Under the proposal, the ethanol plant will be built (subject to approval) near Leeton and Narrandera in rural NSW and co-located on the Rockdale Beef site.

The plant’s feedstock will be wheat and barley and the ethanol produced will be sold into the Australian transport fuels market. Rockdale Beef will acquire all by-products, including distillers grain, produced at the facility.

Rockdale Beef Partnership operates an integrated beef cattle feedlot, feedmill, meatworks and farming business on properties near Leeton and Narrandera in the Riverina district of NSW.

Rockdale Beef general manager Paul Troja said the relationship with BNB created new opportunities to generate additional value from the grain resource.

"The proposal provides for substantial synergies between Babcock & Brown and Rockdale, delivering sustainable social, environmental and financial outcomes," he said.

Troja says the company also has plans for a biogas plant to generate electricity from cow manure.

But the benefits of producing fuel from food crops are dubious.

The move has the potential to shift inflationary pressures from the service station to the supermarket.

In addition, the CSIRO has said when wheat is used as a feedstock for a 10% ethanol blend there are no reduction in greenhouse gases as the energy inputs into the farming and ethanol production processes cancel out gains from burning E10 fuel.

Sugar is a significantly more efficient feedstock for ethanol, but Australia does not have a sugar surplus large enough to supply even E5 blends across the country. At the moment, E10 blends produced from Queensland sugar are only available in Queensland and northern NSW.

BNB said the site of it new plant was well located for raw materials and infrastructure, and centrally positioned for the transportation of ethanol to major centres.

BNB has agreed to give BEI the first right of refusal to buy the plant at an appropriate time and at an independently verified market price.