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Biomass Markets – Friend or Foe: How Will New Biomass Subsidies Impact the Market?
Industry experts discuss the impact of new biomass subsidies and the emergence of wood energy markets on low grade lumber and the pulpwood industries.
By Chaille Brindley
Date Posted: 2/1/2010
Industry publications and trade conferences have been awash with headlines about wood biomass and its impact on the future of the forest products industry. From the growth of wood pellet facilities over the past two years to the development of cellulosic ethanol technology to new biomass subsidies offered by the U.S. Department of Agriculture, energy offers markets for wood residues and byproducts. But this growing emphasis on biomass opportunities is fraught with risks depending on market demand, impacts of government policies, competition for raw material supplies and other local dynamics.
The biggest news in the biomass arena over the last year is a subsidy program launched by the Obama administration in hopes of spurring experimentation with new crops and development of biomass fuel markets. Although the primary target appears to be non-wood, agriculture markets, the forest products industry and forest landowners are eligible for payments through the Biomass Crop Assistance Program (BCAP).
BCAP is a new program where the U.S. Department of Agriculture will match the price of biomass delivered to designated biomass conversion facilities, up to $45 per dry ton. BCAP payments will be available for two years to qualified entities with no apparent dollar cap on the amount that can be paid.
Kelly Novak, program representative for BCAP, said, “To be a qualified facility, you have to provide information about your business, your process, and you have to have a biomass conversion process. That would be anything from converting eligible material to heat biomass, bio-based products or fuel. That is anything from making pellets to producing cellulosic ethanol to producing heat, power or steam.”
The USDA recently released a list of eligible materials to qualify for BCAP. Lumber and pallets are excluded from the program, while slash, thinning, and sawdust have been deemed eligible. Biomass from private forestland must be under a forest stewardship plan or the equivalent to qualify. Payments are made to the biomass producer, such as the landowner or logger depending on the arrangement, not the biomass conversion facility, sawmill or wood energy facility.
Novak said, “All the benefits for the biomass facility are indirect. They will have a long-term feedstock supply. It generates a larger pool of materials that they can purchase from.”
Pallet and lumber facilities that utilize sawdust or other approved wood biomass for heat or energy may qualify to participate as a biomass conversion facility. The USDA is still finalizing the program, which is very much in the draft stage. The federal government hopes to have an Environmental Impact Statement and full program details available sometime this year.
BCAP is designed to help biomass conversion facilities compete with traditional energy generation methods. One goal is to raise the price of biomass to the point that loggers can economically justify removing slash from logging sites. Additionally, government subsidies are helping to keep the cost of the raw material supply low for a period of time. The programs could have some unforeseen impacts including price spikes in wood biomass value or possibly even low-grade lumber. A lot of that depends on what biomass generators and facilities do with the money.
Payments began in August 2009 although most of the money just started to flow to producers in the fourth quarter of 2009. The BCAP program is being administered by the Farm Service Agency (FSA) under temporary spending authorization until the full program is finalized later this year. Novak said that about $514 million has been appropriated to fund the program through March 31, 2010. Currently, the Office of Management and Budget is examining the program and should release details soon for comment.
BCAP Market Impact
From a forest products industry perspective, the big question mark in the whole BCAP program is what kind of impact it will have on wood biomass markets.
William Perritt, executive editor of RISI’s Wood Biomass Market Report, said that the BCAP program could cause “Market Distortion” although it is really too early to tell since the subsidies are just starting to reach producers.
Perritt explained, “Right now the market reactions have been spotty. It all depends on the density of wood energy plants in a region and their competitors for materials, which would be pulp mills and composite panel mills – anybody consuming pulp wood grade all the way down to bark.”
Pointing to what happened in the New England area in 2008, Perritt said that state and local subsidies designed to reopen wood energy plants caused pulp prices to spike in the region. Round wood deliveries were diverted to energy markets because loggers could earn as much or more money with less effort. Loggers could make whole tree chips a lot easier than limb trees and cut to the right size for the pulp mills. Eventually, pulp prices reached historic highs going from $30 per green ton to mid/upper $50s per green ton, hitting spot markets as high as $70 per green ton.
While there is no guarantee that similar reactions would ever occur due to the BCAP program, Perritt’s example does show how unintended consequences caused by government subsidies can impact markets. Although most people in the forest products industry tend to look at their own piece of the pie as distinct, all the various sectors are interconnected because they are competing for limited resources, including wood, loggers and customers.
Perritt said, “BCAP has the ability to cause rearrangement of the typical hierarchy of wood values. Typically, your wood values have biomass on the low end, pulpwood, chip and saw and low-grade, stud, clear, high-grade and then veneer. What it does is flip the values of pulpwood and biomass.”
BCAP is more likely to negatively impact some pulp, particleboard and fiberboard plants than it would pallet, rail tie and other users of low-grade lumber.
George Barrett, editor and publisher of the Hardwood Review, said, “I don’t think that the pallet industry is going to be impacted by a shortage of wood because of the BCAP program. I don’t think that enough mills will take low-grade logs and move them into wood pellets or something like that.”
Dan Meyer, Appalachian editor for Hardwood Review, agreed with Barrett although he said biomass markets could become a problem down the road for other low-grade industries if the volume steadily grows to the point that they are directly competing for logs.
Tim Knol, Northern editor for Hardwood Review, said that the wood biomass industry could run into the same hiccup that the ethanol industry has faced where it builds a bunch of plants, develops too much capacity and discovers that the costs are not as efficient as first thought. Tim added, “A lot of new pellet plants came online over the past few years, and I am still hearing that there is excess pellet capacity right now.”
After reaching historic highs in 2008, the sudden collapse of oil prices over the past year combined with relatively mild winters has eased demand for wood energy. Hakam Ekstrom, a consultant with Wood Resources International, said, “The demand for wood energy is not there. In many cases, it is much cheaper to run natural gas or oil instead of any kind of green energy. That is a problem for biomass sellers right now. Even with the subsidies, I don’t think the energy market will have a major impact on the flow of wood residue and chips.”
Over the next quarter, companies should watch to see what impact the BCAP subsidies may have. Conditions are likely to vary from region to region depending on the concentration of facilities in an area competing for the same raw material sources. Not every single facility can take the same type of material. Ekstrom pointed out that most pulp mills can’t use sawdust, which is a material that pellet facilities prefer. Additionally, pulp mills are more specific on what kind of wood material they use to make pulp, and they would be able to pay a lot more on average than an energy plant could afford.
Although the BCAP money can only go to the producer, everybody will likely want a cut in some way. Smart mills may reduce their gate prices because suppliers still get more money if they qualify for BCAP payments. Perritt reported, “Mills in the BCAP program are starting to drop their gate prices, taking off $5-10 per ton initially.”
Opponents Line Up Against BCAP or Seek Changes
One group has already taken aim at the BCAP subsidies. The Composite Panel Association (CPA), criticized, “BCAP will take wood out of the hands of an industry making important consumer and construction products and hand it over to the biomass fuel industry to burn. Worse, taxpayers will foot a bill for a $500 million subsidy to make this happen in 2010, with no net benefit to the US economy or the environment.”
The composite panels industry wants the list of eligible materials to be changed to exclude wood chips and sawdust.
The CPA stated, “The 2008 Farm Bill states that renewable biomass includes materials that ‘would not otherwise be used for higher-value products.’ BCAP’s inclusion of wood used for higher value products is contrary to this directive and represents a fatal flaw in the way the program has been crafted…Congress never intended that it divert materials currently used for
Ekstrom stated, “The biggest problem in the future will be for MDF and particleboard plants. They will have difficulties competing with energy plants for saw dust. It is not quite the same for pulp mills because they can use chips and round wood.”
On the other side of the issue, the paper industry is likely to push for BCAP to be expanded to include black liquor, a fuel produced in the pulping process that was not included in the initial launch of the program.
Perritt, “I think there is a fundamental disagreement with this program among industry players. I don’t think that anybody likes BCAP on the wood consumer side. I am sure that the loggers are happy with it. The mills (pulp) are very displeased with BCAP.”
Barrett explained that hardwood sawmills have tended to be very standoffish when it comes to government intervention or assistance. These companies may still line up to be eligible to participate, all the while cursing the existence of the program.
Barrett said, “People who will suffer the most are those who can’t participate in the program, such as farmers who use wood material for animal bedding because they can’t gain that subsidy dollar. They will probably see their price go up and more scarcity.”
The same goes for pump mills that don’t burn biomass to produce energy or other wood products companies without a co-generation facility or other qualifying process.
It is important to remember that wood biomass is only one small part of the BCAP initiative. Knol of Hardwood Review said that the primary focus of the program appears to be farming and energy crops, such as switch grass.
Knol said, “Maybe the wood industry is fortunate that it was included in BCAP. The reason wood was included in BCAP was probably because it is the only major user of natural biomass right now.”
Some in Congress have already expressed concern about the scope and the cost of the program. Original estimates by the Congressional Budget Office forecast the BCAP program would cost $70 million over five years. It has swelled to over $500 million in only a matter of months.
Senator Tom Harkin (D-Iowa) attributed the mushrooming cost of the program to the large number of timber companies and other wood manufacturers who applied for qualification as biomass conversion facilities. He said that he would ask for a review of the program in 2010.
After talking with representatives of FSA, it appears that no major changes in the program will take place without Congressional involvement. Jonathan Groveman of FSA said, “We have very limited discretion to change a law given to us by Congress.”
In regards to financing the program, Groveman said, “As of today, money is appropriated as needed. We will meet the financial obligations of the program as stated within the Congressional bill.”
Market Realities May Derail Subsidy Goals
No matter how much money the government pumps into programs, it can be meaningless without economic recovery and an increase in biomass fuel demand.
Looking specifically at pellets, the domestic wood pellet market is jammed up right now as facilities have cut down production, according to Perritt.
“The prices haven’t gone down because the raw material input costs remain high,” said Perritt. “Right now the pellet guys just aren’t buying. You can have subsidies all day long. But if you don’t have a market for your product, they are pretty much meaningless.”
Some of the wood energy technologies have not materialized as fast as the markets would like. Barrett mentioned that the only cellulosic ethanol facility in the United States has run through millions in government money and its completion is behind schedule.
Opportunities for Scragg Mills & Low-grade Lumber Producers
So what really is the impact of biomass on low-grade lumber producers?
Perritt observed, “I think it has created an opportunity for the scragg mills. They seem to be the more reliable suppliers for sawdust and clean chips right now over the dimensional lumber and high grade shops just because those markets are so bad, they are just idle.”
Expanded biomass for fuel in a region could be both positive and negative. Perritt explained. “It could be a plus for the scragg mill in terms of its residual, but it could be a minus at the gate because wood is now being diverted to pellet or other forms of energy production.”
Biomass Market Resources
Homepage for BCAP operated by FSA includes a list of approved facilities, guidelines for the program, the latest developments in the program launch, etc. Visitors can sign up to receive e-mail notices of updates on BCAP.
Follow on Twitter at http://twitter.com/usdafsaenergy
Weekly market report covering the U.S. hardwood industry, includes detailed reporting on price changes and market developments. Hardwood Review is known for its in-depth reporting on the hardwood market.
Publishes specialty reports covering the biomass and pulp markets. Key publications include Wood Biomass Market Report and International Woodfiber Report. RISI also tracks all major wood biomass projects in a proprietary database.
William R. Perritt www.woodbiomass.com
follow on Twitter at http://twitter.com/WoodBIOMASS
Wood Resources International LLC
Consulting firm and publisher focusing on the global biomass and pulp markets. Publishes the Wood Resource Quarterly, which tracks global timber markets worldwide, especially sawlog, pulpwood, lumber and pellet prices in key regions around the world. Also includes regular updates of the latest developments in international timber, pulp, lumber and biomass markets.
Hakan Ekstrom www.woodprices.com
BCAP Tips and Next Steps
The Biomass Crop Assistance Program (BCAP) was developed to spur experimentation with new crops and development of biomass fuel markets. Although the primary target appears to be non-wood, agriculture markets, the forest products industry and forest landowners are eligible for payments. BCAP is a subsidy program where the U.S. Department of Agriculture will match the price of biomass delivered to designated biomass conversion facilities, up to $45 per dry ton. BCAP payments will be available for two years to qualified entities with no apparent dollar cap on the amount that can be paid.
The following are some tips and insights into BCAP for anyone considering being involved.
• Companies must register to participate in BCAP. This includes biomass producers (landowners, loggers, etc.) and biomass conversion facilities.
• All deliveries seeking BCAP funds must be approved by the local Farm Service Agency (FSA) office. Visit www.fsa.usda.gov to locate the office nearest you.
• Before seeking pre-approval make sure that both the producer and biomass conversion facilities have been approved for BCAP. Then obtain an invoice to show to the FSA office.
• BCAP registration is currently open for all qualified producers and biomass conversion facilities. Funds are currently being dispensed through temporary funding even though the final program is still being developed.
• Kelly Novak, program representative for BCAP, said that wood biomass must come from producers who have followed all state laws and filed forest stewardship plans with the proper authorities. She explained, “Each state might be a bit different. Forest stewardship plans or the equivalent judged by the state forester is acceptable.”
• In order to receive BCAP payments, a producer needs to have scale tickets to demonstrate delivery in addition to having a forest stewardship plan and proof of material ownership on file with the local authorities.
• Novak said that 400 qualified biomass conversion facilities have signed up for BCAP.