Try it. It's really really slow.
Yes, you can craft infinite pellets, but there are already ways to get unlimited bio resources from just water. The Seablock modpack is built around this idea (plus "make everything 100x harder"). Wood pellets can be produced from Green Algae, which requires CO2 and mineral water. You can make CO2 from wood pellets; you need less than half the output to be self-sustaining. You can get mineral water from normal water by electrolyzing for slag, crushing the slag, and combining with more water.
