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Implications of the Minnesota Biodiesel Increase

May 7, 2009

Beginning May 1, 2009 the Minnesota Legislature increased biodiesel mix to 5% for all diesel fuel.  Previously, diesel contained only 2% biodiesel.  This increase represents the second of four state mandates with the last one coming in 2015 at a 20% biodiesel mix statewide.  The mandated increase could not come at a better time for the biodiesel industry, which has been idling. With the statewide increase, the biodiesel market should improve, but by how much?

Initially, with the first mix increase in 2005, the biodiesel market did well as the price of diesel stayed high and the cost to produce—mainly the price of soybeans—stayed low.  After 2006, the two markets reversed, causing a major slow down.  Many Minnesota companies went under, which reflected the national trend at the time.  Approximately two thirds of national biodiesel companies closed as a result of the market flux.  Currently, the producers that remained open have started to see profits return, but unfortunately, the companies that shut down operations do not know if the increase will give a large enough stimulus to reopen their doors. 

The overall outcome remains unclear for biodiesel.  Since the first mandated increase, questions have lingered regarding biodiesel reliability.  One big issue that existed from the beginning pertains to cold weather performance.  In the recent winter months, biodiesel buses did not perform well—when temperatures dipped into the subzero category the buses would not start.  Further investigation suggested factors other than fuel contributed to the starting issues, but concern still remains.  On top of this, the cost to convert soybean products into biodiesel continues to be high, and some producers want to look at other viable options, like corn and canola products, or a combination of several. 

The biodiesel industry will definitely see a rise in demand thanks to the state mandate increase from 2% to 5% this month, and the market also has future increases to look forward to. However, unless key issues are resolved, the outlook potential outlook for biodiesel is itself quite mixed.

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