45Z economics: crunching the numbers and practical insights

Chris: Welcome everybody to another episode of the Ag View Pitch. Today we're going to have a brief conversation here with Paul Kneifer on the economics of 45Z, if there's anything there. There, Paul, how's it going today?

Paul

Neiffer: Well, it's going actually pretty good. Uh, yeah, I probably should tell everybody, not that anybody cares, but today is my birthday and I turned Medicare age. So, you know, that's, you know, one of those, I guess, you know, double-edged sword, double-edged sword, you know.

Chris: So I've already—

Paul

Neiffer: matter of fact, I paid my premium, I think, yesterday. So my premium for February.

Chris: So nice. Well, happy birthday. Maybe everybody can in the YouTube notes, they can send you a happy birthday.

Paul

Neiffer: They can skip sending me the happy birthday. I'm not one of those guys that needs to get 100 birthdays on Facebook or anything.

Chris: You don't need the love, huh?

Paul

Neiffer: No, I don't need the love. I do not need the love.

Chris: So that's all right. That's nothing to do with 45Z, but, uh, you know, maybe, maybe you want some sympathy cards.

Paul

Neiffer: You know, you're getting older, so, you know, hey, I'm gonna go play pickleball, so hey, that's, that's okay.

Chris: Well, stay young, stay young. That's the key. I will, I will. So, all right, well, let's, let's hit, uh, some, some topics here on the 45Z. Um, you know, USDA put out that guidance, um, here last week, and, um, just thought, you know, you know, talking to you, that maybe we could get some updates on it. What does it mean? Is there anything there that— yes, it's meaningful, at least in the short term. And what do we need to be watching for?

Paul

Neiffer: Yeah, so, you know, we remember back about not quite a year ago, US— or actually the IRS had come out with some guidance and indicated that for the old, what we call Section 40B, which expired at the end of last year, that the ethanol plant or the biofuel producer, let's call it the biofuel producer, could get a credit based on the fact that the farmer had done 3 practices for corn. They had done no-till, which includes strip-till in some cases. So no-till and then a cover crop and then enhance, actually it's enhanced efficiency fertilizer or nitrogen. So, or nitrogen inhibitor, et cetera. But you had to do all 3. And hardly any farmers really were doing all three.

So what the guidance was that came out last week, or depending on when you're listening to us, it would be last week, probably indicated, hey, we're going to now score your field or score your county based on whether you're doing what's called reduced tillage, no-till tillage, cover crops, and then enhanced nitrogen. Of course, for soybeans, you don't have to do the enhanced nitrogen because typically you're not You're not applying nitrogen. So you're not, you're not locked into doing all 3. You're allowed to do 1. And based on that 1, let's say you elect to do no-till. Based on electing to do no-till, that's going to equate to some type of cents per gallon or cents per bushel. Let's say cents per bushel, for the biofuel producer, which then might be willing, let's underword the word might, might be willing to pay part of that down to the farmer.

So, you know, and what I did is I went through and I ran some numbers for, actually, you'll probably get a kick out of this, Chris. I ran some for Buchanan County, Iowa, which is where you're at and my field is at. Then I ran it for Dade County, Missouri, which is where my Missouri farm is at. And then I wanted to run one for farther north. I didn't do Washington State. I could have done Walla Walla maybe because they do grow corn, but they don't grow soybeans there very much. So I did one for Brown County, South Dakota, which is where Aberdeen— so Aberdeen, South Dakota, basically. And the interesting thing is, is the farther south— now this is just based on these 3 counties— the farther south you are, the more benefit you get. The farther north you go, the benefit starts to get reduced.

And so just to give you an example, and again, these are rounded numbers, they could be off a little bit. If you did reduce tillage, uh, in, in Missouri, you would get 20 potential of 20 cents per bushel of benefit. Now that's not for you. That's for the total benefit. And again, you got the biofuel producer and then you're going to have the elevator that might be storing your grain, and then you're going to have you. So, and then you're going to have to have it certified and audited and verified. So probably as a farmer, whenever I share a number with you, divide it by 3. At the best, you're probably going to get 1/3 of the number I'm telling you. So just divide it by 3.

Chris: And the $0.20, is that on corn?

Paul

Neiffer: That's on corn. So we're talking about corn right now. So, so in Missouri, you'd get $0.20. In Iowa, you get 11 cents, actually, in South Dakota, you get 13 cents. Now when we jump up to no-till, then you start seeing a pretty big jump. In Missouri, you'd get $1 per bushel for no-till tillage, and then 51 cents in Iowa, 44 cents in South Dakota. And that sort of makes sense to me because I've been to my farm in Missouri multiple times. No-till, I'm going to say based on the soil type and everything going on down there, it's going to be much more difficult to do true no-till down there than versus, you know, the farm there in Iowa or maybe in South Dakota just because of the clay and everything going on down in Missouri. Now, I may be wrong. Now, when we drop down to cover crops, you know, the value of COVID crop in Missouri is like 88 cents per bushel.

But for Iowa and South Dakota, it's about 30 cents. You know, it's, it drops quite a bit. And then for the enhanced, whatever you want to call it, the enhanced fertilizer, it's about 30 cents in Missouri and about 17 cents in Iowa, and then 11 cents in South Dakota. And then finally, if you do all three, you know, you do no-till, you do cover crops, you do enhanced fertilizer, in Missouri, the potential is $2.25 per bushel. So even if you divided that by 3, that's $0.75. You know, that's, that's not bad. But in Iowa, it's $1.05. So that'd be $0.35. And then in South Dakota, it's about $0.90. So, so yeah, you know, certainly no-till, if no-till is going to give you the same yield, and is going to save you money because, you know, you're not going through the field 2 or 3 times, you know, you're saving on fuel and so on.

And you're able to get an extra 20 or 30 or 40 cents, probably a good deal. Now on cover crops, you know, I know people have tried cover crops in some areas, it works well. Other areas, maybe not so well. You have to decide, you know, if you're going to get an extra 20 cents for a cover crop and it costs you 20 cents, You know, maybe it's not worth it. So those are the numbers that I saw on corn. We'll talk about soybeans here in a second. But any comments you have on that, Chris, as far as what you're seeing or, or anything that jumps out at you?

Chris: Yeah, a couple of things. I guess the, you know, is the reduced till, is that like strip till or, or like a VT pass or something?

Paul

Neiffer: Okay, good, good question. Let's go over to that. So you have to look at your STIR rating. And the STIR rating, hold on a second here, that stands for Soil Tillage Intensity Rating. It's from, I think, 20, I guess there's an updated one in 2023. So the STIR rating is basically, and I'm looking at the sheet right here, it's based on what is your speed, you know, what is the recommended speed from the, from the, from the manufacturer. It's then what is the type of tillage, you know, strip till, plow. Plow is not going to qualify automatically. If you're, if you're plowing the soil, you don't even qualify for reduced tillage. And then what's the depth? You know, is it 1 inch, 3 inch, 5 inch, whatever it might be. And then what's the type of surface disturbance? So, so just as an example, they have 2 examples in here.

They show, If you're doing a tandem light finishing disc, then at 5, 5 mile an hour speed, then your STIR rating is 19.5. So if all you're doing, if you're only pass through the field is a disc, of course, then you're going to have to plant it. So I'm not sure if the planter is the then part of it, but that 19.5, that's a key number because if your STIR rating for all your tillage is less than 20, it qualifies as no-till. If your, if your STIR rating is over 20 but less than 200, then it qualifies for reduced tillage. So that's, so you have to look at that, that STIR rating to find out what it is. Now, under the 40B guidance, it said STIR, it said strip tillage would qualify. I'm just not sure Yeah. What's your normal depth when you're doing strip till, Chris?

Chris: It varies, you know, if it's in the spring or in the fall. So there's a seasonal component to it. And then whether or not you have a knife, the guys that are running knives are usually, you know, anywhere from 5 to 7 probably. And yeah, with a—

Paul

Neiffer: I think strip tillage that deep is going to be difficult to qualify as no-till just because of— because you're— well, but your speed, what's the typical speed?

Chris: 6.

Paul

Neiffer: 6. So yeah, so 6 times the speed. And so, yeah, I think you're going to easily be over 20. So I don't think strip-till is going to count. Uh, now I may be wrong. I'm just saying you have to look at that STIR. And there is no, I couldn't find a table of all the types of tillage and what the STIR rating is. And that probably is, is true because, you know, some speeds are different than other speeds. So, uh, But that's what you're looking at.

Chris: It'll be interesting because with the strip till, some guys are putting nitrogen down or, or P and K, and you're putting that at the, you know, at just below the root zone. And I would think that would have a lot of economic value because you're not, you know, you're, you're not stratifying the, you know, fertility and stuff.

Paul

Neiffer: So I don't know, but it's hard to know. So we'll find— and again, this is just initial guidance. We still have to figure out what's going on.

Chris: So, uh, I do have another question, or I don't know, maybe the comment, but, you know, to your point on the COVID crops, in our observation, see the exact same thing that you're talking about. I mean, how they're paying out, it's really hard to do cover crops when you— like, if you use the, the south part, the south line of Iowa and the north line of Iowa, Iowa is kind of the transition if you do it all the way around you know, at that geography all the way across the Corn Belt. You go south of that line, south of say I-80, it's a pretty good deal. It works really good. You get north of say, you know, you get up around I-90 and north, it's really tough because you're— it's— the ground's froze. It's pretty damn hard to get anything, you know, by the time you get done harvesting, even trying to interseed or anything.

Just with, with harvest dates and stuff, you're going to get a hit and miss at best. You know, you have a year or two that it works, but a lot of years it's not going to.

Paul

Neiffer: So I think, yeah, maybe with the drone, maybe you have some drones, you can go out there and, you know, fly it on in September or August or something, let it start coming up. Maybe I—

Chris: half the time that stuff doesn't take anyway. So it's just, you know, it sometimes things look good on paper and then when practical applications have to come around, It's like, well, that didn't work very good.

Paul

Neiffer: Well, and the other thing that, that you have to realize, and I already deal with a lot of entities being formed just because of FSA payment limits and all that stuff. This, if you, let's say you farm 5,000 or 3,000 acres and 1,500 acres, you're doing no-till and the other 1,500 acres, for whatever reason, you have to do conventional till because of the type of soil or whatever it might be. You have to do a weighted average for this calculation. So for those 1,500 acres that you might be qualifying for $1 per bushel, you know, in total, again, $0.30 to you, but then your other 1,500 acres don't qualify. That means you're really only going to be paid $0.15. So does that mean then that the farmer to take advantage of this program is going to set up another entity that will strictly farm the fields, because this is a field-by-field calculation.

You have to do this calculation on every single field that you have with FSA. So then you do that field calculation and you decide this year, my 45Z farm is going to farm these 17 fields and my regular farm is going to farm the other 32 fields. Talk about a pain. Talk about the record keeping because you have to maintain massive amounts of records that some farmers probably are already maintaining, maybe 60% of these records, 70% of these records. But then on top of it, you have to maintain more records and then you're not automatically subject to an audit, but you're likely going to be subject to an audit at least every 2 or 3 years. And that means somebody like me is going to come in and look at all your records, look at all your verification. And if they don't like what you did, you're going to have to pay the credit back or pay your bonus back. Fun.

Chris: Yeah. Yeah.

Paul

Neiffer: And farmers really love recordkeeping. We know that, Chris. They're very good at it. And, and that's their favorite thing to do.

Chris: Yeah, exactly. Not so much. But, but I would say, though, one thing about it is the technology, you know, in the equipment anymore, you know, like, you know, your nitrogen and all that stuff. You're going to have all that data. It just, it's just a matter of accumulating it in a, in the proper format as a report that—

Paul

Neiffer: yeah, exactly.

Chris: That's really going to be more of the issue, I think. But yeah, I think the raw data isn't going to be that hard. But I, I guess a couple of things, questions, maybe from a 30,000-foot view is how practical is this? You know, we've got a new administration coming in this week, uh, as we record this. We're recording this on, on the weekend before the inauguration of President Trump. His administration's not super enthused with all this green stuff that he calls the green scam.

Paul

Neiffer: And so, yeah, 45Z is already on one of their list of things that they can chop to save money.

Chris: Right. And so, you know, if that's chopped, is there anything else or are there any components of it that are viable or something that makes sense? Because— and is it correlated to this, you know, the SAF, if the, you know, the sustainable aviation fuel and that kind of thing, does this have any correlation to that directly or—

Paul

Neiffer: or— Yes. So the 45Z on the SAF side you know, I was talking about when I said $0.06 per bushel per point. So if you're able to get a— so how the 45Z works is at the biofuel producer level, once their emissions drop below 50 kilograms of CO2 per million BTUs. So I mean, that's a mouthful. So once it drops below that level, then they start qualifying for regular biofuel for a $0.06 per gallon credit or $0.06 per bushel credit. I'm going to keep it in bushels because there's about 3 gallons per, per bushel. But if it's SAF, you actually get a 75% bonus on top of that. So instead of qualifying for about $0.06 per bushel, you would qualify for a little bit over $0.10 per bushel. So, so the SAF side is, is better for the farmer. However, if you have— if you're supplying your— supplying your corn to the ethanol plant, the ethanol plant may not be doing the SAF.

So then that ethanol plant is then transferring it over to the SAF plant because they have to do some different, you know, they have to blend it probably or do something. That— so that plant is then qualifying for the credit, which then will pay down the ethanol plant and pay down to the farmers. So the farmer doesn't get a credit. The only way the farmer is able to participate in this credit is via the ethanol or the biofuel plant actually paying them an extra premium for their corn or for their soybeans or for their sorghum.

Chris: The other interesting thing is going to be like, you know, some of our corn goes to a wet mill or it goes to like food grade and all that kind of stuff. I mean, we've got stuff going, you know, in our operation going to food grade and wet mill stuff. I mean, there's nothing— there's nothing there for that stuff, right?

Paul

Neiffer: No, no, no, no, no. This has to be purely for biofuel. I mean, it has to be able to go into some type of transportation. So whether it's an automobile truck or whatever it might be, a tractor, semi, or SAF.

Chris: So yeah, so I want to get your, you know, as we get close to wrapping up here, I want to get your two cents on, you know, if you put your, your, uh, open up your crystal ball or put that out in front of you and, and ask it, you know, what of this comes out of anything?

Paul

Neiffer: If it does show up, is it, it's probably a 2026 thing before I, I, I think potentially there might be some pilot programs in 2025 where, you know, Because again, if you, if you didn't plant a cover crop in '24, you don't qualify for your '25. You don't get the COVID crop anyway.

Chris: What about strip till or no-till?

Paul

Neiffer: No-till, you probably could qualify and that's a decent amount. But again, we, we still are waiting for really good guidance. I think at best for the farmer, this is going to be a '26 item. And again, as you said, Trump may just it's gone. You know, the Republicans may just eliminate it anyway. So we're going to have a lot of turmoil on this in 2025. Matter of fact, the administration was supposed to have this guidance out in 2024. The law said thou shalt have guidance by December 31st. And of course, they didn't care, which is, you know, well, we won't get started down that rabbit hole. Now, let me just finish with the soybean side because it is a little bit when you look at the numbers originally, you think it's better. But remember, we have to really convert this to per acre. And so your soybeans at best are typically, what, one-third of a corn crop, at least on a per bushel.

So I'm going to give you per bushel numbers. But remember, if you're getting $1 per bushel for corn, you have to have at least $3 per bushel for soybeans to be equivalent on a per acre basis, is what I'm saying. So again, reduced tillage in Missouri is about 33 cents per bushel, Iowa's 18 cents, and South Dakota's 22 cents. Now, if we're able to do no-till, that's $1.60 per bushel in Missouri, 90 cents in Iowa, and then 79 cents in South Dakota. Cover crop, uh, is actually the biggest, uh, benefit, $2.45 in Missouri, uh, $0.85 in Iowa, and then $1 in South Dakota. And again, you're getting up almost to the North Dakota border, getting a good cover crop in, who knows. And then overall, if you do all of them, do it in cover crop and no-till, because remember, we don't have the nitrogen fertilizer here. It's $4.26 in Missouri, $1.93 in Iowa, and then $2.01.

So about $2 a bushel for Iowa and South Dakota and $4 a bushel for Missouri. But again, if you did that on a per acre basis, that's, you know, it's not going to be as good. So $2 per corn per bushel versus $4 for beans. You're still better off with corn is what I'm saying, because that's equivalent of $6 for soybeans essentially.

Chris: Right. Interesting. Well, I guess time will tell what's going to happen here. We're going to, we're going to find out, I guess. And the other thing too is I think, I mean, I think some of this stuff is good, some of this stuff not so much. And I think, you know, just from what I've heard from producers having some of these conversations, a lot of times producers don't like to be told how to farm either.

Paul

Neiffer: Yep.

Chris: Yeah. On the same token, there's a lot of people doing a lot of this stuff anyway. Yeah. And so, you know, it's probably a— there's probably a balance in there somewhere to figure out. And then I think that, you know, this renewable fuel thing is really the big deal for the producers because we need the demand somewhere. I mean, that's really the big issue.

Paul

Neiffer: And that's a mandate, which is good. I mean, that's why we're able to get the premium is we're mandated to have a certain amount of ethanol. And then also, you know, all they did was these 3 type or 4 types of practices we thought, and they have it in and there is a calculator for so, so those that are interested, there is a calculator so you can plug in your state, your county, and then your type of practice that you do. They have in there that you can plug in your yield. But as of right now, the yield does not change the value. And our understanding is, you know, if you're a farmer and your base yield, let's say, is 200 bushels per acre, but you produce 250 bushels per acre, you should get a premium for that because you've amortized that CO2. You know, the tillage that you did, you amortized it over more bushels, right?

So you should get a premium if you only produce 150 bushels. You should get a discount. But so far that calculator does not have that in there. So we would think at some point in time, uh, they would have, um, uh, an update on that. Also, it doesn't matter how much fertilizer you put on. So if you put on 200 units or 250 units or 300 units or 100 units, no difference. And then there's no benefit right now for applying manure. You would think manure is a byproduct of the animal. It would be a whole lot better than fossil fuel, you know, fossil fuel fertilizer, whatever it might be. So we're still— there's, you know, they still got a long ways to go. I mean, it took them this long to get this. So, you know, this credit technically is supposed to expire by December 31st, 2027. I think that's when we'll get the final guidance is like January 15th of '28.

You know, so got a little ways to wait on that. Yeah, yeah, yeah. No, I'm being facetious, but not, not by much. Yeah, not by much.

Chris: Well, and the big thing here is, and I'll use, I'll steal the term from one of our clients and actually who farms in Aberdeen, North Dakota. He made a comment at TPAP a couple of weeks ago that, you know, there's, there's the black swan, but now we have the orange swan. And so we don't really know exactly what might happen here. And so Yep. We're gonna find out.

Paul

Neiffer: So I think the bottom line is, is farmers really don't need to do anything right now. You know, they may, you know, they may want to start documenting their practices a little bit more formally, you know, just in case, you know, like you said, Chris, the data is there. You know, they may just want to take their data and actually put it in a format, you know, that allows them maybe to go to that ethanol producer and say, hey, look, based on this calculator, I have pretty good score. And you can actually go negative, you know, in the, on the Missouri scores when you factor in no-till and, and, cover crops, you know, my score definitely goes negative. So, so it's that difference between your positive and the negative. You get to add the two numbers together. So it's, it's a pretty good deal.

Chris: Yeah, I think, I think there's another reason for tracking a lot of that stuff too, is there's an economic component to it too, to measure the benefits from an economic standpoint. If, you know, we don't really— none of us really like relying on the government, nor do we like the government telling us what to do either way. But a lot of these practices, if we just do it for our own reasons and for our own benefit and for our own data, that data will help us. And then if something comes along, you know, to me that's That's kind of the reason for doing it is just, you know, the economic piece of it.

Paul

Neiffer: But yeah, totally agree.

Chris: Totally agree. All right. Well, hey, Paul, it's been a good conversation. Gives us something to think about and something to look forward to. And then we'll, we'll see what, what Trump has to say about some of this stuff along the way, too.

Paul

Neiffer: And by the time we are in Florida next week, we may have some good ideas of what he may be saying by then.

Chris: Yeah, exactly. Exactly. It'll be interesting. So, yeah, we'll be at our Ag View Executive Business Conference for the 2025 year ahead and looking forward to having you guys there. And a bunch of, bunch of you guys that are listening will probably be down there as well. So looking forward to it. With that said, thanks a lot, Paul. Appreciate it.

Paul

Neiffer: You're welcome. Thanks, Chris.

Chris: You bet. And thanks everybody for listening, and, uh, we will catch you again next time on the Ag View Pitch.