TED DURFEY was paid peanuts for the first harvest of canola seed taken off his Sunnyside farm in 2003. But he wasn't in it for the money. It was a test. "We grew 120 test plots to see which types of canola grew best and how much yield we would get," says Durfey, the owner of Natural Selection Farms.

This year, the farmer became an environmental entrepreneur and turned the 2,000 acres of canola he had grown into biodiesel, using the seed-crushing facility he built at the Port of Sunnyside, with the help of $750,000 in low-interest loans from the state.

Durfey is one of many farmers and business leaders who are looking to biofuels, such as biodiesel and ethanol, as a new business opportunity. The rise of alternative vehicle fuels could transform the state's agricultural economy and support a whole new industry. But the new industry may be hamstrung by a lack of available farmland, opposition from oil companies, and the fact that the infrastructure necessary to build this economy may never be developed.

SETTING THE AGENDA

When Washington state lawmakers convened in Olympia in 2006, biofuels were high on the agenda. Gasoline and diesel prices had steadily climbed after Hurricane Katrina rav- aged the Gulf Coast and disabled oil refineries. President George Bush had signed the Energy Policy Act in August 2005, which mandated doubling the use of ethanol and biodiesel by 2012 to 7.5 billion gallons annually. And state leaders believe Washington is the perfect place to drill for biodiesel - a simple mix of methanol and plant oils, from soybeans or seeds like canola and mustard. Biodiesel burns cleaner than petroleum and can be burned in most diesel engines. And the state sees it as a new cash crop for Washington farmers, so they started seeding the pot.

In March, Gov. Chris Gregoire signed a bill giving the state its own renewable fuel standards (RFS) - requiring diesel sold in Washington to be blended with 2 percent biodiesel, and gasoline to include 10 percent ethanol - making Washington the fourth state to have its own standards.

The state Legislature passed the Energy Freedom Program, which set aside $17 million in low-interest loans for bioenergy projects in the state - $6.75 million of the money was set aside for projects to convert agricultural waste into energy, and $10.25 million was earmarked for developing oilseed-crushing capacity in the state.

"We have to get the horse before the cart," says Durfey, whose oilseed crusher was not only one of the first projects to receive funding through the Energy Freedom Program; it's the first commercial project in the state to be crushing seed. In February, Natural Selection Farms cut a deal to sell 1 million gallons of canola oil to Imperium Renewables, the largest producer of biodiesel in the state.

State Department of Agriculture Director Valoria Loveland says she believes the biofuel industry, and in particular biodiesel, can be a huge boon for Washington's farmers, but all the puzzle's pieces, like the seed crushers, have to be put in place first. Loveland says the federal renewable energy standards will create demand for 1 billion gallons of biodiesel annually on Washington's military installations alone.

"We can either be a player, or they will get it from someone else," she says. Loveland hopes the mandated local demand will create a trickle effect - giving a greater market to local biodiesel producers, like Imperium Renewables, which is building a 100 million gallon refinery in Grays Harbor. As biodiesel producers pump out more of the veggie-petrol, they'll need more soybean, canola and other oils to make their product.