This issue contains the third of a three-part informational series focusing on wood pellet project development. These stories cover a wide range of topics related to biomass supply agreements.
In the US South, the distribution of forest ownership can be broken down into two categories, public and private. Public lands in the South are owned by federal, state and local governments; they make up 12 percent of the timberland-just over 29 million acres. Private lands are owned by corporations, financial institutions and private individuals with small tracts; they own 88 percent of timberland in the South-nearly 222 million.
The majority of wood consuming facilities take a portfolio approach toward their supply chains and use multiple models to balance costs with assurance of supply. The basic structure and process flow for forestry supply chains are relatively consistent across the US. The differences arise in operational details, primarily harvesting and processing.
The greatest variable operating cost of a bioenergy project is the cost of biomass feedstock. Driven by market supply and demand (reflected in stumpage prices) as well as changes in other cost drivers such as diesel and CPI, feedstock costs can vary significantly over time.
Every year, 25 million tons of wood move under supply agreements indexed to Forest2Market's data and pricing. It's no wonder why we get barraged by questions about supply agreements. How long should they last, should it be based on delivered prices or stumpage prices, what pricing mechanism should I use, and, of course, how much volume should I place under agreement.
Supply agreements are intended to spread risk among supply chain participants with conflicting interests. Sellers are inclined to think of supply agreements as lost opportunity when spot prices increase. Buyers, on the other hand, see the same lost opportunity when spot prices decrease.
The fragmented nature of timberland ownership across the US South can make it difficult to identify biomass suppliers. Numerous parties deal with wood raw material between its origin in the forest and its arrival at a pellet mill. Add to this the variety of materials (from sawtimber to come-along products like biomass) that come from any one harvest, and the complexity of the wood supply chain becomes apparent.
Project developers are often faced with two challenges in the very early stages of pellet mill development: find suitable biomass suppliers and negotiate feedstock agreements for wood deliveries 5, 10, even 15 years into the future. This blog assumes the first challenge has been met and negotiations have begun.
We in the forest products sector were certainly glad to see the 'wins' in the Farm Bill. Clarification that logging roads are not point source emissions and inclusion of forest products as qualified materials under the BioPreferred Program are good news for the industry.
