The global biofuel industry is undergoing its biggest restructuring in a decade as the United States and Brazil abandon cross-border feedstock trade in favor of regional self-sufficiency.

The shift, driven by new US tariffs of 50% on Brazilian goods and tax credit restrictions taking effect in 2026, threatens to disrupt billions of dollars in annual trade and could complicate efforts by both countries to meet climate commitments.

"Tariffs impacting nascent industries like SAF [sustainable aviation fuel] will undoubtedly hurt the US' potential to continue to lead in this space," said Meg Whitty, vice president for corporate affairs at LanzaJet, a Georgia, US-based company operating an ethanol-to-jet fuel facility that imports Brazilian ethanol.

"This will limit our ability to import necessary resources and export our own for the global market, given aviation is a global industry," she said.

The US and Brazil dominate global biofuel production - the US is the world's largest corn ethanol producer, and Brazil is the second-largest ethanol market, using mainly sugarcane. Brazil's flex-fuel vehicles, which account for the majority of its light-vehicle fleet and can run on pure ethanol, absorbed a large share of the 36 billion liters of ethanol consumed by Brazil in 2024.

Their biofuel industries have been complementary. Brazil's sugarcane ethanol earns premium carbon credits in US markets due to its lower emissions, while US corn ethanol has traditionally filled supply gaps during Brazilian sugarcane’s off-season.

The partnership extended beyond ethanol: Brazil, as the world's second-largest beef producer, became a major supplier of animal fats and waste oils to American renewable diesel plants. Beef tallow - the rendered fat from cattle processing - emerged as particularly valuable in California because the state's environmental programs treat it as a waste product with low carbon intensity, making it eligible for premium tax credits when converted to fuel.

That integration is now unravelling. Brazilian exports of beef tallow to the US, which surged to 318,000 tonnes in 2024 from just 22,000 tonnes in 2021, have effectively halted since the Trump administration imposed a 50% tariff on Brazilian goods in August, according to market data from Fastmarkets. Nearly 97% of Brazilian tallow exports had been destined for US renewable diesel plants.

The disruption extends beyond animal fats. Starting in January 2026, new rules governing the US 45Z clean fuel tax credit will exclude feedstocks for biofuels from Brazil and most other countries, limiting eligibility to materials sourced from the US, Canada, or Mexico. The restrictions affect Brazilian sugarcane ethanol, tallow, and used cooking oil that had been flowing to US biofuel producers.

Brazil's response has been equally protectionist. The country maintains an 18% tariff on US ethanol imports and has kept its biodiesel market effectively closed to foreign suppliers despite industry complaints about high prices. In August, Brazil announced retaliatory measures against US goods and added a 30 billion real ($5.5 billion) credit line for exporters affected by American tariffs.

Inevitably, the policy shifts threaten substantial planned investments. Brazil had anticipated investing 110 billion reais in biofuel sector expansion through 2035, including 99 billion reais across 25 sustainable aviation fuel projects, the USDA report said. Many of those projects assumed access to US markets, raising questions about their viability.

The policy reversal also threatens American investments. The US renewable diesel industry has undergone massive expansion, with production capacity surging 538% since January 2021, according to Fastmarkets analysis. Much of this buildout was predicated on access to low-cost, low-carbon foreign feedstocks.

Major producers including Diamond Green Diesel (jointly owned by Valero and Darling Ingredients), Marathon Petroleum, Phillips 66, and Chevron have collectively invested billions in renewable diesel facilities that now face feedstock constraints. The industry produces approximately 3.5 billion gallons annually and requires volumes that domestic supplies of waste oils and animal fats cannot fully meet.

"The US biomass-based diesel and sustainable aviation fuel industries are at a pivotal moment," Fastmarkets noted in July, as the combined effect of tariffs and tax credit restrictions "reshape market dynamics, creating both challenges and opportunities for domestic production."

The feedstock squeeze is already visible in market prices. US soybean oil prices jumped more than 20% between mid-June and the end of July as domestic producers pivoted from cheap imported feedstocks to higher-cost domestic alternatives.

Meanwhile, Brazil also faces the challenge of absorbing domestically the 318,000 tonnes of tallow it previously exported. "The use of beef tallow for biodiesel production in Brazil is expected to rise," Andre Nassar, president of the Brazilian oilseed lobby Abiove, told Reuters in August, noting that domestic biodiesel companies would increase purchases to offset lost export revenue. However, Brazil's limited export alternatives became clear when sources noted that "Brazilian tallow is already uncompetitive [in Southeast Asia] in terms of costs and product quality."

One notable exception to the trade barriers emerged in August when Brazil's oil regulator authorized Plymouth Energy, an Iowa-based ethanol producer, to participate in Brazil's RenovaBio carbon credit program. It marked the first time a foreign ethanol producer received such certification, potentially opening a channel for US corn ethanol during Brazil's off-season when domestic supply tightens.

But that development runs counter to the broader trend. US ethanol exports to Brazil crashed to $53 million in 2024 from $761 million in 2018, according to trade data, reflecting Brazil's tariff barriers.

"What's more ironic is that these tariff barriers have been erected against US ethanol imports while our country has openly accepted - and even encouraged and incentivized - ethanol imports from Brazil," said Geoff Cooper, president and CEO of the Renewable Fuels Association.

"Brazil's tariff rates have no doubt had a demonstrable impact on US ethanol exports. While Brazil was once the top export market for US ethanol, the imposition of tariffs in recent years has essentially closed the market."

Market participants say the coming months will determine whether the shift toward regional self-sufficiency is sustainable or whether feedstock shortages and higher costs force policy reversals. With Brazil's biodiesel mandate set to increase to 20% by 2030 and US renewable fuel standards remaining in place, both countries face pressure to secure adequate supplies while meeting environmental targets.