Todd's Take

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

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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As of May 2, spot soybean oil was so "excited" about the new opportunities for sustainable aviation fuel that it closed at 42.57 cents, near its lowest price in three years (DTN ProphetX chart).

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/….

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/….

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.

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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

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Todd Hultman