In February, the IRS issued long-awaited proposed regulations on the 45Z clean fuel production credit. This marks the end of the bottleneck in moving 45Z deals along. After a 60-day comment period, we’ll know exactly which practices will lead to eligibility and which record-keeping system will be used.
For manufacturers and carbon developers, this means that now is the time to start planning 2027 purchasing programs. The goal: inspire growers to adopt the practices and products that will lower their Carbon Intensity (CI) score and thus make them eligible for higher crop prices from ethanol plants and grain traders.
The method: make adoption less risky for growers.
But the challenge is significant: given their current financial straits, most growers are reluctant to introduce any new sources of uncertainty to their harvests. The crop inputs and practices that reduce CI scores (like biologicals, cover cropping, and no-till) will, in many cases, be new and therefore perceived as riskier. What’s more, some inputs may cost more upfront than what farmers are used to.
All to say: growers will need incentives to adopt the inputs and practices that make their crops eligible for 45Z payouts. Here’s an approach manufacturers and carbon developers can take that focuses on minimizing risk for growers.
Part 1: Outcome Guarantees Tied to Product Bundles
For manufacturers of products that help lower CI, the opportunity 45Z presents is a big one. Growers now have a concrete financial incentive to use your crop inputs.
The problem is that that incentive comes after harvest and only if a grower’s crops and cultivation techniques meet the standards laid out by the program. Asking farmers to invest more than usual in inputs – even for a larger-than-normal payday this fall – is a nonstarter right now.
It’s just too risky for most growers to adopt new products and practices at a time when they’re already dealing with fast-shifting trade policy, high interest rates, high input costs, and low commodity prices.
To drive adoption, then, manufacturers need to find ways to reduce growers’ risk. Outcome guarantees are one such tool.
Here’s how an outcome guarantee can drive adoption of products that lead to 45Z payouts:
- Create a bundle of multiple crop inputs, including those that will reduce nitrogen use or otherwise reduce CI.
- Attach an outcome guarantee to the product bundle. In other words, guarantee performance such that, if a grower uses the inputs as instructed and doesn’t meet expected production thresholds, they qualify for a cash payout.
- Partner with carbon developers, retailers, agronomists, and others to educate growers about 45Z, how your products will make their crops eligible, and how the outcome guarantee protects them.
To be clear, we’re not suggesting that you build an outcome guarantee from scratch. That’s what we do. We can tailor it to your products, your customers, and your data. Basically, if fear of the unknown is stopping potential customers from using your products, an outcome guarantee can help.
Part 2: Assurance Program–Backed Product + Platform Adoption
Another common goal among the manufacturers we work with is to drive adoption of their digital platforms. Farmers may be hesitant to adopt for any number of reasons – they don’t want the hassle of one more thing to track, they want to keep their data close to their chest, or they’re skeptical about the value a digital platform might add.
But in the world of 45Z, digital platforms make it possible to deliver precise product recommendations that hit CI targets while also maximizing yield.
If this is your situation, it might make sense to attach an outcome guarantee to a bundle that includes both an unfamiliar product (either to reduce CI or maximize yield) and your platform.
Growers that follow the platform’s guidance on applying the product or products in question can then qualify for a cash payout if their yields fall short of expectations.
Again, you can tailor the specifics of the assurance program to your situation. Here’s what we’ve found most successful:
- If uncertainty about farm economics is the main adoption barrier, an outcome-based assurance program may work (e.g., tying the payment to achieving a certain carbon intensity score).
- If growers are more concerned about yield loss, an APH assurance program tends to work well.
- If growers are skeptical about yield gains promised by a new product, a side-by-side assurance program (where some acres are planted with the familiar product and some with the new product) usually fits the bill.
If your growers have a different primary concern, let us know. There’s a good chance we can build you a custom solution.
Part 3: Buydown of Input Financing Interest Rates
Here’s the reality: in the current economic environment, many growers may struggle to justify new crop inputs even with an outcome guarantee attached.
When that’s the case, both manufacturers and carbon developers can step in to further facilitate the purchase of crop inputs. One financial tool that’s gaining in popularity is a buydown of input financing interest rates.
As more and more growers turn to retailer-backed financing to purchase crop inputs, manufacturers and carbon developers have an opportunity to make their products and platforms even more attractive. In addition to attaching outcome guarantees, they can buy down interest rates on financing plans to give growers an additional financial incentive to purchase those products.
For example: A $50,000 loan with a six percent interest rate will cost a grower $3,000 in interest when the loan comes due. If a manufacturer or carbon developer buys down the interest rate by 40 percent, the grower owes just $1,800 in interest at loan payment time.
This is a significant savings and can provide enough incentive for a grower to try something new, especially when an outcome guarantee is attached.
Now Is the Time to Plan for 45Z-Ready Crops
We expect to have final guidelines for the 45Z tax credit by late spring, which means the big opportunity for manufacturers and carbon developers is for the 2027 growing season. Growers understand that 45Z opportunity exists, but many consider the risks of adopting new products and practices too great.
The right financial products can reduce that risk and convince growers to embrace products and practices that reduce their CI score and thus make them eligible for 45Z payouts. Manufacturers and carbon developers are uniquely positioned to offer those products – and now is the time to start considering and shaping the associated programs.
If you’re ready to talk about what an assurance program or an interest rate buydown might look like for you, let’s talk!