California’s Low Carbon Fuel Standard and federal biofuel policies, in particular the Section 45Z clean fuel production tax credit, are reshaping the landscape for grain growers across the United States. While new opportunities emerge, farmers are grappling with rising production costs and regulatory hurdles that could impact their bottom line.
On this week’s Ag Marketing IQ In Depth, Terrain analysts Bree Baatz and Matt Woolf explore those opportunities and implications and urge farmers to lean into the regulatory process. Though national attention recently focused on E15, an alternative fuel that helps create corn demand, the conversation in this episode focuses on diesel, and how those clean energy products impact demand for that crop.
The LCFS, an emissions trading scheme introduced in California in 2011 and recently updated, is designed to reduce the carbon intensity of fuels.
“Dirty fuels generate deficits, while clean fuels generate credits,” Woolf explains. “Recent updates to the LCFS are making it stricter, with lower carbon intensity scores, a new emissions model, and caps on crop-based renewable diesel credits.”
For Midwest grain growers, the LCFS creates demand for renewable diesel, which is chemically identical to petroleum diesel and can replace it one-for-one. But that demand is tempered by a preference for used cooking oil, which has a lower carbon intensity score. For that reason, Baatz notes that soy oil is among the products California’s caps for utilization in renewable diesel production, and their lowering that to 20% by 2027. That move could have significant implications.
“California was the driving force behind the soybean crush boom, but now they’re seeking to limit it,” Baatz says. “Farmers need to pay attention to how federal and state policies evolve.”
“So, there'll be a transitionary period here before we feel the full effect. But it's really going to come down to what federal policy and state policy look like over time,” Baatz says.
On that note, the federal government put its finger on the domestic crop demand side of this scale with the federal 45Z credit.
“The federal 45Z tax credit, applicable from 2026 to 2029, prioritizes soybean oil as the preferred feedstock for renewable diesel,” Baatz says. “This is a major win for farmers, as it removes penalties tied to indirect land use and limits the tax credit to North American feedstocks.”
One regulatory obstacle in 45Z for farmers looking at the economics of the legislation is which segment of the industry receives the credit.
“The 45Z tax credit goes to biofuel producers, not farmers. We need discussions across the supply chain to ensure farmers are compensated for producing low-carbon grain,” Baatz says.
Another concern for farmers in relation to the LCFS is the cost implications for California farmers, especially in the specialty crop segment. “Fuel prices in California are already high, averaging $5.42 per gallon compared to $3.27 in Nebraska,” Woolf says. “LCFS could add up to $1.50 per gallon by 2035, especially for diesel, which impacts farming supply chains.”
Baatz urges farmers to be proactive across the energy spectrum, with fuel producers and with federal representatives and agencies.
“Farmers should negotiate with fuel producers and advocate for fair policies,” Baatz says. “With new demand expected from the EPA’s renewable volume obligations, there’s hope for better prices, but farmers must stay proactive.”
For more details on these fuel policies and the opportunities and challenges clean energy presents for farmers and ranchers, watch this week’s episode of Ag Marketing IQ In Depth.
For a technical analysis of 45Z and California’s LCFS, read the reports provided by Terrain, an agriculture economic research and market insight service provided by American AgCredit:
- California’s Shifting Fuel Rules Pose Hurdle for Grain Producers, an update on recent changes to the LCFS.
- Renewable Diesel: The Soybean Crush Engine, an analysis of federal and state policies that influence the renewable diesel market and the potential impact on soybean oil and soybean prices.