Federal and state governments are seeking to apply home-grown solutions to address the problem of the U.S.'s energy dependence. One of these proposed answers is biodiesel, a fuel derived from vegetable oils or fats. Biodiesel does hold promise, but the government incentives may already be creating a totally different problem. A recent announcement suggests that biodiesel supply could quickly outpace demand, and that could spell trouble for Archer Daniels Midland (NYSE:ADM).
The latest entrant in biodiesel production is French company Louis Dreyfus Corp. The firm is set to begin construction soon on the nation's largest biodiesel plant. When completed, the facility will have the capacity to produce 80 million gallons of biodiesel annually. It's a major investment considering that the National Biodiesel Board estimates that a total of just 75 million gallons of biodiesel were produced in the U.S. last year.
Louis Dreyfus' production capacity should come on line around the same time that Archer Daniels Midland's first fully owned U.S. biodiesel plant begins operations next year. ADM's facility will be able to produce 50 million gallons per year. That means that by 2007, Archer Daniels Midland and Louis Dreyfus together will be able to make 73% more biodiesel than was produced in all of 2005.
Admittedly, biodiesel has taken off recently. If the National Biodiesel Board's estimates are correct, production tripled in 2005 from 2004. Still, there seems to be more of a limit to demand for biodiesel than say, ethanol. While some amount of ethanol can be used in millions of gasoline-chugging vehicles already on the road in the U.S., biodiesel works in diesel engines only. Yes, the trucking industry is a big diesel user, but the passenger market is pretty minuscule. Despite new U.S. diesels from DaimlerChrysler (NYSE:DCX) and Volkswagen, just 3% of the vehicles sold in the U.S. last year used the fuel.
Greater energy independence is a laudable pursuit. But in light of this latest announcement, ADM should seriously consider whether biodiesel is worth the investment.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
