Two feasibility studies said, “Don't do it.” But South Dakota's first certified biodiesel plant stands as a testament to eight farmers' savvy and determination.

Four years ago, Alexandria, SD, farmer Paul Iburg perfected biodiesel chemistry in his home blender and then in an old milk tank. Hoping to add value to local oilseed crops, he took a course on biodiesel production and economic planning from Iowa State University (see sidebar on page 18h). But when two separate agribusiness consultants assessed the feasibility of building a biodiesel plant, they each gave it a thumbs down.

Eventually, the South Dakotans' small enterprise grew into Midwest Biodiesel Producers (MBP). But right out of the chute, the new company decided to scale back its intentions by two-thirds, and eliminated its proposed crushing facility.

Both of the original consultants are now board members in the re-scaled biodiesel plant that they initially deemed infeasible. Since then, higher diesel prices and a 2005 $1/gal. federal biodiesel subsidy have secured MBP's financial footing.

Beresford, SD, farmer and MBP investor Paul Shubeck says, “We call it the plant from eBay. Instead of a grandiose 20-million gallon plant, we built a 7-million gallon plant with used dairy tanks, heat exchangers, nitrogen purifier and boiler. But our junk works,” he says. “Despite our old tanks, we're a continuous flow, not a batch plant.”

The eight farmers that built this plant themselves are a brain trust. Members of the group have a degree in electrical engineering and experience in process industries, a master's degree in business administration, an agronomy degree, state governance experience, military leadership posts, diesel mechanic training and ethanol plant ownership. One (non-farmer) owner is a veteran Continental Grain global soybean plant crushing manager/grain trader.

MBP buys instead of crushes its soybean oil feedstock. The crushing business doubles plants' up-front costs, says Jon Van Gerpen, department head of the University of Idaho Biological and Agricultural Engineering. He's also researched biodiesel and taught production courses for 14 years. Van Gerpen and five engineering colleagues teach a semi-annual course, the Biodiesel Technology Workshop (see sidebar on page 18h), which was Iburg's inspiration for MBP.

“Crushing margins can be thin,” Van Gerpen says. “However, farmers should know that rapid growth in building these plants will increase the demand for oil, and oilseed growers stand to benefit.”

Nationally, the number of biodiesel plants is projected to grow by 53% next year, with 65 plants under construction and another 13 existing plants planning expansions.

Scaling back the size of MBP was not the death knell that it might have been to a small ethanol plant. “Economies of scale are not as dramatic as they would be in ethanol production,” says Van Gerpen. “The process is simpler and not nearly as capital-intensive.”

But any economics of scale from a larger biodiesel plant are quickly offset by the transportation costs of a large trade area, Shubeck adds.

“Smaller plants work if you scatter them about 50 miles apart to reduce trucking costs,” he says. “There are very few economies of scale in this business unless you can corner the (soybean) oil market. There aren't volume discounts in inputs like methanol and sodium metholate.”

The idea to build a local biodiesel plant hatched as Iburg read in the previous Farm Bill that the government would subsidize a domestic biodiesel industry. The Alexandria, SD, corn and soybean farmer explains the evolution of the MBP plant: “Nothing just fell into place quickly; it grew from the frustration of experts telling us that it wouldn't work, to asking a lot of questions and doing what will keep us alive out here. It's taken four years of blood, sweat and beers,” he says.

The goal was to add value to local crops, says Dennis Hardy, a farmer-investor who grows corn and soybeans near Beresford, SD.

“But the idea was risky enough that we hesitated to have a public offering to build a plant that we were told wouldn't work. We came up with a 10-member board of investors and used grants to raise the money,” he says.

These eight southeastern South Dakota farmers hope MBP will anchor people and jobs in this town of 630. “Our Main Street has lost everything but the bank and the bar,” Iburg says.

The plant occupies a former grain elevator's storage building. So far, it employs 10 employees (five are full time) in two daily nine-hour shifts, five days a week. It produces one truckload a day, or about 7,000 gal. of biodiesel.

Looking ahead, they hope to eventually add oilseed crushing to the process in order to secure MBP's source of oil as markets tighten. “Right now, oil is the surplus dog of the market,” Hardy says.

That will change in a few years if Paul Shubeck is correct, however. “If you consider the number of biodiesel plants on the board, the writing is on the wall that plants will fight for oil,” he says. Even MBP's oil supplier is building its own biodiesel plant.

Another thing that may change as more biodiesel plants pop up is biodiesel marketing. Presently, MBP hasn't had trouble marketing its biodiesel to local jobbers. “We get even more calls when diesel prices rise,” says plant CFO John Bumgardner. “Our biggest customer is Bio-Energy in Mt. Vernon, SD.”

Soybean oil costs MBP up to 32¢/lb., or $2.25/gal. Other ingredients and plant costs add another 75¢/gal., for a total of about $3/gal. to produce its biodiesel. Making 1 gal. of biodiesel requires 7.5 lbs. of oil to yield 7.3 lbs. of biodiesel (1 gal.). The plant receives a $1/gal. federal excise tax credit that is available for biodiesel blending plants who use virgin oils to make biodiesel blends.

“Biodiesel is easy to make, but the devil is in the details, and in how to separate the biodiesel back out and recover the methanol,” says Steve Iburg, plant manager. “We are somewhat of an R&D facility; we continue to refine concepts. Anyone can find the recipe on the Internet, but meeting ASTM standards for each batch takes some practice.”

This practice in biodiesel manufacturing is now another profit center for MBP. Its process refinements have become marketable intellectual property as MBP consults on the design and operation of other biodiesel plants.

Biodiesel Capacity Is Booming

Considering that Rudolf Diesel's original engine burned vegetable oil, biodiesel's growth has been slow.

Biodiesel is made from vegetable oil, used cooking oils or animal fat. It can be used in a blend with diesel fuel year-round, in blends of 20% (B20) or lower. Its cleaner emissions, higher cetane level and higher flash point make it an attractive alternative to straight diesel fuel. Higher blends than B20 are not recommended in cold climates during cold weather, when biodiesel thickens sooner than does diesel fuel.

Perhaps the most important boost to biodiesel's marketing will come from regulations reducing fuel sulfur levels. In fact, Chevron recently invested 22% in the Galveston Bay Biodiesel LP, with a 100-million gallon/year capacity.

There are currently 86 American biodiesel plants with the capacity to produce 580.5 million gallons annually. Another 65 companies are building new plants, and another 13 plants are expanding their existing operations, amounting to another 1.4 billion new gallons per year of biodiesel production. The average mid-sized plant is about 30 million gallons per year, according to the National Biodiesel Board (www.biodieselboard.org.)

Biodiesel blends containing 20% biodiesel (B20) are approved by groups such as the U.S. military, the American Trucking Association, Arctic Cat ATVs, more than 600 major truck fleets and Dodge Ram pickups. All major OEMs support use of B5 and lower blends in their equipment. Biodiesel must meet ASTM standard D 6751.

Should You Build A Biodiesel Plant?

Here are resources to help you assess the feasibility of building a local biodiesel plant:

  • Biodiesel Technology Workshops. Taught at Iowa State University and the University of Idaho, the semi-annual five-day course covers business planning and management for biodiesel producers, analytical methods and production technology. Since 2003, about 400 people have taken the course, many of them farmers. See www.Me.iastate.edu/biodiesel for details.

    The course content has been made into a book available at www.biodieselbasics.com. Course instructor Jon Van Gerpen encourages farmers to take the class since “the value of the course is the interaction and the labs.”

  • CooperationWorks, a network of cooperative development centers, assists producer groups in project development, feasibility studies, securing grant funding and addressing governance issues. Information is available at www.cooperationworks.coop. This site has links to regional centers in the Midwest, as does www.ncba.coop/serv_cbd_cw_mem.cfm.