The Road to Commodification

By Kolby Hoagland | February 28, 2014

The rapid growth of the pellet sector over recent years has led to the development of trade groups, industry magazines, and standards (PFI for example), all with the aim of unifying efforts to realize the greatest amount of healthy growth for the sector. One indicator of the industry’s growth has been Statistics Canada and the Foreign Agriculture Service at the USDA tracking pellet exports in quantity and value on a monthly and annual basis. Though only two years of data have been gathered, the graph below shows total annual exports of pellets from U.S. and Canada and the primary destinations.

NA Exports and Destinations2

As greater production capacity comes online in North America to produce industrial pellets to supply Europe’s strong demand and Asia’s anticipated demand, the pellet export/import industry advances on a path toward full commoditization of pellets. Currently, large scale import pellet consumers primarily act as buyers and deal with producers directly to secure their bulk quantities of industrial pellets. The pellet buyer/consumer then coordinates transportation to have the pellets delivered to their point of consumption. This is a very rough generalization of the multi-layered business transaction that actually occurs, but compared to corn, iron ore, pork bellies, and other traded commodities, the pellet industry is an immature commodity market. It has yet to attain the market efficiencies that other mature import/export commodities have established. In Biomass Magazine’s recent pellet plant outreach effort, I had the pleasure of speaking with a pellet producer who explained the dichotomy of running a large pellet plant and answering calls from the five “price bidders” that call each day. The industrial pellet space is ripe for fluid purchasing and storage (or even hedging!) that would alleviate summer production lulls that drag down annual revenue. What does the pellet sector need for more fluidity in purchasing, storage, and a supporting commodity market?

There are a number of physical and logistical aspects that maturation of an export/import market share: accepted standards, fluid transportation systems that limit spoils, consistent supply and demand, supportive policy, and the longevity to support a trajectory of growth are a few market qualities that make commodities from pork bellies to succeed as a market. In one form or another, the current pellet industry has most of the necessary components that I wonder when the “invisible hand” will wave in market maturity and fully commodify pellets. The pellet industry’s continued expansion furthers steps towards a mature market that may one day be run by price indices and a highly disconnected supply chain. What is not known is how quickly the process is occurring. What do the next five years hold for this industry?  This is the question we all wish we had an answer.