Issue Update: Soybeans & Proposed Tax Credits

Editor’s note: There’s been a lot of buzz regarding tax credits associated with biofuels, but what does it mean for farmers? We’ve asked Iowa Soybean Association (ISA) Chief Officer of Demand and Advocacy Matt Herman for the latest.

What are the current tax credits in place for fuel made from soybeans?

There are two tax credits that soybean oil-based biofuel producers are eligible for. The long-standing blenders tax credit provides $1 per gallon of biodiesel, renewable diesel and sustainable aviation fuel (SAF) that was blended into the U.S. fuel pool, even if the fuel is imported. In August 2022, the Inflation Reduction Act (IRA) extended the blenders tax credit through the end of 2024. The IRA created two additional biofuel tax credits; the Sustainable Aviation Fuel Tax Credit (40B) which will expire at the end of 2024, and the Clean Fuels Production Tax Credit (45Z) starting in 2025.

Farmers may have heard about 45Z, but what is it?

The 45Z tax credit changed the blenders tax credit approach in three important ways. First, the biofuel must now be produced within the United States to qualify for the tax credit. Second, the tax credit now applies to a wide number of fuels, including biodiesel, ethanol, sustainable aviation fuel and many more. Third, rather than the tax credit being a fixed value of $1 per gallon, the value of the tax credit is dependent up on the life cycle carbon footprint of the gallon of biofuel. This last change is significant as it means the farmer can now be compensated for the adoption of certain conservation practices which lower the carbon footprint of the grain used in biofuel production.

How does the carbon footprint affect the tax credit value?

Both the 40B and the 45Z adjust the credit to reflect the life cycle greenhouse gas (GHG) reductions of the biofuel. In short, fuels with greater GHG reductions generate a larger tax credit. The 40B guidance released earlier this summer credited a limited number of conservation practices for corn and soybean farmers. If a farmer were to implement cover crops, no till, and a nitrogen stabilizer, a 10-point reduction would be applied to the resulting corn-based sustainable aviation fuel. For soybeans, adoption of cover crops and no-till resulted in a five-point reduction. This is estimated to be worth 35 cents and 17.5 cents per gallon, respectively.

How has industry responded?

Industry and the Iowa Soybean Association have responded with caution. While the idea of driving greater value to farmers is alluring, practical implementation will be key. In July, the industry delivered a clear message to the U.S. Department of the Treasury: the limited practices, contracting requirements and bundling approach discussed in 40B are impractical and should not be carried over to the 45Z tax credit, which starts Jan. 1, 2025. The soybean industry asked Treasury and USDA to allow for a much wider set of practices, more flexibility in grain delivery, easier contracting with farmers, and sensible verification procedures. The industry expects final guidance from the Treasury following the election.

How does the 45Z tax credit relate to foreign feedstock importations?

In anticipation of the 45Z tax credit and its carbon footprint-based approach, there have been record imports of used cooking oil (UCO) and tallow driven by increased domestic production of renewable diesel. Those feedstocks have lower carbon intensity scores than domestically grown soybeans, giving them an advantage in the market. The combination of carbon intensity-based production and consumption policies across the globe have collectively heightened demand for low carbon feedstocks, displacing soybean oil’s once-dominate position in the U.S. feedstock market.

What financial impact does the importation of used cooking oil/ foreign feedstocks have on soybean prices?

This surge in supply of imported fats and oil has put downward pressure on soybean oil prices and is directly affecting soybean prices. According to some estimates, if importation continues at this pace, imported tallow and UCO could displace the soybean oil from about 5.7 million acres, more than half of Iowa’s crop, and could be impacting prices by as much as a $1.30 per bushel.

How is ISA engaging in this issue?

ISA is working to educate farmers, industry, and all stakeholders on the negative impact a poorly implemented 45Z tax credit will have on farmers across Iowa and the United States. The Iowa Soybean Association has supported the National Oilseed Processors Association and American Soybean Association as they also seek to engage on these issues.