The July 4 passage of the “Big Beautiful Bill” included Section 45Z, a tax credit for sustainable fuel producers. The news has the agricultural ecosystem buzzing. It makes available more than $100 billion in tax credits in the next four years, and virtually everyone in the industry can benefit.
Here’s a quick overview of how the tax credit works and how various groups (including ag retailers, manufacturers, food companies, and others) can derive the most benefit—while also supporting farmers.
How 45Z Works
Until last week, there was uncertainty around whether 45Z would be carried over from 2024. The updated guidance is a strong signal that 45Z is here to stay and stronger than ever.
The longer horizon and elimination of the ILUC penalty means stronger premiums for US corn, soy, and oilseed growers, plus clearer demand signals for ethanol plants and feedstock buyers.
You can read the full text of Section 45Z here. Briefly, the tax credit works like this:
- Low-carbon fuel producers (ethanol, renewable diesel, and sustainable aviation fuel plants) can get a per-gallon tax credit.
- The credit is tied to the carbon intensity (CI) of the feedstocks used to make the fuel.
- The lower the CI score, the larger the credit.
- Farmers can lower a crop’s CI score by using certain on-farm practices that decrease a crop’s carbon footprint, including cover crops, reduced nitrogen applications, and no-till.
- Fuel producers pay a premium for crops with low CI scores so they can maximize their 45Z payout.
In other words: farmers who achieve a carbon intensity (CI) below 50 on feedstock crops can sell those crops at a premium to fuel producers, who can then get a tax credit for producing biofuels.
As we wait for final 45Z rules from USDA and IRS, the biggest hurdle we face is helping farmers adopt practices that lower their crops’ carbon intensity (CI) with CI payments still a few months away.
It’s a significant hurdle: with exact incentive payment amounts still pending and dependent on the methodologies chosen, farmers have to take on all the upfront risk of adopting new, lower-carbon products and practices.
The key, then, is to find ways to share with farmers the upfront risk of trying new things so everyone in the ecosystem can enjoy the downstream benefits of lowering CI. Crop Plan Warranty is a tool that can do exactly that. Let’s look at how various groups can use it to take advantage of what 45Z is offering.
Ag Retailers
Farmers looking to cash in on 45Z will need the support of ag retailers with low-carbon services, products, and expertise. This includes trusted agronomists with expertise in conservation agronomy services including cover cropping and products that can increase yield, such as biologicals.
To make sure your ag retail business is set up to help farmers lower their CI scores and maximize 45Z payments, consider hiring additional conservation agronomists.
USDA and IRS are deciding between two open-source MRV models. Either can easily be plugged into ag retail offerings with the right expertise. To prepare, consider hiring or training a current team member skilled in data management to offer data and tracking services for 45Z practices.
To ensure that farmers don’t have to take on all the risk of new practice adoption alone, consider building a Crop Plan Warranty for a full-acre prescription designed to lower CI scores without low yield risk.
This could look like a combo offer of conservation cover crop planting service, cover crop seed purchase, biological product purchases, and CI data tracking service, all backed by a yield warranty. This leads to several wins:
- It removes the guesswork for farmers who want to see the benefits of 45Z.
- It increases wallet share for retailers (you can structure a Crop Plan Warranty to take effect only when a farmer purchases all inputs from you).
- It lowers the upfront risk on farmers: should their yields fall short of predictions, they collect a cash payout to compensate them for the loss.
Get more details about how Crop Plan Warranties can help retailers drive revenue.
Manufacturers of Biologicals and Other Carbon-Lowering Inputs
With such large CI payments on the horizon, farmers will be looking for the best ways to reduce their carbon intensity. Expect increased demand for biologicals that boost yield and can reduce the need for nitrogen.
Three recommendations for manufacturers:
- Directly reference 45Z in marketing materials. This connects your product to the new income stream, which can boost sales.
- Tie in Growers Edge’s input financing. It’s easy, flexible, and turnkey.
- Tie in a Crop Plan Warranty to your product. Since there are so many biologicals on the market with such mixed results, putting skin in the game with a yield warranty is a key way to make your product stand out and build trust with farmer audiences. An APH warranty pays out when the current yield is less than previous years. Side-by-side warranties payout when treated strips have lower yield than untreated strips.
Food Companies / CPGs
The passage of 45Z is something of a mixed bag for CPGs. On the one hand, increased adoption of sustainable farming practices is good for long term supply chain resilience. Expanded technical-assistance programs, specialized equipment, and on-farm monitoring will hopefully boost and sustain low-carbon practices beyond 2029.
On the other, if IRS and USDA decide to use book-and-claim tracking, low-CI grain prices could be bid up in the short and medium term. This would force food buyers (and other non-feedstock buyers) to reassess their sustainability premiums to make sure they can still meet sourcing goals while staying within budgets.
In this moment of excitement around 45Z, it’s important for food companies to think about how they can…
- Leverage the momentum of 45Z to help enroll farmers in their own sustainability sourcing programs
- Structure programs that can offer farmers comparable or improved benefits in comparison to 45Z’s high tax credit.
Many CPGs are already using Growers Edge warranties to share risk with farmers and encourage sustainable practices. If your organization is considering such an offering, 45Z is simply one more factor to weigh as you structure the terms. Offering a crop plan warranty can make your program stand out.
Help Farmers Get Started So Everyone Can Reap the Reward of 45Z
We’re in a moment of great opportunity, and there’s urgency around taking action now. Tax credits are still eligible for 2024 grain so the key right now is helping farmers make sure their data is cleaned up and ready to go, and that they’re ready to maximize lower CI actions ASAP for their current and future crops.
If you’ve got any questions about how you can take advantage of 45Z, we’d love to help you work it out. Feel free to get in touch via our contact form or by reaching out to Elena Bell directly at elena.bell@growersedge.com.