When Congress returns today (April 12) from its Easter recess, the biodiesel industry will have survived 101 days without a $1 a gallon tax credit that has been its lifeblood. Some people argue the industry cannot last long without the credit.

“They cannot exist but for the subsidy,” said David Swenson, an economist at Iowa State University. “The cost of production relative to the bid price for biodiesel as a fuel is a gap that cannot be closed without that subsidy.”

An immediate measure of the importance of the credit to the industry is the idling of plants in Newton and Ralston that are owned and operated by Ames-based Renewable Energy Group Inc. (REG).

The company has biodiesel filling tanks at the plants, but is finding no buyers, said REG spokeswoman Alicia Clancy. As a result, 22 workers have been laid off, and more layoffs could follow.

REG became the nation’s largest producer of biodiesel last month after it completed the acquisitions of the Newton plant and a refinery in Danville, Ill.

In a letter to Rep. Sander Levin, chair of the U.S. House of Representatives committee that will take up legislation to extend the tax credit, REG Chairman and CEO Jeff Storburg said additional jobs are at risk at the company’s factories in Danville and Houston.

“This dire situation is occurring not only in Iowa, but all over the country,” Storburg said in the letter.

When REG acquired the Newton and Danville plants, the Newton plant was in default on loans and struggling to stay in business, a former investor said. Documents filed with the U.S. Securities and Exchange Commission for its approval of the transaction showed that REG carried a high debt load into the deal as well.

Tightening credit markets have made it difficult for biodiesel manufacturers to refinance debt and expand research efforts, but debt is not causing the current round of concern in the industry, said Clancy.

She laid the blame squarely on the expiration of the tax credit, also called the blenders’ credit, which has been in place since 2004 and allows producers of biodiesel to offset costs of production. That essentially reduces the price of biodiesel that is blended with conventional diesel fuel before it enters the retail market.

Those costs have been volatile over the last two years, following swings in the price of soybeans and the soybean oil that is the principal feedstock for biodiesel.

Companies such as REG cannot operate at a profit without the credit, according to a study released in December 2009 by research and consulting firm LECG LLC.

“Elimination of the tax credit will essentially erase all profitability in the biodiesel industry leading to a complete decline in output, expenditures and jobs,” wrote LECG director John Urbanchuk.

Citing research conducted at Iowa State University, Urbanchuk noted that the industry would have lost money on every gallon of biodiesel it produced from April 2007 to August 2009, ranging from a low of slightly more than 20 cents a gallon to a high of nearly $1.20.

“Without the tax credit, the price of biodiesel would be insufficient to provide a positive return over variable costs and the biodiesel industry could be expected to collapse,” he said.

The tax credit expired Dec. 31, 2009. An extension had been approved earlier that month by the House of Representatives. On March 10, the U.S. Senate also approved its extension. However, Congress went into recess without reconciling the two bills, including taking the crucial step of determining how to offset the credit’s effect on the federal budget.

Revenue saving or creating offsets planned by the Senate for the bill that extended the blenders’ credit also were included in legislation enabling controversial health-care reform legislation. Once that bill was signed into law by President Barack Obama, those offsets were no longer available for use in the bill extending the tax credit.

Swenson said elected officials might be rethinking whether the credits should be extended. He is not a fan of the credits or other subsidies of industries that need taxpayer support to survive.

“The intersection of politics and renewable energy enthusiasm oftentimes leads to unsustainable policy,” Swenson said.

He noted that biodiesel is a victim of volatile markets and that soybeans have proved far more useful as food and feed than as the raw material for fuel.

“I just don’t have a good feeling for that industry’s viability,” he said. “Mother Nature taught us something … food trumps fuel.”

Swenson also noted that the industry tended to overbuild its production capacity.

The LECG study found that that biodiesel production for the 10 months ended in October 2009 totaled 409 million gallons, nearly 30 percent below the same period in 2008.

In addition, biodiesel sales last year were estimated at 475 million gallons, 31 percent below the 691 million gallons sold in 2008.

Production capacity last year was 2.7 billion gallons, yet utilization was at about 15 percent, according to figures from the National Biodiesel Board that were cited in the LECG report.

The quest for added capacity was no fluke, REG spokeswoman Clancy said.

She noted that the under the federal Renewable Fuel Standard, biodiesel is required to make up 1.15 billion gallons of fuel on the market.

“This is one of the reasons REG has become large,” Clancy said.

Clancy also bristled at the notion that the industry was taking advantage of taxpayers, noting that federal policy mandates that the country reduce its reliance on foreign oil, create more jobs in so-called green industries and also support agricultural markets.

“I don’t think there is anyone in the state of Iowa who would disagree with that,” she said.