Wood Bioenergy Projects in the US: Rankings by State

2 08 2013

This post includes data from the July edition of Wood Bioenergy US (WBUS). 

As of July 2013, WBUS counts 459 announced and operating wood-using bioenergy projects in the United States.  These projects represent total, potential wood use of 128.6 million green tons of wood per year by 2023. However, Forisk analysis indicates 296 projects (64%) pass viability screens.  These projects could consume 78.5 million tons of wood per year.  [To download the free WBUS summary, click here.]

In the United States, 44 of the 50 states have at least one operating or announced wood bioenergy project.  However, the bioenergy sector is characterized by clusters of projects near forest resources and ports, and in states with advantageous policies and subsidies.  The 20 states with the most wood bioenergy projects account for 81% of the U.S. total (see table below).  Georgia (34) and California (31) are the only states exceeding 30 projects each, while eight states have at least 20 projects each. The viable projects in the top 20 states account for 86% of the projected wood use from the bioenergy sector by 2023.

20130802 Wood bioenergy by state

Forisk will detail wood bioenergy project screening during “Timber Market Analysis” on August 12th in Atlanta, a one-day course that details how to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here.





Forest Certification: What Have We Learned?

3 07 2013

What should forestland owners know about forest certification in the U.S.?  Recently published research highlights the inconsistent implementation and varying operational impacts across U.S.-based forest certification programs.  In sum, the findings indicate that forest certification creates, ironically, uncertainty for landowners and, in cases, destroys landowner value while producing unclear forest health benefits, if any, relative to standard and commonly applied best management practices (BMPs).

Forest Certification Refresher

Forest certification includes third-party programs that signal responsible forest management based on an audited set of criteria. Established forest certification programs in North America include:

  • Sustainable Forestry Initiative (SFI).  In 2005, the Programme for the Endorsement of Forest Certification endorsed SFI, giving it international recognition.
  • The Forest Stewardship Council (FSC), based in Oaxaca, Mexico, is a major international certifier.
  • The American Tree Farm System (ATFS) supports a program for nonindustrial family forest owners in the United States.

Generally, landowners enrolled in SFI or FSC programs are industrial owners that participate in certification as an industry standard and to satisfy investor requirements for sustainable management and public relations.  Typically, small or nonindustrial private landowners either participate in ATFS or not at all.

Previous Research

Private landowners question the added costs for programs that seem to mirror existing sustainably-oriented forest management plans (“Forest Certification Conundrum”, June 8, 2012). This has been reinforced by research that shows state-mandated management practice guidelines provide effective means to protect water quality (Lang, A.H. and B.C. Mendell. 2012. Sustainable wood procurement: What the literature tells us. Journal of Forestry. 110(3): 157-163).  For example, when BMPs are followed, water quality on forest stands in the South recovers in 2-5 years following a timber harvest. Research in the Pacific Northwest also confirms that buffer zones along stream banks allow water systems to recover following timber harvest.

Key Findings from Recent Research

Recent studies commissioned by the American Consumer Institute (ACI) and EconoSTATS at George Mason University assess implications from on-the-ground implementation of ATFS, FSC and SFI.

ACI’s white paper, “Comparing Forest Certification Standards in the U.S.: How Are They Being Implemented Today?” by Brooks Mendell and Amanda Lang at Forisk, notes that “adherence to a given certification program does not necessarily confirm specific forest management practices or restrictions.”  To better understand how the certification programs implement standards on the ground, the authors conducted nearly two dozen interviews with timberland owners, managers, and auditors. Findings indicate that forest owners and certification auditors have wide latitude to design and interpret management plans that broadly conform to responsible forest management and satisfy forest certification objectives. In the words of one forest certification auditor interviewed for the paper:

“The way that foresters interpret plantations in the South is not the way FSC defines plantations. FSC has narrowed its definition of plantation: basically, the only plantation in the South would be a Eucalyptus plantation.”

EconoSTATS, in “Comparing Forest Certification Standards in the U.S.: Economic Analysis and Practical Considerations” by Brooks Mendell and Amanda Lang at Forisk, supported efforts to model and quantify operational and economic implications to timberland owners in Arkansas and Oregon from implementing four forest certification scenarios: FSC-Natural, FSC-Plantation, SFI, and a base case that corresponds with state timber harvest guidelines that approximate ATFS.  FSC has two scenarios because it imposes different forest management standards on forest plantations versus natural stands.

The estimated effects are above and beyond what forest owners already account for in current management activities.  The modeled scenarios comprise criteria from ATFS, FSC and SFI related to clear cut size, land set-asides, adjacency (“green-up”) and streamside management zones.

Key implications to timberland owners based on the EconoSTATS study include:

  • In Oregon, both FSC scenarios significantly reduce economic returns to landowners. Relative to base forest management practices and SFI scenarios, forests managed as either natural stands or plantations under FSC reduce the estimated present value of net operating cash flows by 31% to 46% for modeled 46-year operating period. The FSC guidelines reduced the acres available for timber harvests, which resulted in 30% to 42% lower harvested volumes of wood compared with the base case and SFI scenario.
  • In Arkansas, the FSC-Plantation scenario significantly reduces economic returns to landowners. Forests classified as plantations under FSC reduce the estimated present value of net operating cash flows by up to 26% and reduce total harvest volumes by up to 28% for the modeled 36-year operating period compared to other scenarios. For those seeking FSC certification in the South, this creates tremendous incentives to avoid classification as a plantation as defined by FSC.

Conclusions

Timberland owners enrolled in third-party certification programs adhere to program standards and are subject to confirmation by third-party auditors.  However, when implemented, forest certification criteria remain subject to interpretation.  Certification under a given program does not necessarily confirm specific forest management practices or restrictions. Even auditors responsible for verifying landowners’ compliance with certification programs acknowledge how some standards, even if explicit, remain subject to interpretation in implementation.

Forisk will discuss forestland ownership issues  during “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here





Assessing Mill Risk when Analyzing Timber Markets and Wood Baskets

16 06 2013

In evaluating timber markets and wood baskets for forest industry and bioenergy investments, a key concern is the “riskiness”, health and competitiveness of wood-using manufacturing facilities in and near the market.  Timberland investors want to confirm that the mills will remain open for years to come to buy their trees and logs.  Existing wood-using mills have interest in the health of their competitors for wood raw materials.  And new wood-using plants – such as bioenergy projects – want a sense for the potential that existing wood-users may have outlived their usefulness and may slow down or shutter, thereby alleviating competition for desired raw materials.

When analyzing mill risk, consider three categories of analysis:

  1. End markets.  Are the end markets – such as newsprint versus fluff pulp versus linerboard – served by the mill strong or weak?  The answer to this question is observable and can be answered with readily available data.  It provides a powerful, first-cut at the situation for mills in the market.
  2. Firm commitment.  Ultimately, are the corporate parent and owners demonstrating high or low commitment to the continued operations of the mill?  We maintain a checklist of items that, for the most part, are answerable with publicly-available information.  Questions on this list include, for example, employment levels and hiring activity, signs of community involvement, and capital allocation as disclosed in press releases or public filings.
  3. Facility health.  Is this facility, in its structure and equipment, old or new?  Does it employ cutting edge technology?  What is the “ability to pay” for raw material?  How efficient is the plant relative to others in its industry and market?  While this is the most difficult of the three categories to assess, strong conclusions on “end markets” and “firm commitment” usually correspond with conclusions associated with facility health.  In this way, each of the categories serves, at some level, as a proxy for the others.

Forisk will discuss risk analysis of wood-using mills  during “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here





How Reporters Miss the Forest and the Trees When Covering Wood Bioenergy Markets

3 06 2013

While the general public’s understanding of wood bioenergy remains incomplete, recent reporting on the issue fails to meaningfully inform readers on the status of woody biomass supplies and the actual development of wood bioenergy markets in the U.S.  In fact, several articles suffered from three common errors we observe in major media coverage:

  1. Failure to provide context.
  2. Improperly assigning “causal” relationships.
  3. Errors of fact.

For example, Roger Harrabin of the BBC, in a March 5, 2013 article “Biofuels: MPs to Consider Subsidies for Power Stations” about potential subsidies for using wood at power stations in the UK, reported that power producer Drax plans to convert approximately half of the boilers at its coal-fired power station in Yorkshire to wood pellets.  Harrabin notes that this would “burn more wood than the entire output from the UK’s timber industry.” And how much wood would that be?

This took four minutes to track down and summarize using the online “ForesSTAT” database from the United Nations. The UK produced one-half of one percent of the world’s industrial timber in 2011.  The U.S. timber industry is 32 times bigger.  EU timber production is over 38 times bigger.  This failure to provide context for UK’s timber industry is like reporting on hamburger sales in India or breweries built by BYU graduates.  While these could prove interesting, the numbers may prove trivial.

A more recent May 28, 2013 report by Mr. Harrabin, “Renewable Energy: Burning US Trees in UK Power Stations”, further addresses the growing trade of wood pellets from the U.S. to the UK.  While the story gives ink to all sides, it lacks the context to illuminate the scale or likelihood of operational impacts on U.S. forests from UK pellet demand.  In fact, bioenergy is a relatively small business in the U.S. and will remain that way for the foreseeable future.  Readily available research and studies conducted by private firms and conservation groups, while sometimes diverging on potential implications, generally align with the facts on the current state of affairs.  One study is “Biomass Supply and Carbon Accounting for Southeastern Forests” conducted for the National Wildlife Federation and the Southern Environmental Law Center (with whom Mr. Harrabin produced an interview).  The study incorporates academic and private studies, and provides necessary context relative to potential policy outcomes.

In “Limits to Growth: Wood Pellet Production in the U.S.”, Forisk addresses the issue by quantifying how the actual growth of bioenergy relative to available resources in the U.S. can be understood.  In “Three Realities of Wood Bioenergy and Forest Owners”, Forisk specifies areas of direct relevance to timberland owners and legislators that forest analysts understand well and can address with authority and data: bioenergy project failure rates, forest landowner behaviors that increase long-term supplies, and wood supplier adaptability.  New wood markets do not create a frenzy of forest harvesting.  Forest owners and wood suppliers adapt through improved forest management, incremental growth of logging operations and utilization of previously underutilized wood raw materials.

#             #             #

On Tuesday May 28, 2013, the Wall Street Journal published a front page story related to wood bioenergy markets that managed to score the trifecta and feature all three common errors appearing in media reports related to wood and timber industries.  Posted online on May 27th, the article, “Europe’s Green-Fuel Search Turns to American’s Forests” by Justin Scheck and Ianthe Jeanne Dugan contains factual errors, fails to provide context or measures of scale, and improperly implies causal relationships.  Ugh.  A few examples include:

  • The article does not scale UK demand to the U.S. forest industry.  During normal economic conditions, the U.S. forest industry consumes ~500 million tons of wood per year.  Currently, the U.S. is exporting on the order of 2 million tons of pellets per year.
  • “….Europe doesn’t have enough forest to chop for fuel…”  Not true.  Europe has 25% of the world’s forests.  While the article notes that “many restrictions apply” to Europe’s forests, it does not question the quality, usefulness or soundness of these restrictions.  The bottom line is that Europe may actually have enough wood, but chooses not to use it.
  • Many of the pellet-making plants springing up in the U.S….are near pine plantations established long ago partly to serve the now-slumping wood-pulp market.”  The reference to the “slumping” pulp market is factually incorrect and easily knowable.  This is a critical miss because the U.S. pulp and paper mills dominate the market for the low valued wood raw materials of interest to wood pellet producers.

The Wall Street Journal also dwells on the topic of swamp logging in North Carolina.  Few people would look to swamp logging as inherently desirable or preferable for a host of reasons.  However, it represents between 1% and 4% of related forestry activities, and the article skirts the primary economic drivers and realities for U.S. forest management.  Regardless wood pellet demand in the UK, forest owners in the U.S. will not overhaul their long-term forest management strategies or harvest practices for pellet markets.  The economics don’t make sense.  The U.S. remains a “sawtimber” market where landowners grow trees for lumber production.

In forestry, a natural tension exists between the unfettered exercise of private property rights and the biodiversity preferences of third-party conservation groups.  This “tension” is important.  Market incentives help ensure that private forests remain productive and forested, while spotlights on best management practices that protect soil integrity, water quality and wildlife habitat support long-term forest health.  This tension, like a tug of war, puts someone in the mud once in a while.  Sometimes a landowner cuts trees you might not cut, and sometimes states or groups seek a rule that restricts private property owners in an unreasonable way.  That is part of the back-and-forth.

Wood bioenergy in the U.S. faces limits to growth.  No one will be vacuuming U.S. forests to feed UK power plants.  The economics, logistics and sustainability of such strategies fail on multiple levels.  This is why markets in other regions such as South America, Russia and Canada continue to scale up capacity.  The facts, context and market relationships highlight a stuttered, evolving wood bioenergy market in the U.S. that continues to feel its way forward as part of the large, established wood-using forest industry.

Forisk will cover wood bioenergy market analysis during “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here





Data Sources for Analyzing Timber Markets in the U.S.

22 05 2013

If a tree falls in the woods, will someone buy it?  Who?  What will they use it for?  How much will they pay for it?  How many other trees will they need this year?  Next year?  A rigorous timber market analysis (TMA) process helps prioritize questions, aggregate data, conduct analysis and communicate results and recommendations.  Much of the data required for TMA in the United States is readily available.  The following list includes a sample of free and fee-based data sources for supply, demand and price data:

Forest Inventory and Analysis (FIA) data from the U.S. Forest Service.  The FIA Program includes a “continuous forest census” to help project how U.S. forests are likely to change over the next 10 to 50 years. Specific data from the FIA Program includes, for example, inventory, growth and removal data for hardwood and pine. The USDA Forest Service manages the FIA Program in cooperation with state and private forestry organizations. The McSweeney-McNary Forest Research Act of 1928 created the FIA Program, which initiated the first forest inventories in 1930.

Timber Product Output (TPO) data from the U.S. Forest Service. The TPO Database includes a standard set of consistently coded data variables for each U.S. state and county related to forest harvesting and tree removals.  Specific data includes, for example, the volume of roundwood products harvested, logging residues left behind, and the wood and bark residues generated by primary wood-using mills. The latest data available from the TPO Database is dated 2009. When using TPO data, Forisk often projects the base numbers to the current year by applying annual changes in wood demand.

Wood Demand data from the Center for Forest Business at the University of Georgia.  The Wood Demand Research Program collects wood use data from participating mills on a quarterly basis. In addition, the Program publishes Forest Industry Shapefiles that track all forest industry facilities.  These shapefiles are updated two times per year and can be used with GIS/map-making software.

Timberland owner data from Forisk Consulting. Forisk tracks hundreds of the largest private timberland owners and managers in the United States that own 10,000 acres or more. This is part of Forisk’s ongoing research program of timberland investment vehicles and is updated annually.

Wood bioenergy project data from Wood Bioenergy US. Forisk analyzes the U.S. wood bioenergy sector through tracking and screening all announced and operating wood-using bioenergy projects in the United States. In addition, WBUS tracks and analyzes project development over time. This is part of Forisk’s ongoing wood bioenergy research program and the WBUS database is updated every two months.  The project lists provide a means for evaluating the relevance and implications for wood bioenergy to specific timber and wood markets.

Several organizations provide regional and local stumpage and delivered price information.  State forestry and natural resource departments sometimes track sales from public and/or private lands.  A good example is the Oregon Department of Forestry.  One source specific to the U.S. South is Timber Mart-South.  Managed by the independent, non-profit Frank W. Norris Foundation located at the Warnell School of Forest Resources at the University of Georgia, Timber Mart-South publishes quarterly and annual reports of stumpage and delivered prices in the US South. Timber Mart-South has surveyed and reported timber prices since 1976.

Timber markets are uniquely local.  Decision-supporting analysis of timber markets depends on a process of systematically evaluating and tracking local wood raw material markets for investing in and managing timberlands and wood-using facilities.

Forisk will cover these and other data sources during “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here





Wood Supply Agreements, Part II: Basic Principles for Transfer Price Calculations

12 05 2013

This is the second in a two-part series related to wood supply agreements and their relevance to analyzing timber markets.

Part I of this series on wood supply agreements introduced basic pricing mechanisms often used in supply agreements and associated concerns raised by parties to these agreements.  Bioenergy firms new to local wood markets, in particular, focus on potential conflicts of interest associated with price indices or pricing mechanisms implemented by the same firm that collects and reports the underlying price data.  They ask “how reliable and independent are these data sources and indices?”

As a general rule, we find it helpful to avoid swimming in the toilet or peeing in the pool.  Clear, verifiable methodologies for collecting data and reporting changes over time facilitate strong wood supply relationships.  In specifying these methods, parties in a long-term wood supply agreement may rely on a set of working principles.

We believe the following three criteria for establishing an independent pricing mechanism include the proper principles while maintaining the practical necessities of an operational transfer price in a real world forest products or bioenergy supply agreement:

  • Reflects market prices: The log or wood transfer price should approximate an “arms-length”, market based price. While the transfer price may deviate from the market price for a given month, the prices paid by the mill or bioenergy plant for raw matieral over time should minimize the perceived and actual missed opportunities of bypassing other customers and markets.  This criterion passes the fairness test and retains the benefits of operating in a market environment.
  • Easy to implement and to use: The model should be easy to understand, easy to explain, and easy to use.  Complex transfer pricing methods do not create value for business owners; simple transfer pricing models allow managers to focus time and resources on operating the business.
  • Retains flexibility:  At times, the two parties may feel the transfer price requires an adjustment.  Rather than disregard the model to make an adjustment, an approach should be determined in advance for adjusting the model or revising the price. As such, the option would exist for both parties to agree to periodically review and revise, if necessary, the transfer price based on new information or on a region-wide log price index.

Situations exist when both parties want to revisit prices and how they were calculated, and accounting for this in advance based on clear principles can minimize unnecessary costs, friction and arbitration.

For investors and analysts evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here





Wood Supply Agreements, Part I: Pricing Mechanisms and Market Analyses

9 05 2013

This is the first in a two-part series related to wood supply agreements and their relevance to analyzing timber markets.

In his 1989 book Liar’s Poker, Michael Lewis wrote, “Risk, I learned, was a commodity.  Risk could be canned and sold like tomatoes.”  This represented a prevailing view among the sophisticates of Wall Street prior to the mortgage bubble and collapse of AIG.  Though the view of risk “as a commodity” varies over time, it remains critically important to managers and investors exposed to timberlands and wood-using assets.  One tool employed to mitigate risk in timber-related industries is a wood supply agreement.

Forest industry managers and bioenergy project developers sometimes use wood supply agreements to manage the costs and flows of logs and other woody raw materials to manufacturing facilities and bioenergy plants.  Integrated forest products firms also used them to work through the operational impacts of timberland divestitures.  A typical agreement comprises a contractual obligation by a supplier to provide agreed-to volumes of wood to a buyer, who commits to purchase this raw material at the contract price.

Most agreements reflect a tradeoff between security and flexibility.  In guaranteeing volumes, the supply agreement secures supply for the mill and a market for the timberland manager.  The aspects subject to negotiation include product, volume, timing, and price.  Product specifies the species and “specs” of the product to be delivered.  Pine pulpwood or hardwood logs?  Volume specifies the amount of wood covered under the agreement, whether it is fixed or a range.  Timing specifies the timeframe covered, and the time periods for actually delivering the wood.  Price specifies the method and manner for pricing the wood delivered, and the process of updating and communicating this price.

The “pricing mechanisms” built into wood supply agreements are of central importance.  They have influenced many a bonus, ulcer and sleepless night.  How can fair prices be calculated over time that account for actual market activity while minimizing the “penalties” for being locked into a set marketing arrangement?  Existing supply agreements attempt to balance two competing aspects of pricing wood based on available data.  The first asks the question, “How does the market price this wood?”  The second asks, “What is the value of this wood in the market?”  The first is the question of the wood buyer, and the second is the question of the stumpage seller.

Common approaches include rolling averages, indexing, and blended indexing.  Rolling (moving) averages are used within the forest products industry, and in other heavy industry settings, to calculate transfer prices and for raw material supply agreements. One advantage of a moving average is that it reduces the peaks and valleys associated with changes in log prices.  One disadvantage is that, for any given month, the transfer price lags the actual market price, though this should balance over time.

Recent issues related to supply agreements have focused on reduced confidence in the data underlying a supply agreement and concerns about conflicts of interest associated with pricing mechanisms or indices provided by the same firm that collects and reports the underlying price data.  These issues become relevant when conducting due diligence on timber markets or wood baskets as they can affect the ranking and risk assessments associated with potential or existing wood procurement strategies.

For investors and analysts evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here








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