Todd's Take                   05/03 06:58

   Do Corn and Soybeans Have a Chance in the SAF Market?

   For suppliers of used cooking oil and tallow and producers of Brazilian 
sugarcane ethanol, Tuesday's SAF announcement was good news. For U.S. producers 
of corn and soybeans, the pathway to this new market is not so clear.

Todd Hultman
DTN Lead Analyst

   If there is one thing I learned from watching too much basketball in March, 
it is that I shouldn't say the word "ludicrous" too loud or some bossy rapper 
will show up at my house. However, after reading the U.S. Energy Department's 
(DOE) guidelines for sustainable aviation fuel (SAF) on Tuesday, ludicrous was 
the only word I could think of. It's going to be very difficult for corn and 
soybean producers to benefit from the new SAF market anytime soon, even if 
they're willing to comply with the government's required farm practices.

   It's not completely hopeless, but there is a classic chicken and egg problem 
here. Currently, the U.S. has no significant SAF industry. As DTN Ag Policy 
Editor Chris Clayton explained Tuesday, EPA data shows roughly 24.5 million 
gallons of SAF were produced in 2023. Read about that here: 
https://www.dtnpf.com/agriculture/web/ag/news/business-inputs/article/2024/04/30
/climate-smart-practices-offer-jet.

   To encourage investors to build SAF production facilities, the federal 
government is offering tax incentives with a long list of complicated rules 
attached. Tuesday's document laid the groundwork for what the rules would be in 
2024 and would have been in 2023, just in case anyone owns a DeLorean. Even if 
a producer accidentally grows SAF-compliant corn in 2024, he is going to get 
the same price he would have gotten for any corn. For now, there is no magic 
SAF market, eager to share tax credits with producers.

   There was some hope producers could benefit from the SAF market by selling 
corn to a nearby ethanol plant, for example, or soybeans to a local crush plant 
and those facilities would sell the ethanol and soybean oil to SAF plants for 
further processing. Tuesday's guidelines make those kinds of arrangements 
difficult to set up.

   Consider on the one hand, we have an SAF industry that doesn't exist, and on 
the other hand, we have corn and soybean producers, understandably skeptical 
about diving into a pile of new regulations and changing their farming 
practices to grow corn or soybeans for a market that may still be years away. 
We also have ethanol plants and crush plants that would like to have a place in 
the supply chain, but are they now supposed to be liable for policing their 
producers to make sure the crops were raised in compliance with SAF 
requirements? USDA doesn't have the budget for such meticulous enforcement. Do 
ethanol and crush plants want to be liable for fraud in the system?

   Time and the promise of new rules under 45Z will tell if the pathways for 
corn or soybeans can be improved; but for now, consider the choices in front of 
an ethanol plant. The ethanol plant already has a business with viable markets 
and the freedom to buy corn from anybody it wants. Becoming SAF-compliant 
involves finding and becoming dependent on an exclusive network of producers 
who agree to raise crops in a prescribed way.

   If the ethanol plant tries to sign up SAF-compliant producers incrementally, 
it will have to segment production schedules between compliant ethanol 
production and noncompliant production. That doesn't seem practical. Let's say 
the ethanol plant is lucky enough to find an SAF producer to do business with 
and decides to go all out, committing to only taking corn from its network of 
SAF-compliant producers. Will the plant be able to find enough producers by the 
fall of 2025? What if their network falls short on production? Once committed, 
they can't just go out and buy corn from anybody. Do ethanol plants need these 
extra headaches?

   What kind of contracts will the new SAF plants be willing to write and how 
much of the tax credit will they share down the supply chain? These are just a 
few of a thousand questions yet to be answered.

   Another possible strategy is for investors to build SAF plants throughout 
the Midwest and contract directly with local farmers, willing to follow the 
rules. Gevo is one example of a company that has signed contracts with airlines 
and is in the process of figuring out how to produce low-carbon SAF by 
contracting directly with participating farmers (see Gevo.com for more).

   Gevo was ready with a press release after Tuesday's DOE announcement, saying 
the company was well-positioned to help with SAF production and has an 
accounting tool to help farmers track emissions and keep carbon scores down. 
Read it here: 
https://www.globenewswire.com/news-release/2024/04/30/2872828/0/en/Gevo-s-Sustai
nable-Aviation-Fuel-Well-Positioned-in-Light-of-New-Guidance-from-Treasury-Depar
tment.html.

   The challenge for any company with a strategy like Gevo is we have yet to 
find out if SAF, produced from corn and soybeans with all the new regulations 
and record-keeping requirements, can compete with SAF produced from used 
cooking oil, tallow and Brazilian sugarcane ethanol. None of those three 
feedstocks have to verify production processes, the way products from corn and 
soybeans do. In the cases of used cooking oil and tallow, there aren't even 
restrictions on the country of origin.

   Tuesday's DOE guidelines are the first proposal we've seen in black and 
white and it's fair to say we all have a lot to learn about how this new 
industry will move forward, if at all. The early questions I raise above are 
just a small sample that will need better answers and a lot more discussion in 
the days ahead. Unfortunately for corn and soybean producers, I suspect the 
road to a new SAF market is going to be long and rocky. The bulk of ethanol 
plants will probably sit out.

   In round one, the winning feedstocks for any new SAF plant are going to be 
used cooking oil, tallow and Brazilian sugarcane ethanol, all made appealing by 
their comparatively light regulatory burdens.

   Knowing how accountants are good at finding loopholes, I have to believe 
somewhere in an American boardroom, executives are trying to figure out the 
cheapest way of converting soybean oil into used cooking oil.

   **

   Comments above are for educational purposes only and are not meant as 
specific trade recommendations. The buying and selling of grain or grain 
futures or options involve substantial risk and are not suitable for everyone.

   Todd Hultman can be reached at Todd.Hultman@dtn.com

   Follow him on social platform X @ToddHultman1




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