our quality needs and be cost-competitive and to try and do business with as many suppliers as we can and we also play in every commercially available feedstock, so I guess spreading out our risk amongst many vendors with many different feedstocks is one of our advantages. And most of our production plants have that lower-cost model of manufacturing where we’re able to use lower-cost, lower-valued feedstocks and we’re able to convert those efficiently into biodiesel.
Q: What are some mistakes that biodiesel companies make in procuring feedstock that end up hurting their bottom line? How could they correct these?
A: We would probably say, get to know your vendors very well. Sample and test their product to see what kind of quality parameters they are able to meet. Get to know your vendors. They’ll get to know you. But have a very good understanding of what your plant is capable of utilizing. We’ve all heard the stories out there in industry that startup plants start buying feedstocks before they know what their plants can process. Understand what your plant is capable of utilizing before you’re in the marketplace filling up the tanks.
Q: For third-quarter financials, REG initially proposed its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) would be $10 million to $15 million, but due to lower RIN values and risk management positions, the company’s third quarter adjusted EBITDA came in at a $2.3 million loss. Can you talk in detail about what those positions were, how that led to a significant loss in adjusted EBITDA versus initial guidance of an even more significant gain, and what lessons have been learned from the third-quarter of 2012?
A: In our conference call, we talked about a tougher biodiesel environment, the RINs market tested down, due in part to the level of production that the market had produced to date. The market was giving signals that we need to slow down production. That made the market environment challenging during the third quarter, but we’re also excited about the announcement of the 28 percent increase in the RVO (renewable volume obligation) for 2013, and we look forward to starting produce for that higher mandate.
Q: A couple years ago at the Fuel Ethanol Workshop, where you presented, you said corn oil extracted from the backend of the ethanol process made up slightly less than 10 percent of U.S. biodiesel production feedstock in 2010. What are those numbers today, and what do you project them to be in coming years?
A: First of all, inedible corn oil has been a great synergy story between the biodiesel industry and the ethanol industry. REG has been using inedible corn oil since 2007, and it’s a very [important] feedstock for us. And as the ethanol industry has expanded its production of inedible corn oil, we have made plant investments to put in the capability to use it. It’s a growing feedstock for us. Some of the numbers you might be looking for are, at the end of September 2012, the EIA data shows that we’ve used 414 million pounds of inedible corn oil in biodiesel production this year. If you extrapolate that into biodiesel gallons, it’s roughly maybe 6 to 7 percent of the overall gallons produced. But certainly the inedible corn oil used, having a growth feedstock, helps us and, in the process, is a story to point to as we work to grow the RVO in the forward years.
Q: Is there any concern about the current state of the ethanol industry now with plants idling due to the so-called blend wall having been reached? Obviously, the less ethanol that’s produced, the less inedible corn oil is available for biodiesel production.
A: We always are watching the ethanol industry closely, it’s a good partner for us, and their margin structure is challenged right now, which reinforces the need for many of the ethanol producers to have this capability installed in their plant. We do think the ethanol industry will continue to move toward this separation on the back of their plants. And we think the market is going to, in another year or two, be fully penetrated through all ethanol plants. In a lot of cases, it will be the help in margins that they’ll need to continue to produce ethanol in a difficult market. The other thing we think will get a lot of attention in the next year or two is improvements in separation technology. They have seen the positive benefits of separating a little bit of the corn oil from the DDGS and there’s certainly a direction to separate more and more of the oil out and get it pushed into the market and get them the higher returns. So the ethanol industry production could be down a little this year, but we do think overall corn oil production will be up.
Q: In mid-September the USDA released its soybean forecast for this harvest, the worst drought year in decades. The numbers were not good and analysts projected that in early 2013 soybean prices, and therefore soy oil prices, would reach record highs. What is your perspective on this year’s harvest, how it will affect soybean and other feedstock prices under the theory that a rising tide raises all ships, and ultimately, biodiesel production margins?
A: The current USDA soybean estimate for the June crop is 3.094 billion bushels, and this is the fourth highest bean crop ever in the U.S. I think it really benefited a lot from the late season rains we got from the last half of August. I think the yields have improved dramatically from what we thought they would be in the month of July. I do a little bit of farming in Northwest Iowa and many of our neighbors were seeing 50 to 60 bushels per acre range. But the demand for soybeans has been strong, crush margins have been excellent, we have very strong demand for protein. Exports of soybeans have been very strong. So the market is concerned a little about bean supply as we get into Q2 and 3, but the positive story out there is the growing South American crop. I’ve looked at some estimates, and currently the Argentina soybean production estimate is for 54.5 million metric tons versus production of 41 million metric tons last year. And soybean production in Brazil is estimated at 80.8 million metric tons versus 66.5 million metric tons last year. It looks like we could be getting off to a very good start, and again it won’t be long before the U.S. starts a new growing season and I would anticipate that higher prices on soybeans are going to send strong signals to farmers to grow more. But we could have a bias toward higher soybean oil prices as we get into Q2 and 3. But again, the biodiesel industry is built off a very strong multifeedstock approach to it, and at REG, our focus is to be able to use the full spectrum of commercially available, lower-cost feedstocks. We think there’ll be plenty of feedstocks in the marketplace to be able to sufficiently meet the requirements for 2013. And do it cost-competitively.
Q: With higher soybean prices in Q2 and Q3, like you mentioned, might we see some upward pressure on the other feedstocks that are considered lower-valued, lower-cost for biodiesel?
A: One of the factors tempering soybean oil is very strong palm oil production and palm oil stocks on the market. That’s tempering a little bit of the upside on soybean oil.
Q: We have only a matter of days before Congress breaks for the year. Do you think a tax credit will pass by the end of this year (2012), or even possibly early next year? Some people ask, what’s the value of the credit to producers if it’s only going to raise feedstock prices?
A: Well, we’re certainly monitoring the situation and we have a staff that’s in D.C. that is working through the proper channels and we’re hopeful the tax credit does get passed, we think it’ll be positive for our relatively new industry to continue to get support as we work toward meeting the [requirements] of RFS2. The dollar tax credit, how that gets split up in the marketplace, is determined every day by varying trading levels between what we’re buying feedstocks for and what we’re selling biodiesel for. It doesn’t necessarily all end up in the hands of the feedstock providers. The market splits it up based on everyone’s supply and demand factors. I was looking at the numbers the other day and we had this happen at the end of 2010. Mid-December 2010 the tax credit wasn’t in place and at the end of the year Congress passed it, and made it retroactive back to the beginning of the year and through 2011. If you look at how the markets moved over the next 90 days, when you look at feedstock increases and RIN prices over that time frame, it seems like about 25 percent of that tax credit ended up in higher feedstock prices. So, again, the dollar—what I didn’t look at is the biodiesel basis selling price, so it’s split between all the parties in the value chain.
Q: The concept of a multifeedstock biodiesel plant is to be able to take advantage of the feedstock markets so that when prices go up or down, the plant can maneuver and be flexible to buy cheaper available feedstocks. In reality though there are risk management decisions such as locking in prices on futures contracts, limited regional supplies and other elements that seem to make the ability to switch feedstocks on a dime more difficult than that. Can you describe how REG manages feedstock supply for its multifeedstock plants and explain what are the factors involved in making these decisions, and how are these decisions actually executed?
A: The risk management, procurement and biodiesel selling positions are all intertwined, which is why we have the open trading floor [in our Ames, Iowa, office]. We’re all looking at and sitting right next to one another so that the coordination and communication and speed of decisions, when it comes to feedstock and selling decisions, we’re all right next to each other, and it helps us make decisions that we need to make in the time we need to make them.
Q: What are some of the more promising feedstocks under development now that have real potential in biodiesel?
A: Pennycress, camelina, algae oil and jatropha are all oils that are under a lot of development and receiving a lot of R&D. We think that they’ll be potentially commercialized in the next one to three years. One of the positive things that REG has is, because of our experience and manufacturing expertise on using a very wide array of feedstock, we make very good commercialization partners for these companies to come to and work with, for them to bring their new oil to the market. That will be very helpful for us as we try and continue to grow the RVO each year going forward.
Author: Ron Kotrba
Editor, Biodiesel Magazine