While the outlook for U.S. agriculture and many commodity markets has softened over the past two years, there is hope on the horizon among some market watchers for biofuels to drive a new demand surge for agriculture.

Increased usage and prospects for renewable fuels, particularly renewable diesel and sustainable aviation fuel, could help propel the ag economy forward.

Recent agricultural baseline projections from the Food and Agricultural Policy Research Institute (FAPRI) document the growth in biofuels over the past 20 years to a point where corn usage for ethanol rivals feed use, and soybean oil use for biodiesel or renewable diesel rivals food usage.

The projections over the coming decade suggest further growth in renewable diesel usage, and thus, soybean oil usage and could spike upward for renewable diesel or ethanol if further low-carbon fuel or sustainable aviation fuel markets are fully realized.

Complex market

Before counting market returns, however, it is worth considering that the biofuels market in general is largely driven by policy decisions, adding more complexity to the outlook beyond basic supply-and- demand fundamentals.

While the biofuels market for ethanol and biodiesel has been around for decades with various levels of support and tax credits, it was largely influenced by the renewable fuel mandates passed by Congress in 2005 and 2007.

Those policy decisions established minimum usage requirements for conventional biofuels (primarily corn-based ethanol) and advanced biofuels (including biodiesel and cellulosic ethanol). The original legislative mandates ran through 2022, giving way to annual rulemaking by the Environmental Protection Agency in the years since.

There have been numerous policy fights over the mandates and the related biofuel usage over time, including adjustments to the mandates and small refinery exemptions or waivers of the requirements in numerous years.

There have also been battles over ethanol usage related to the so-called 10% “blend wall” and the usage or availability of higher blends, including the ongoing effort to get permanent approval of E15, the 15% blend rate, for year-round usage.

Now that EPA is responsible for establishing annual usage mandates, there is a nearly continual debate over mandates and usage. Will mandates help biofuels command a growing share of the motor vehicle fuel market, or will future mandates reflect a flattened-out share of a mature market for motor vehicle fuels?

The latter would, in fact, suggest a decline in usage over time if trends toward higher mileage standards and electric vehicle usage reduce overall fuel usage going forward.

While the ongoing market and policy developments continue, it is the potential growth of low-carbon fuel standards and sustainable aviation fuel that have some observers excited about future demand. Just like the earlier generation of biofuel demand, these potential markets are also heavily affected by policy.

New markets

Demand for renewable diesel is growing with low-carbon fuel mandates, particularly for heavy trucks in regulated markets such as California, with Oregon and Washington joining in. Substantial further growth may be dependent on additional states adopting similar requirements, or on the ability of U.S. renewable diesel production to serve Canadian consumers facing similar mandates.

The increased adoption of sustainable aviation fuel could come from either mandates or corporate stewardship commitments to reduce carbon emissions from aviation. There are pathways for both renewable diesel and ethanol to be processed into SAF, but here, too, policy may drive the way.

The Biden administration is using the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation model to score emissions from various sources and processes when calculating emissions reductions and qualifications for low-carbon markets and tax credits.

Ag groups were largely relieved to see the administration commit to the GREET model over an alternative model because of perceived differences in accounting for agricultural emissions from indirect land use, but there are still important elements left to flesh out.

Carbon emissions in the biofuel sector can be scored at each step of the production and marketing process, but the largest contributors are in the feedstock production phase, the processing stage and the calculation of indirect land-use change, which implies carbon emissions from land brought into agricultural production because of the diversion of crops to fuel production.

Where practices come in

At the feedstock production phase, lowering emissions may require the adoption of emissions-reducing practices such as conservation tillage, cover crops or nutrient management. At the processing stage, increased efficiency in terms of gallons of ethanol per bushel of feedstock helps to reduce emissions, but there is still the unavoidable production of carbon dioxide along the way.

For ethanol production, basic chemistry says nearly one-third of the total output will be in the form of carbon dioxide. Reducing emissions further at the processing stage requires capturing that carbon and using it or sequestering it — thus, the proposals for carbon pipelines to transport it to locations with suitable underground formations for storage.

Regulated production practices or the development of a carbon pipeline network can be controversial enough, but the calculation of indirect land-use change could be the most complex and least understood.

While the concept of indirect land-use change follows sound economic intuition that increased use of agricultural feedstocks for biofuels drives increased ag production elsewhere, and thus increased emissions from converting grassland or forest to ag land, the calculation can be extremely difficult and subject to question.

At one time, the indirect land-use calculation assumed by California regulators implied that Brazilian ethanol exported to California was more environmentally friendly than Midwestern U.S. ethanol shipped to California.

As a result, there were in fact two (or more) ships passing in the night, both loaded with ethanol — one going from Brazil to California and one going from the U.S. to Brazil to replace the ethanol supplies that were shipped to California — certainly negating whatever environmental benefits might have been assumed to exist. How the indirect land-use factor is calculated and how it is used in the regulatory process is an important policy question.

The big picture for biofuels and agricultural demand seems to be a potential growth market with opportunities to produce and supply biofuels for developing low-carbon motor vehicle fuel and sustainable aviation fuel markets.

However, it is also a market complicated with numerous policies, from tax credits and usage mandates to carbon intensity modeling and scores to access potential markets and credits. Producers will need to keep an eye not only on supply and demand in the market, but also the supply and demand of policies from Washington, D.C., and beyond.

Lubben is the Extension policy specialist at the University of Nebraska-Lincoln.