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Recent environmental concerns, such as deforestation or climate change, are deeply transforming contemporary South American agriculture with uncertain impacts on participating actors and the environment. Efforts supporting biofuel production in this region has been fervently contested by environmental/agrarian organizations and scholars. This has motivated a rapidly growing body of research on the effects of biofuel initiatives on smallholder agriculture and conflicts over resource access such as land grabbing, family farming and small farmers’ livelihood, and food sovereignty. In this context, the current biodiesel expansion in Brazil is a paradigmatic case. In this country, a biodiesel policy has been implemented to include small farmers in the benefits of biodiesel production by establishing contract farming arrangements with agribusiness. This paper explores the implementation of this policy in oil palm production in the state of Pará in Northern Brazil. It aims to understand the way in which oil palm production and the new relations with agribusiness impact livelihoods of participating small farmers, the role of the state in creating and reproducing capitalist relations and inequalities in this agrarian frontier, and the limitations and opportunities to achieve social and environmentally sustainable biodiesel production. A better understanding of the role of the state to remedy biofuel trade-offs or reproduce and create new inequalities seems a necessary step towards sustainability of bio-energy initiatives.