From traditional timberland leases to agreements between private owners that are guided by a strict legal contract, the forest products industry has effectively used wood supply agreements for years. What is common and pertinent to the market today are supply agreements between large landowners – usually commercial tree growers – and a traditional pulp mill or sawmill or a new pellet facility.
Most wood buying facilities view wood delivered under supply agreement as one of the many – not the only – source of available wood fiber. Other sources such as gatewood (wood that was not purchased as standing timber by the mill), direct purchase fiber, and fee wood are equally important. A smart procurement operations uses supply agreements in a very strategic manner: to leverage other sources of wood to meet more favorable volume and price criteria.
Placing the majority of needed wood supply under agreement seems like a sensible way to reduce supply chain risks. If 100% of supply is guaranteed in terms of volume and price, it would seem the project is assured to be a success. Supply chain realities, however, outweigh supply agreement theory.
First, it is rare to find one landowner with such a large ownership in one area that would allow a manufacturer to contract for all its supply. Furthermore, many landowners are unwilling to commit all or most of their future harvests to one buyer. As the volume demanded by one buyer increases, so does the landowner’s perceived risk and the price risk premium demanded.
Lastly, it is often difficult to find enough suppliers within a logical freight haul willing to enter into long-term agreements to secure even a moderate percentage – let alone all - of a manufacturers' wood supply needs. Forest2Market data indicates that organizations rarely have more than 15% of their supply under a long-term agreement.
Statistically speaking, there is no significant difference in cost between a wood buyer that has 10% of their supply under long-term agreement and that of one that has 20%. The best rely on a mix of procurement sources that fit their local needs and provide the flexibility needed to adapt to changing market conditions. Supply agreements need to be thought of as an integral part of the supply chain solution, not as the entire solution.