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Three Things to Evaluate in a Biomass Feedstock Price Index

Posted by Stan Parton on January 29, 2014
The greatest variable operating cost of a bioenergy project is the cost of biomass feedstock. Driven by market supply and demand (reflected in stumpage prices) as well as changes in other cost drivers such as diesel and CPI, feedstock costs can vary significantly over time.

As a result, it is common practice for a bioenergy production facility 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 bioenergy project, but they also afford protections for biomass suppliers, the bioenergy facility and the customers of the bioenergy facility:

  • Biomass suppliers contracting with the bioenergy 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 bioenergy facility needs to have confidence that the prices they pay for feedstock are not at a premium compared to local market prices.
  • Bioenergy product purchasers need assurance that any product cost adjustments based on biomass feedstock cost do not reflect a premium compared to market prices for the biomass feedstock.

Biomass feedstock price indexing is the 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 index must satisfy.

Structure

The index must be structured so that it accurately reflects:

  • The types and percentage weightings of materials purchased by the bioenergy 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 for the US South rather than the pine pulpwood price a facility pays in its local market.
  • The actual market. The share of the bioenergy facility’s procurement must not inordinately determine 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.

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.

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 confidence in the index, the company providing the index must be viewed by all parties as independent as well as a market expert. Only an independent and unrelated party with no economic interest in the biomass transactions should be trusted with providing data which can impact all parties throughout the supply chain.

Forest2Market and its data meet these requirements. Each year, transaction prices for tens of millions of tons of feedstock and biofuel are tied to custom Forest2Market indexes.

Topics: biomass feedstock price index, wood biomass supply agreements

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