Feb. 8, 2010

By By William Perritt, Executive Editor, Wood Biomass Market Report, RISI

RISI ECONOMISTS: Draft BCAP rule angles to protect "higher-value" wood markets

LOST RIVER, VA, Feb. 8, 2010 (Viewpoint) - By William Perritt

The long-awaited draft rule for the Farm Service Agency's (FSA) Biomass Crop Assistance Program (BCAP) was released this week, and early analysis by RISI suggests the language is getting closer to providing assurances that wood for higher-value products will not be diverted for use as biomass. Since the program's inception last year, the overarching concern among traditional forest products players is that the cost match would drive up prices for composite panel furnish, OSB raw material, pulpwood and even some low-grade sawlogs. Payments are just now flowing to the market in earnest from a $517 million allocation (good until March 31).

Market sources reported limited problems for now in relation to cross-grade competition, according to RISI's Wood Biomass Market Report, ( www.risi.com/woodbiomass ) but the early read is skewed by the fact that demand for wood to power production is soft, and pellet producers are in a nasty sales slump. Had markets been strong at the time of funding, rest assured higher grade wood resources would have flowed past pulp and panel mill gates to the nearest BCAP-approved facility.

Is it fuel? Currently, BCAP operates under a confusing NOFA (notice of funding availability), which contains a proviso that wood consumed for energy or pellets "would not otherwise be used for higher value products" if originating from federal public lands. However, the NOFA is more liberal for wood coming from non-federal (including private) or tribal lands, omitting the higher-value language. Wood from private land is not addressed. Wood Biomass Market Report sources currently report the use of higher value wood in power boilers and pellet mills under BCAP.

Why, indeed, would a logger harvest and process pulp-grade trees (including efforts to limb and cut to length), when the same material could be chipped in-woods and delivered as biomass for a much higher price? During third quarter 2008, RISI's International Woodfiber Report noted a situation in Maine and Northern New England in which biomass demand -- driven by renewable energy credits -- drove pulpwood directly to fuel use since energy plants were able to pay more for the material. A short scramble and price war resulted based on a multiplicity of factors.

The FSA recently issued a clarification to state and county offices (where payments to suppliers are made), reiterating that eligible materials include "tree and shrub species without timber, lumber, or wood pulp value."

In the proposed rule, the eligible material definition has been further tweaked in an attempt to thwart diversion of material from higher-value wood product production. The new language proposes exclusion "from matching payment eligibility wood wastes and residues derived from mill residues ... or other production processes that create residual byproducts that are typically used as inputs for higher value-added production (i.e. particle board, fiberboard, plywood, or other wood product markets)." The rule applies to both "public and private" lands -- certainly a tighter definition.

This can be interpreted to mean that sawmill residues, which could be used to produce MDF or particleboard, or woodchips that could be used to produce pulp, cannot be eligible for matching funds. For trees which are harvested and processed (i.e. chipped), which are not "waste materials," the rule says the agency "proposes to continue the exclusion of commercially-produced timber, lumber, wood or other finished products that otherwise would be used for higher value wood products."

So, if you're growing timber, and your thinnings, small logs, tops, etc. are big enough to haul to the chip mill to make pulp or to haul to the OSB mill, then you should not be able to chip that and send to biomass, according to this rule. Logging slash, chips with bark, non-commercial species, or pre-commercial thinning, etc., are eligible for matching payments.

The clarification on utilization begs one question: Suppose non-eligible materials are too far from a higher-value market? May they then be diverted to biomass and qualify for BCAP payments?

Reactions vary. Composite panel producers are acutely exposed to the current vague enforcement of the program, and fear the rule will do little to change the situation. One panel industry source said, "Given the poor way the eligibility list was crafted last year, we take nothing for granted and will continue to press for explicit language that is not subject to (much) interpretation."

On the other hand, some mills clearly eligible for BCAP have shied away from the program, not wanting to be stung for receiving questionable materials -- even if there is no local market for wood to panel or pulp production. "I don't want to wind up in the newspaper for accepting ineligible material," one wood buyer told Wood Biomass Market Report.

Payment options. FSA is seeking comments on different options they propose for the matching payments, which seems to indicate that this program is still a "work in progress". In one scenario, for the existing forest products facilities planning to use eligible biomass for heat or electricity, matching grants of up to $45 per dry ton will only be paid on the amount above the historical baseline consumption. For example, if a pulp mill was consuming 100,000 tons of hog fuel per year previously, and they sign up with BCAP and use 101,000 tons next year, the matching payments are only on the 1,000 additional tons.

In a second proposed option, cellulosic ethanol plants will be eligible for the full $45/dry ton match, but the use of biomass for other purposes, to produce, heat, electricity, or pellets would be eligible for some type of lower payment. FSA throws out $16 per dry ton as a possible example, although they also suggest matching this payment (somehow) to greenhouse gas reductions.

The third proposed option suggests the dollar-to-dollar matching payments, but somehow reducing the match relative to a baseline. So, new biomass plants, or those that convert from fossil fuels to biomass, would be eligible up to the $45/dry ton maximum matching payment, but existing facilities would only be eligible for the subsidy on material above the "established baseline." The use of "new, innovative material" could also qualify for the full $45 match.

No liquor, no way. The agency makes it quite clear that black liquor is not, and never will be considered an eligible material, and therefore no one shall ever receive payments for black liquor. Ever.

Pulp mill sources express frustration over the black liquor omission, since a significant percentage of wood (often around 40%) passes through to the black liquor waste stream. And black liquor is a legitimate biofuel by anyone's standard.

The moisture question. FSA agreed to accept "industry standard conversion rates," meaning that while payments will still be based on dry tons, measurement of moisture content is not required, if buyer and seller agree to use a standard rate of, say, 50%. Several wood buyers noted the latitude for "creative accounting" in moisture level determination.

Supplier applications suspended. The FSA imposed a moratorium on new biomass supplier contracts through BCAP since posting its proposed rule for the program this week. An FSA source said while new CHST (collection, harvest, storage and transportation) applications will not be considered until after a final rule is approved, those suppliers already approved are eligible to continue receiving matching payments for biomass deliveries. It is unclear whether FSA will continue the approval process for consuming mills (with nearly 450 already approved nationwide). California has the largest number of BCAP registered facilities (37), followed by Oregon (31) and Maine (26). In total, the South has the largest number of BCAP facilities, with 37% of the total, followed by the West (27%) and the Northeast (22%).

The proposed rule is now in a 60-day comment period. "We can't anticipate a timeline" for a final rule, FSA told Wood Biomass Market Report.

- William Perritt, Executive Editor, Wood Biomass Market Report