For over 30 years the leading pallet and sawmill magazine in America.
Biomass Credit Update: A Look at BCAP’s Past and Future Impact
Biomass facilities are gearing up for the release of the final BCAP rules. Find out what it could mean for the forest products industry.
By DeAnna Stephens Baker
Date Posted: 9/1/2010
The U.S. Department of Agriculture’s (USDA) Farm Service Agency (FSA) has still not issued the final rules for the Biomass Crop Assistance Program (BCAP), yet preparations for the reinstatement of the subsidy are already well on their way. The following is a look at the affect BCAP has already had on the pallet industry as well as a glimpse at technology development and business plans being put in place with the imminent release of the final BCAP rules in mind.
According to the USDA, more than $224 million in BCAP payments have been made through August of this year. The original Notice of Funds Availability (NOFA) was published by the USDA in June 2009, but payments were suspended in February 2010, followed by the release of the proposed revisions to the BCAP rules. Seven months later, the waiting game continues. FSA is currently reviewing comments and drafting the final rule, which is expected to be published in the Federal Register in fall 2010. For now, the freeze put on the program in February will remain in place, as the FSA wades through the more than 24,000 comments received on the proposed rule.
The original BCAP NOFA had mostly negative effects on the pallet industry. BCAP was originally designed to stimulate development of innovative technology and alternative energy markets primarily with crops. Unfortunately, instead of prompting the development of new energy crops, it created a new demand for low-grade lumber, creating distortions in the market felt keenly by the wood pallet manufacturing industry. “In certain markets, BCAP drove the price of wood biomass up to a point where it was about the same as pulpwood,” said William Perritt, executive editor of RISI’s Wood Biomass Market Report. “This reduced the incentive for producers to sort pulp-grade from biomass-grade wood, and forced some pulp mills to raise prices to compete with the subsidized market.” This price increase for low-grade lumber left pallet manufacturers competing for a material that had previously been their almost exclusive territory. “Conditions were most pronounced in the Northeast, especially Maine and Northern New England where there is a concentration of both wood energy facilities and pulp producers,” said Perritt.
However, there were significant price increases all over the country. A pallet company in eastern North Carolina experienced the price jumps firsthand with its suppliers when procuring logs for its scragg mill. “The loggers started chipping everything,” said the owner. “They chipped whatever they could get in the chipper, even the bigger logs.” The company reported an average price jump of around 30% for both softwood and hardwood logs during the time that BCAP payments were being made. Prices went from around $30 per ton for both
“Loggers got to the point that they told us we were going to have to pay at least $40 per ton or they’re not shipping us anything,” the North Carolina pallet company stated. “Two loggers kept shipping to us only because they were friends of ours.” However, they saw prices quickly return to pre-BCAP levels after payments were suspended earlier this year. “When they killed the program we went straight back to $32 per ton,” the owner said. “They were happy to take $30 per ton and get paid immediately.”
To address the issue of how BCAP caused this and other market distortions, the proposed rules specifically prohibit wood materials that might otherwise be used for higher-value products. The biggest question now is whether the final rule will successfully prevent this problem from happening again. Many in the industry are concerned that, as proposed, BCAP’s matching payments program would cause a return of the same type of market distortion.
The American Forest & Paper Association (AF&PA) said that the matching payments component of the proposed rule discriminates against the forest products industry and will create serious unintended harms unless significantly revised. In their comments on the proposed rule, AF&PA said the proposed rule:
• Attempts to exclude some, but not all, forms of woody biomass used in value-added production processes from eligible materials.
• Clearly favors other forms of existing Energy production, such as biomass-fired utilities, co-fired utilities, and pellet plants, over energy production at forest products facilities, especially with the black liquor exclusion.
• Favors new energy production over existing energy production (e.g., establishing an historical baseline for existing energy production and providing a much richer subsidy for cellulosic ethanol).
“In sum, the proposed BCAP regulations do not provide a level playing field for key segments of the forest products industry and contradict the stated goal of avoiding the diversion of any materials potentially eligible for BCAP matching payments from existing value added production processes already occurring in the marketplace,” stated AF&PA.
Perritt does not believe the prohibition as presented in the proposed draft, is sufficient to protect existing markets, either. “While this could effectively take pellet mills out of the eligibility category for sawmill residuals, pulp mills will still have to compete with wood energy producers,” he said. The pallet company in North Carolina is so concerned about what the reinstatement of BCAP will do to prices that while prices are down they are stocking up on logs; currently they have even their overflow yard around 75% full.
Other changes proposed in the draft included replacing the dry tonnage measure with industry norms and reducing matching collection, harvest, storage and transportation (CHST) payments. The complete draft rules can be read online at www.fsa.usda.gov.
Despite its negative impact on the low-grade lumber market, BCAP does seem to have prompted some technological advancement. Research into ways to increase the efficiency of transporting woody biomass is an example of advances that could benefit the forest products industry. In-woods residues are not typically collected for bioenergy use due to the challenge of collecting and transporting it in an efficient matter.
“Even in systems where the harvesting of biomass is conducted simultaneously with the harvest of sawtimber or other products, the low bulk density of residues makes collection and transport difficult and expensive,” said a report from University of Tennessee’s Institute of Agriculture.
Despite these economic hurdles, interest in such activities is increasing, according to a report by Dr. Samuel Jackson, a research assistant professor with the Tennessee Agricultural Experiment Station. One and two pass harvest systems to remove in-woods material, both of which could be used in typical logging situations, have been receiving the most research and development.
Research into new technologies may be able to minimize the trade-off between transportation costs and the cost of altering the material before transport, thereby increasing the profitability of slash and other residues in the biomass market. Advances in bundling and densification equipment will be of great benefit to the forest products industry based on their cost reduction possibilities alone.
“In-woods chipping at the time of harvest can reduce costs by $56.76 to $216.76 per acre when compared to operations that cut, pile, and mulch, due to reduced handling of the material over time,” said Jackson’s report.
The development of more cost-effective processes could be what enables landowners and logging companies to expand into collecting for bioenergy use and new business models, which may be crucial for survival. Jackson’s report commented “some analysts feel that the basic industry models of the past are dead and that, to survive, the forest products industry will have to adjust, explore new opportunities, and take risks.”
Some companies are already preparing to cash in on the new opportunities that the reinstatement of BCAP will present, even though the details are still unknown.
“Biomass developers are preparing business plans in anticipation that the USDA will issue final BCAP rules later this year,” said Gregory Lynch, co-chair of the Renewable Energy Practice Group and managing partner of Michael Best & Friedrich LLP. “The specific terms are unknown so developers are modeling the projected financial statements under multiple potential BCAP funding scenarios.”
With thirty-three states already mandating renewable energy goals and five more with voluntary goals in place, there is no doubt that renewable energy is the future. Wood pellet use in the United States alone tripled between 2000 and 2007, from 3 million tons to 9 million tons. Though the exact role that biomass will play is still being worked out, companies already involved in the biomass market are poised to profit greatly.
“When the final rules are issued, it is possible (and perhaps likely), that many biomass projects will move ahead aggressively with project financing and development,” said Lynch. “As part of this process the biomass facilities would be actively negotiating for feedstock supplies, including forest products. The forest products industry should fully understand the final BCAP rules so that they can maximize potential revenue under BCAP.”
The companies that will benefit the most under the new BCAP rules will be those that take the time to understand them, look for ways to expand into the new markets and build relationships with biomass facilities now.