Matching Pellet Supply With Growing Demand

Despite fluctuations, producers and distributors agree: Good relationships and communication can help keep stores stocked with wood pellets during the busy heating season.
By Ron Kotrba | September 14, 2015

Few events can sour the experience of domestic, residential pellet stove users more than being unable to buy product during a cold snap. “Frankly, not having enough products to meet demand is my major concern,” says Paul Stringer, vice president of sales and marketing for Somerset Pellet Fuel, a Kentucky-based pelleting operation with an annual capacity of 50,000 tons. Somerset’s raw material comes to the facility already kiln-dried from its hardwood flooring plant. The company’s pellet customers are big box stores such as Tractor Supply Co. and Lowe’s. “All of us in the pellet industry want the market to grow,” Stringer says. “If customers can’t get pellets, they won’t buy the stoves and it hampers growth in the industry.”

Supply shortages are part of any growing market, but the business of residential wood pellets is different than many other, more predictable industries. It’s an emerging market that is based on unpredictable events such as oil and natural gas prices, the housing market, weather, the economy and even politics.

“The past year has been difficult with supply and demand,” says James Mayer, salesman for PelletsNow LLC, a third-party distributor of pellets in the Northeast supplied by Maine Woods Pellet Co. LLC. “Demand is greater than supply and it’s hard to meet the needs of our customers the way they want to be met.” He says while demand usually slows down in spring and summer, this season it hasn’t.

PelletsNow has a retail network of 150-plus small businesses in the Northeast. According to data from a recent Pellet Mill Magazine distribution survey, less than 50 percent of respondents’ annual production is sold to big box stores, leaving a majority of domestic market sales to smaller retail outlets. “We don’t deal with big box stores, mostly just mom-and-pop stores,” Mayer says. “We have a couple of retailers that have five or six locations, some have four that do 10,000 tons out of one retail location.” He says the small retailers in his network really distinguish themselves by getting to know their customers and the product, and by delivering product to the customers’ homes—even bringing a pallet jack to the customers’ driveways or helping hand-stack product.

Dejno’s Inc. operates a 40,000-ton pellet facility in Kenosha, Wisconsin, and has a fleet of 35 trucks and 600 trailers to deliver its Dejno’s brands of hardwood blends and softwood blends. “We’ve been in business for 10 years and we’ve seen the ups and downs—the times of extra supply and then crisis management where everyone’s out,” says Vice President Larry Dejno. Located between Milwaukee and Chicago, Dejno’s pellet facility doesn’t have a dryer, so the plant doesn’t process green product the way other facilities do. It receives sawdust directly from suppliers such as sawmills.

Dejno says pellet shortages in stores are oftentimes beyond the retailers’—and his—control. “Weather, propane and petroleum price spikes, or a housing market downturn where the raw material is not available—there’s always a reason,” he says. “But from my perspective, there’s no doubt it’s not a pellet production capacity issue. No one in the industry thinks that. It’s not a capacity issue—except when the market gets to crisis mode and then it’s a matter of playing catch-up.”

He says in times of tight supply the industry does tend to see pellet mills pop up to meet growing demand, but then there’s a glut and facilities that aren’t the lowest-cost producers shut down. “I do wish the market didn’t have the ups and downs it does,” Dejno says. “It could be a good, stable, dependable business model, but we have to contend with these factors that make it fluctuate wildly. But fundamentally, I don’t think it’s a production capacity issue.”

Stringer says it’s less about production capacity and more of a raw materials supply issue. “Having the raw material source, especially a quality supply of sawdust, is critical to efficient production and to making a quality product,” he says. “So, in my view, it’s all about raw material supply. I can build a plant, but without raw materials, it doesn’t operate.”

Sally Goossen owns Green Friendly Pellets LLC, a 17,000-ton mill in Plainview, Minnesota. The plant has moved several times since it opened in Balsam Lake, Minnesota, in 2008. From there it was relocated to New Richmond, Wisconsin, and then to Plainview, Minnesota, and it may soon be moving again to either a reservation in North Dakota or near Bemidji, Minnesota, to be closer to feedstock. Like Dejno’s and Somerset, Green Friendly Pellets doesn’t have a dryer so the facility takes in prepped sawdust. Goossen says in New Richmond, the company dealt more with retailers but since moving to Plainview, it does more wholesaling. In addition to its own production and labels of PennyWise and Green Friendly Pellets, her company buys product from Spearfish Pellet Co. LLC and bags and sells it under the Stall Pro brand. She wholesales product to a distributor, Industrial Builders, which sells to hometown retailers such as Ace Hardware stores. Goossen also notes the pine pellets from Spearfish, South Dakota, are used as an absorbent in the shale fracking industry on the completion side.

As to why the industry experiences shortages at times, Goossen says there’s “a lot of little things happening” that affect supply and demand. For starters, the growth in pellet stove users has been “dramatic,” she says. “A few years ago in my home town of Balsam Lake, no one had a pellet stove. Now everyone in my neighborhood has one.” She also says that additional outlets for pellets, such as the use in oil fields or even oak heating pellets for barbeques, increases demand and tightens supply. “The Lumberjack brand, instead of having 20 semiloads a month for heating pellets, they’re now being distributed as barbeque pellets,” Goossen says. She also mentions that a few plants have closed in Minnesota, which has affected supply. “Demand went up, but production didn’t,” Goossen says. Finally, Goossen notes that a lot of mills have been, or are being, developed in the Southeast to satisfy European demand. “That wood waste could be used for the U.S. market, but it’s used for pellets that are going to Europe,” she says.

The biggest variable, according to Mayer, is the price of oil and natural gas. “When it goes down, people are less apt to use wood pellets,” he says. “When it goes up, they’re more apt to use wood pellets. So what’s going on with the fuel market—and politics—is big.”

Alleviating the Pinch
So, with factors beyond anyone’s control such as energy markets, politics, the economy, housing and export markets, expanding uses and the weather, how can producers, distributors and retailers better predict the market to keep shelves stocked without holding too much inventory?

“You can never forecast to a tee,” Mayer says, “but if you look at last year’s numbers, including spring and summer sales, the mills that are online, supplies and oil prices last year, weather forecasts and the economy, then 50 to 75 percent of the time you can do a decent forecast.”

Capital and storage space are two major problems with keeping retailers adequately stocked, according to Mayer. “No one wants to sit on product for more than a month or two,” he says.

When weighing which situation is worse—not having enough product to meet demand or stocking too much inventory—Dejno says it depends on point of view. “It’s worse not to have product,” he says. “From our perspective, it’s worse to have retailers’ expectations of your capacity and inventory, and not being able to perform. Either their expectations were wrong or their numbers on what you can do are wrong. There’s not a shelf life on this stuff, it doesn’t expire. Sure it costs money to carry over inventory, but it’s not like it is spoiling.”

According to data gathered from Pellet Mill Magazine’s distribution survey, nearly 24 percent of producer-respondents offer storage for their customers’ off-season purchases at a fee, and nearly 22 percent offer storage at no fee. The remaining 55 percent offer no storage. Dejno says occasionally he stocks inventory for his customers if they don’t have the storage space. “They don’t want to be left shorthanded,” he says. “Sometimes if they do a prebuy we’ll stock more inventory for them.” Mayer says transportation and storage are the biggest variables and the largest cost. Using PelletsNow’s partner, Quest Transportation, the company drops product directly from Maine Woods Pellet Co. to retailers. “Storage has always been something we have looked at, but it’s a lot of cost,” Mayer says.

Buying early can help alleviate the supply crunch later in the season. “We’ve had more customers this year make an effort to put their orders in early,” Mayer says, adding that some of them have already ordered one-third to one-half of their predicted supply for the upcoming season. Goossen says for the pine pellets used as absorbents in oil fracking operations, orders have been put in six months ahead of time to ensure supply.

She says the issue with the local hardware stores comes down to risk of investment, noting that last year there were a few stores in Hudson and St. Croix Falls, Wisconsin, that were out of pellets for weeks, which surprised her considering natural gas prices were so low. “For them, they would have to buy through a distributor and purchase a semiload at a time, so the company is putting out this money up front hoping that the local customers come there to buy [versus going to a big box store],” Goossen says. “They’re putting up this investment and hoping they’ll buy at 25 cents more a bag or $1 more a bag from the local place, and now you’re housing 24 pallets outside and trying to keep them from the weather, or rodents. So the biggest complaint I hear is putting up $4,000 in August and maintaining a semiload of pellets, but come January they may be out, and if they order more and pay a premium for that, and have to turn that price over to the consumer, they will go to a big box store like Menards. I’ve seen it happen.” She says Menards has called her a few times in the past month. “They’re anxious for pellet purchasing in the upcoming season,” she says.

“This is a business that requires investment,” Stringer says. “Clearly, for the manufacturer, you are holding a lot of pellets in the summer so that you can meet the demand in the winter. It is a cash investment that you have to make, in my mind, to be a good supplier.” For retail, Stringer views it the same way. “The best suppliers can afford to invest in pellets when they get them in the summer months, or at least the months prior to winter and they stock up,” he says. “Otherwise, they are going to be caught up in the scramble that we see each year. I don’t think there is a magic solution for that. It is the business.”

A piece of advice Dejno offers retailers that want to alleviate the madness when demand is crazy and supplies are tight is to keep the good buyers employed. “That’s the reason we run into issues—when we’re dealing with a new buyer,” he says. “We don’t do a whole lot with big box stores, it’s mostly small retailers such as garden shops and independent businesses. There are only a few big box stores we regularly work with, but when they have a changeover in responsibilities it feels like we’re reeducating them all over again. When there’s a shortage, they scramble and buy stuff going into next year. When they’re comfortable and supplied well, they’re not interested in putting in inventory for the next season.”

Retailers carrying multiple brands might also help offset tight supplies in the heating season. Mayer says some of the retailers he services sell several brands. “That’s good—they need a diverse line of products,” he says. Dejno says many retailers have realized that more brands are better because it helps with fluctuation. “What we find is when a retailer is short on a brand and orders are way behind, we get a lot of calls in those times of shortages,” he says. “We don’t take on new customers at that time. We call them back in the off season so we don’t deplete our inventory.” Many of his customers have been with the company for five to 10 years, and Dejno says he doesn’t want to short loyal, long-term customers to satisfy new orders.

Ultimately, the best solution to tight supplies of pellets during the heating season may boil down to two simple, but very important, elements: communication and relationships. “We have strong relationships with loyal customers and we agree to target volumes to deliver to each customer,” Stringer says, adding that there is always more demand than he can deliver.

“Once we get into the season, like right about now, the best plan for me is to be in contact with my customers once a week to find out what their customers are saying—are they buying sand, are they buying salt, what’s the consensus,” Mayer says. “Then they ask me what’s going on with the mill and ask if there are any changes. That way the retailers know and they aren’t out of the loop.” Mayer says there needs to be better communication on all ends—between pellet manufacturers, wholesalers, retailers and home owners; and even between pellet producers, wholesalers and stove manufacturers. “I enjoy talking to retailers about trends and forecasts,” Mayer says, adding that he has seven or eight retailers in strategic locations throughout the Northeast that he distinguishes as superior based on their sales. “I give those guys more than one call a week and ask them more in-depth questions and tell them, ‘When you get to 50 or 100 calls a week, give me a call.’”

Dejno says, “If you have long-term relationships on both sides, you get used to a comfort level of what is in inventory and on-hand vs. what your customers’ expectations are. The more you communicate, the better it is for their situation.” He says at least three points during the year—preseason, in-season and end-of-season—his company has good conversations with its dealer-customers. “We just learn from each season, and find that comfort level on how to go forward,” he says. “Sometimes the solution is literally communication. The best thing is when there’s a buyer that understands the market risks of not building up inventory on their side. Everyone wants just-in-time delivery but with this product, it’s about building up inventory on both sides to be prepared for a run.”

Author: Ron Kotrba
Senior Editor, Pellet Mill Magazine