The Economics of Oilseeds for Biodiesel in Montana ~ Overview and Case Studies

I Overview General Barriers to Biodiesel Production in Montana Lowering Barriers to Market Entry Better Alternatives - MSU Profitability Comparisons II. Case Studies The Minimalist Approach Organic Grain Grower Conventional Grain Grower Conclusions

I. Overview

Montana farmers are the highest seasonal users of diesel fuel in the state. Escalating diesel fuel prices are at a point where on-farm, community-based and commercial fuel production of biodiesel may be feasible. Biodiesel is 100 percent biodegradable, reduces air pollutants including carbon monoxide, fine particulate matter and other hazardous pollutants. Proper and safe biodiesel production renders little in the way of waste generation. Also by producing biodiesel for on farm use, energy efficiency and conservation is substantially increased because of the significant energy losses associated with the production, refining and transportation of non-renewable petroleum based diesel fuel.

Montana farmers have a history of oilseed production from which biodiesel could be made. Historical motivations for such production were related to many factors. According to Schumacher (2006), major reasons include the reduction of economic and agronomic risk through diversification and growing niche markets related to health benefits of cooking oils derived from oilseeds¹. The interest in oilseeds for biodiesel production is a relatively recent phenomenon, although some early work was done in the early 80's. In 2002 there was a project to run vehicles on blended biodiesel (B20) in Yellowstone National Park (Montana Biodiesel Workshop, 2006).

As of September 2009, the infrastructure for in-state production of biodiesel from oilseeds in Montana is still in early stages of development. Fisher and Earl Biofuels, LLC in Chester, Montana were the first to commercially produce biodiesel from oilseeds in Montana in 2007 but at a low start-up volume. Great Plains: the Camelina Company has purchased camelina seed from Montana farmers through contracts for out of state biodiesel production in 2007, 2008 and is taking contracts for production in 2009. Finally, Sustainable Oils, a new joint venture of Green Earth Fuels, Inc. and Targeted Growth, Inc., hopes to produce and market 100 million gallons of Camelina-based biodiesel in 2010.

Recent historical data on oilseed production in Montana is presented in Table 1. Flax, canola, mustard, safflower and sunflower have been the dominate oilseeds produced in Montana in the recent past (since 2003). Camelina, as noted above, is the newest oilseed being produced in Montana with first published data in 2007 (MSU Mont Guide, 2008).

Based on historical average prices in Table 1, mustard provides the highest value oil followed by safflower and flax. Camelina may surpass the historical average value of mustard seed if the crop can receive greater than $0.15 per pound and yields can exceed 1,000 pounds per acre. Great Plains-the Camelina Company, offered fall 2008 contracts for 2009 Montana camelina production at approximately $0.205 per pound. This may mean that camelina is becoming one of the higher valued oilseeds in Montana.

However, despite a continued and increasing valuable production of oilseeds in Montana, it is important to note that the total production of oilseeds only represents a very small percentage of harvested crop acres in Montana. For instance, all oilseeds planted in Montana represented less than 1% of all planted crop acres in the state in 2007. Furthermore, the amount of production of oilseed required to meet the demands of a single 100 million gallon biodiesel production facility could be up to 2.6 million planted acres which is about half the 2007 planted acreage of wheat in Montana². Wheat is the dominant crop in Montana taking up over 55% of total planted crop acres in the state.

General Barriers to Biodiesel Production in Montana
Before turning to specific case studies, it is important to outline general barriers to the development of a biodiesel industry in Montana. First and as already noted, there are not yet secure markets for large quantities of oilseeds for biodiesel production at prices that can motivate farmers to switch to new crops or expand current production. This may be rapidly changing, but nonetheless oilseed production for biodiesel is still a new market.

Second, any substantial increase in the production of oilseeds in Montana may lead to the rapid lowering of prices for valuable niche markets. For instance, the production potential in Montana alone for many oilseeds could cause a short-term over-supply of niche culinary oil markets. For instance, Montana farmers produce the second largest quantity of safflower oil in the United States. If Montana farmers were to double their production it could overtake California for the number one producing state. This would, given stable demand, likely cause a decrease in price. Farmers know that a niche market can change rapidly, so even if prices are high because of low supply new entrants can easily dissolve hoped for profits. Thus, farmers will often not enter new markets for fear of rapid downward price changes.

Similarly, farmers and others often suggest that because the value of an oilseed is so high, it couldn't possibly be economical for use as a fuel. In part this is true if the fuel that the biodiesel is to replace is lower in price than the cost of producing the biodiesel. Thus, if camelina oil is selling for $8 per gallon for culinary or cosmetic use, it is hard to see how it can be used as a biodiesel feedstock. The problem with this reasoning is the assumption that those supplying the culinary and cosmetic markets for camelina oil are not currently making large profits because their cost of production is relatively low. Also this begs the further question as to why a farmer doesn't enter into the culinary or cosmetic market for camelina oil if potential profits are so high. The reason is in part because of the uncertainty that the specialty market price will hold as new entrants seek the high profit levels in new niche markets as discussed above.

Third, change and innovation is risky and difficult. Learning to grow a new crop takes time, may require new machinery and/or new ways to use machinery to produce, creates new efforts at understanding new and potentially volatile markets and may cause a certain degree of social ostracism for growing something clearly "different". There is often an expectation that farmers simply maximize profit, but often like all of us they are more often creatures of habit.

Fourth, government policies can impact the ability to change cropping patterns. Subsidized crop insurance and commodity support do not exist for new crops like camelina. The Risk Management Agency is developing a pilot camelina insurance program, but it will not be operational till at least the 2010 planting season.

Dramatic fluctuations in prices for oilseeds make it difficult for those who use oilseeds for feedstock into commercial biodiesel production to estimate the final cost of the biodiesel. Furthermore, the markets for co-products of biodiesel production, oilseed meal or cake, are not yet fully developed or constrained making it difficult for biodiesel producers to optimize profitability. For example, in early 2009 the Food and Drug Administration (FDA) issued a ruling that allows feeding camelina meal to broiler chickens at 10% ration; the allowed rate for swine and beef cattle is 2%. Many Montana producers were hoping for higher allowed feeding rate for beef cattle to fully utilize the meal now available. While livestock feed may not be the only use of the co-product from biodiesel manufacture, it is one viable alternative that may be needed to assure biodiesel manufacture profitability.

Finally, if the farmer can grow a familiar crop for a higher price and with less risk then a new oilseed crop then why even begin to start down the path to growing such a crop? In Montana wheat and barley dominate production and unless an oilseed can offer a return greater then wheat or barley then oilseeds are less likely to be grown. This analysis will focus primarily on this issue.

Lowering Barriers to Market Entry
There have been several developments that may be lowering the barriers to entry into expanded oilseed production in Montana. First, several projects led and sponsored by the National Center for Appropriate Technology (NCAT) have provided mini-grants to assist farmers to reduce the financial risk for those interested in developing and demonstrating biofuels projects and new technologies. Also, NCAT and related projects have provided a series of educational workshops on oilseed and biodiesel production over the last three years.

Second, farmers who were planting camelina for the first time in 2008 were offered reimbursement for part of their seed costs if they farm in the 32 counties of northern and eastern Montana covered by the Workforce Innovation in Regional Economic Development (WIRED) program funded by the U.S. Department of Labor. The reimbursement program covered camelina seed costs of up to $1.30 per pound for a minimum of 10 acres and a maximum of 80 acres at seeding rates of 3 to 5 pounds per acre. The purpose was to encourage growers to gain experience planting camelina at a time when high wheat and barley prices might tempt producers to forego rotation crops. A federal biodiesel blender's tax credit provides biodiesel manufacturers a $1.00 per gallon tax credit and has been significant to encourage general biodiesel development. Finally, though not yet implemented, Montana Senator Jon Tester helped pass federal legislation to require the development of a national pilot crop insurance program for camelina, which is not covered under current crop insurance programs.

Better Alternatives- Montana State University Profitability Comparisons
Prices for the major commodity crops in Montana moved significantly upward in 2007 and there are expectations they will remain high for the 2008 crop. Also, the National Agricultural Statistics Service (NASS) reported in Farm Productions Expenditures 2007, that total U.S. farm production expenditures rose 9.3% over 2006 levels. Such dramatic changes in both prices received and costs do not generally create an atmosphere for farmers to make changes in what they grow. However, a comparison of profitability of oilseeds to other crops is critical to whether shifts in cropping patterns will likely occur because oilseeds provide a better economic alternative.

Duane Griffith, at Montana State University (MSU) has developed an enterprise budget system that sets up a model Montana dryland crop farm with a mixture of crops including three oilseeds (flax, canola and camelina), lentils along with more the more typical crops of wheat and barley. In addition to providing a means to compare the profitability of grain crops and oilseeds the model also provides the means to explore the potential for offsetting diesel costs by estimating the potential for converting either canola or camelina into biodiesel. For the purposes of this analysis we will focus on camelina as the oilseed of choice for biodiesel manufacture³.

The scenario developed here is one in which of the 4,500 acres in production, 1800 acres are in wheat, 345 acres are in barley and 555 are in camelina and 1,800 is in summer fallow. The type of tillage system in use for the scenario is "mechanical tillage" which refers that the number of times machinery is used to maintain weeds on the summer fallowed acreage (5 field passes). The assumed prices for inputs are available in the appendix and generally reflect prices as of September 2008. The results provided by this model are in Table 2 below.

It is clear that at the given prices, expected yields and assumed input costs, camelina is a profitable crop for Montana dry land crop farmers to grow. Indeed, this model would predict that camelina would be more profitable than the traditional crops of wheat and barley. Caution however is advisable for several reasons.

First, the expected yields are only based on the average of work done on experimental research stations. Recent data (2008, 2009) from the National Agricultural Statistical Service has reported that the average yield of camelina in Montana is 569-589 pounds per acre, not the 1,141 pounds in the model above. Second, it is not clear that camelina can sustain such high price levels (though it is also not clear that alternative crops can sustain such high price levels either). Third, there are no insurance costs allocated simply because it is not yet available for camelina at the time of this writing. Finally, it is not well known what pests and diseases may impact future yields and how weather conditions can impact crop development generally.

The fertilizer costs may also be overestimated because there is limited research on the yield response to fertilization and none on the optimal economic application of fertilizers. Also, as will be discussed later, an energetic analysis would suggest a possible recommendation of no fertilizer use to lower fossil fuel inputs to make an alternative fuel.

II. Case Studies

Introduction
These case studies were developed by the author in 2008 through interviews and analysis of economic data provided by the farmers. These figures reflect 2008 costs and prices and should be read and used with that in mind.

The Minimalist Approach
The minimalist is a cattle producer, who is experimenting with camelina production for the primary purpose of supplying the farms diesel needs. He is breaking out new but relatively poor quality soils for production. He has purchased his own small seed crushing press and largely made his own on-farm biodiesel "refinery". He is an economic minimalist, trying to establish the minimal inputs (land, machinery and seed) needed to produce sufficient fuel for the farms use. His enterprise budget is quite simple as shown below:

Minimalist
Seed: $5/acre @ 4lbs per acre applied
Labor: $1.12/acre @$14/hr
Machinery & operating: $20/acre (broadcasts)

Total Costs per Acre: $26
Yield: 350 lbs per acre
Value: 350 x .090= $31.50
Net: $5.5/acre

While the minimalist did not reach even half of the average yields of other growers in the state, he did garner positive returns over direct costs and provided a source of fuel for his diesel machinery.

Organic Grain Grower
Growing oilseeds for the production of biodiesel for use on farm is the major objective of this farmer. It is unusual that an organic grower would not grow an oilseed for commercial sale, since these types of crops (organic and oilseeds) often provide an excellent source of income in culinary and specialty markets. Nonetheless, organic grain growers have significant fuel needs and rising prices and variability of prices places a major constraint on organic and non-organic growers. This farmer started with camelina and grew on 2, 40 acre plots for three years. His enterprise budget is shown below:

Organic Grain Grower
Seeds: (saves)-estimates $1.00/lbs.
@ 4lbs per acre=$4.00/ acre
Labor: $6/acre @ $48/hr for labor
Machinery/operating: $40/acre (drills)

Total Costs per Acre: $50
Yield (average 3years): 800 lbs/acre
Value: 800 x .092= $73.60
Net: $23.60/acre

Interestingly, after four years of experimentation this farmer, switched to hi-oleic safflower (which he also had experience growing) instead of camelina. The reasoning is the farmer decided for his purpose of on-farm diesel self-sufficiency that he would shift to producing straight vegetable oil (SVO) production (instead of biodiesel) and modify his tractors and hi-oleic safflower works better for this change. Also, hi-oleic safflower provides a greater yield and he estimated in 2008 that only 170 acres (5% of his land base) can produce sufficient SVO for the farms diesel needs. [Note: In 2009 this farmer now estimates it take 8% of his acreage to produce enough fuel from hi-oleic safflower. From an environmental and perhaps economic cost perspective, this makes sense as biodiesel production requires attention to potential hazardous waste issues and overall cost of producing fuel is lowered substantially.]

Conventional Grain Grower
This farmer is a typical conventional grain grower, who also is deeply engaged in a limited liability company that was the first to produce commercial-scale biodiesel in Montana. Interestingly, despite this interest and investment in biodiesel production, as a farmer he did not have much experience in growing oilseeds and in particular camelina. The farmer believes that with earlier planting and better management he could improve yield significantly.

Conventional Grain Grower
Seeds: $3.00/acre
Labor: $1.12/acre (@$14/hr from alternative source⁴)
Machinery/operating: $19/acre (drill)

Total Costs per Acre- $23.12
Yield: 400 lbs/acre
Value: 400 x .092= $36.80
Net: $13.68/acre

It is interesting to note the use of fertilizer did not appear in the previous minimalist's and organic cases. Organic grain growers, typically use crop rotations with a legume as a means for fertilization. The minimalist avoids this cost because he simply has extensive land available (albeit marginal) for use and also rotates fields to fields without to regard to fertilization at least in the medium term.

Conclusions
These case studies and general review clearly demonstrate that the learning curve for growing oilseeds is great and that yield and costs are significant factors in individual farm profitability in growing oilseeds, particularly camelina. Also, it is important to note that early planting, use of oilseeds as a rotation crop and direct drilling seem to support improved yields. Finally, the non-use of herbicides, pesticides and fertilizer in the production of camelina stands out and is due in part to the legal issue of no-approved pesticides for camelina.

However, it is also important to realize the different objectives of the farmer. For the minimalist it is not about yield maximization, but rather lower costs and using a resource that is relatively inexpensive (land) to the particular farmer. For the organic grower, the objective is clearly growing fuel for the farm-certainly not at an economic loss- but without the need to maximize profit per se. The conventional grain growers’ motivation is to provide an input to his biodiesel manufacturing investment, ideally to provide a source of fuel for his equipment as well. Thus, why a particular oilseed should or not should not be developed is highly variable depending on multiple motivations of farmers.

Finally, from the perspective of Montana public policy we must also consider the energetics of oilseed production. What is the life-cycle energy requirement for growing oilseeds in Montana? The minimalist case does suggest that we have a net energy contribution, but this is only suggested. The organic farmer estimated that between 5-9% of the land base would be sufficient to supply most of all farmers fuel needs from a renewable source. If the public policy goal is the protection of farmers from the high variability of non-renewable and polluting fuel sources, clearly the case for some level of oilseed production for this purpose is justified.

If you have questions or comments please refer them to:
Jeff Schahczenski (jeffs@ncat.org)
406.494.8636

¹ Some oilseeds like flax that can be used for its fiber have even longer histories in Montana. Indeed, there is small town in northeastern Montana called flax in honor of that production period.

² Schumacher, J. and Vincent Smith, 2007. "Feedstock Requirements for Large Scale 100 Million Gallon Biodiesel Production Facilities in Montana", MSU Agricultural Marketing Policy Center, Briefing no. 92.

³ We chose to use camelina as the oilseed of analysis because the MSU model provides oil production details for camelina, it is likely the best agronomic choice for a Montana oilseed and finally because biodiesel processors and the Montana Department of Agriculture seem to be suggesting it as the ideal crop for development for biodiesel.

⁴ MSU-model
http://www.montana.edu/softwaredownloads/software/EnergyImpactOnAg.html