New biodiesel mandate will drive up costs
Posted: Wednesday, December 12, 2012 7:00 pm
In just a few weeks, a new “sustainable” energy mandate established by the Environmental Protection Administration will kick-in. It revolves around biodiesel – a diesel fuel derived from animal and plant products.
This new mandate may be well meaning. But it will dramatically drive up the price of everyday consumer products for millions of Americans.
The EPA has decreed that American energy producers have to generate 1.28 billion gallons of biodiesel in 2013. That’s a 28 percent increase – 280 million gallons – over last year’s biodiesel mandate.
A large slice of the American biodiesel supply is derived from soybean oil. The basic laws of economics dictate that if energy producers dramatically increase the demand for soybean, the price of the product will go up. That, in turn, drives up the price of other products that rely on soybean oil, including popular foods like salad dressing and french fries.
About 18 percent of biodiesel is derived from animal fat and grease. And those same ingredients also go toward the production of a wide range of personal hygiene and cleaning products, including soaps, detergents, shaving cream, cosmetics, hair conditioner, and much more.
The laws of economics don’t budge. This new biodiesel mandate will make those products more expensive.
Indeed, the American Cleaning Institute trade association filed official comments in response to the EPA’s biodiesel mandate complaining it could distort product prices.
And the EPA itself has acknowledged that “increases in the use of animal fats to produce biofuel could increase the price of those animal fats and/or reduce their availability for the production of oleochemicals (chemicals derived from animal fats used in consumer products).”
Historically, fats and grease trade at lower prices than vegetable oils on the global market. However, in response to this new biodiesel mandate, animal fat prices recently exceeded the price of some vegetable oils, including Malaysian palm oil – tellingly, the only vegetable oil not approved for use in biodiesel
That’s instructive. Heavy handed biodiesel mandates will make countless consumer products more expensive.
This forced uptick in demand for animal fats couldn’t come at a worse time. Already, the biodiesel and ethanol mandate has pushed up the price of feed to the point where farmers have decreased their livestock supplies.
Hog and pig numbers are still below their 2007 levels. Chicken inventory is at its lowest level since 2002. And the American cattle herd is the smallest in over 60 years.
Reduced livestock supplies mean a smaller livestock slaughter in 2013. That, in turn, means a smaller supply of fats and grease. When the biodiesel mandate kicks in, demand for these animal products will jump dramatically, leading to higher prices for the fats themselves and fat-dependent personal products.
These indirect effects on price are completely predictable. About 40 percent of the U.S. corn crop now goes into ethanol production, thanks to government ethanol mandates. This requirement has lead to a huge uptick in demand for corn, which in turn has driven up the price of corn-dependent foods, including meat, eggs, dairy and sweetener.
This new federal biodiesel mandate is severely misguided. Once it kicks-in in 2013, a huge slice fat and grease supplies will be redirected to biodiesel production, driving up the price of these ingredients and making hygiene and cleaning products used by average Americans significantly more expensive.
Who would have guessed that clean energy policy could wind up leaving us all feeling a little dirty?
Dave Juday is an agricultural commodity market analyst and principal of the Juday Group.
Published in The WCP 12.11.12