For the past couple of years, the buzz around the 45Z tax credit has been little more than background noise at coffee shops and farmer meetings. But the “wait and see” period is over, according to University of Illinois Ag Economist Scott Irwin. As the policy takes root, it is fundamentally changing the ledgers of the ethanol plants you deliver to—and, by extension, could improve the profit potential for your farm.
According to Irwin, agriculture is in the process of entering a “mini ethanol boom.” After a decade of stagnant capacity, the industry is suddenly in growth mode.
“Three different ethanol plants have already announced expansions, and there will be more, all due to the 45Z tax credit,” Irwin reports.
The Section 45Z Clean Fuel Production Credit, often called the “Clean Fuel Credit,” is a federal tax incentive that rewards the production of low-carbon biofuels.
Doubling the Bottom Line
To understand why your local ethanol plant might suddenly be eyeing an expansion, you have to look at their margins. Since 2007,
Irwin has tracked the profitability of the typical Midwest dry-mill plant, finding that most have a profit of about 12 cents per gallon.
That profit margin goes up a lot with the adoption of 45Z. Irwin estimates that even a “plain vanilla” plant—one that hasn’t invested a dime in carbon capture—will qualify for roughly 11 cents per gallon in credits.
“Their margin has been 12 cents, and all of a sudden the U.S. government is helicoptering in an additional 10–11 cents, essentially doubling their income,” Irwin says.
For the plants playing the long game with carbon capture and storage (CCS), the profit potential moves from good to an astounding number.
“A 200-million-gallon dry mill ethanol plant that can inject its CO₂… I estimate that they’ll probably get a credit of 60 cents a gallon,” Irwin says. “That means a 200-million-gallon plant will earn $120 million of credits a year over the four years that this is on the books for. It’s almost half a billion dollars.”
With that kind of profit potential, plants won’t just be staying open; they’ll be hungry for grain. “I think we are going to see every plant running flat out with those kind of dollars in front of them,” Irwin notes.
How the Dollars Can Reach Your Farm
While the 45Z credit will be paid directly to the processors, the ripple effect will find its way into your bank account through two primary channels: local basis and premiums.
1. A Stronger Local Basis: As plants “run flat out” to maximize their credits, their demand for physical bushels will tighten the local market.
“For those farmers that are in the ‘draw territory’ for ethanol plants, they’ll probably see a bit stronger local basis, five cents or so,” Irwin anticipates.
2. The Low-CI Premium: The bigger opportunity, however, lies in helping reduce a plant’s Carbon Intensity (CI) score. By using climate-smart practices like no-till, strip-till, or in-season nitrogen use to grow crops, you can help lower the plant’s overall CI score—which makes their 45Z credit even more valuable.
“For each point that the ethanol plant’s carbon intensity score is reduced, the plant will earn about two cents per gallon of ethanol produced,” Irwin says. “I’ve heard that it might be up to 10 points, which would be 20 cents. That’s significant.”
Forward-thinking plants are already evaluating ways to partner with farmers — and share their windfall — who will make a lower CI score possible.
“I have talked to ethanol plants that have really thought this through and are ready to work with their farmer customers on a sharing agreement for the farmers’ role in reducing the ethanol plant’s CI,” Irwin says.
He advises farmers interested in working with their local ethanol plant to reach out to them and start a conversation. Three things to discuss:
- Ask if they plan to claim 45Z credits and what their timeline looks like.
- Find out if they are building a formal low-CI or climate-smart sourcing program.
- Ask which practices (no-till, split N, etc.) and what documentation the plant will require.
