For any manufacturing process that uses biomass as primary feedstock, the operating cost with the highest variability will be the actual cost of that feedstock. This also holds true for manufacturers of biofuels or biochemicals that are derived from wood raw materials. Driven by market supply and demand that includes fluctuations in cost drivers such as stumpage price, diesel price and CPI, feedstock costs can vary significantly over time.
As a result, it is common practice for these manufacturing facilities to use long-term biomass supply agreements and product off-take agreements tied to biomass feedstock market prices. Properly structured supply agreements not only protect the project itself by providing a level of certainty, but they also afford protections for biomass suppliers, the manufacturing facility and the customers of the facility:
- Biomass suppliers contracting directly with the facility need to have confidence that, even with long-term supply agreements, they will be compensated at market-competitive rates throughout the life of the agreement.
- The facility needs to have confidence that the prices they pay for feedstock are in line with local market prices.
- Biofuels and biochemical product purchasers need assurance that any product cost adjustments based on biomass feedstock costs do not reflect a premium compared to market prices for the biomass feedstock.
Biomass feedstock price indexing is the single most accurate and balanced tool to meet the needs of all parties. Annually, millions of dollars tied to supply agreements are at stake. In order for an index to be acceptable to suppliers and buyers, both parties must have the highest level of confidence in the fairness of the index. In our experience, there are three fundamentals an effective index must possess.
1. Structure: The index must be structured so that it accurately reflects:
- The types of materials and the percentage weightings purchased by the manufacturing facility. For example, over time a production facility may change the balance of its feedstock mix to favor roundwood or chips. The index should reflect the changing total feedstock cost associated with the new mix.
- The actual biomass supply available to the production facility. For example, it would be inappropriate to use a pine pulpwood average delivered price from another geographic region rather than the pine pulpwood price a facility pays in its local market.
- The actual market. The share of the manufacturing facility’s procurement (when the facility’s own procurement staff contract directly with landowners or other facilities for the delivery of wood raw materials) must not inordinately influence the index pricing; the facility’s procurement must be a small enough percentage of the total purchases considered in the index to assure that it is not indexing against itself.
2. Data Quality: The data used in developing and updating the index must accurately reflect the total local market. Because a broad sampling of the market must be included in the index, it is critical that the underlying data be continuously updated to reflect short-term market changes.
3. Data Independence: The data used in the index must be based on actual market transactions and free of market manipulation. Surveys of market prices expose the index to manipulation; wood buyers may report the low end of their purchasing range while wood sellers may report the high end of their selling range. Both may be true, but neither is accurate. Only by collecting actual transaction data can an index be insulated from the market manipulation that undermines the confidence of the involved parties.
To assure the utmost confidence in the index, the organization that provides the index must be viewed by all parties as an independent market expert. Only a neutral, unrelated party with no economic interest in the biomass transactions should be trusted to provide the data that has the potential to impact all parties throughout the supply chain.
Forest2Market meets these requirements. Forest2Market’s data is unique within the forest products industry, as it is the only comprehensive set of data that is collected at the transaction level; no survey data is used or incorporated. This transactional data provides a full-spectrum view of market dynamics and includes information supplied by forest products companies, wood dealers, loggers, consultants and landowners. Every year, an estimated 30 million tons of wood raw materials are referenced in supply and off-take agreements to Forest2Market indexes. The depth and breadth of this data allows for unparalleled insight into wood supply chains, from the source to final consumption.