Cooking Up Higher Margins

As another heating season approaches, low heat market margins have pellet producers looking toward other end uses for greater market stability and increased profits.
By Tim Portz | October 22, 2016

Herb Seeger, president of Great Lakes Renewable Energy Inc., recently went to an auction at a distressed wood pellet facility. Recalling meeting the owner of the facility, Seeger says, “My mood isn't the same as his mood.” For Seeger and his team at GLRE, business is strong. In fact, Seeger is shipping wood pellets in containers to countries all over the world, including Japan and Taiwan. On the heels of a soft market for heating pellets, Seeger’s business is healthy, predominantly because he’s aggressively targeting markets beyond home heating users. After a particularly warm winter in the upper Midwest in 2010, Seeger convinced his ownership group to recast its facility as a diversified pellet producer, and began aggressively building expertise and customers in the barbecue and absorbent markets. Without this change in operating philosophy, Seeger doubts that GLRE would be operating today.

A recent Biomass Magazine survey, partial results of which are shown on page 15, suggests that while Seeger may be an early adopter of the idea of market diversification, he and GLRE are certainly not alone. Exactly two-thirds of survey respondents reported that they are engaged in the manufacture and sale of wood fiber products for uses other than home heating. While the majority of the industry is engaged in the manufacture of these coproducts, survey results indicate that the success and importance of those efforts vary from producer to producer. Seeger’s experience suggests that having success outside of home heating markets requires new thinking in fiber procurement, production, marketing and distribution. For producers who get it right, coproducts can improve cash flow, increase profit margins and reduce the seasonality of the wood pellet business, all issues that have plagued even the savviest of producers for years.

“What we learned when we had a warm winter in 2010 was that you can’t survive on a product that has a six-month market unless you have the ability to store pellets while you make them,” Seeger says. “And you have the working capital to make that happen.”

GLRE’s first foray into barbecue pellets wasn’t a story of instant success. Seeger says that the facility struggled with pellets that were too long, too hard and had too many fines. But the biggest hurdle was feedstock procurement. “We’ve spent six years figuring out how to buy the wood species needed to produce 22 different Lumberjack barbecue pellet recipes that we sell,” Seeger says. This means procuring wood in a species specific manner, often in quantities that loggers are reluctant to spend the time isolating and setting aside. It has taken time, but Seeger says he feels like GLRE has finally turned a corner, and its sourcing program is the foundation of their coproduct strategy. “The first nut to crack was to let them [loggers] know there was a need out there,” he says.  “Then we have to provide a price that makes it worth their while to do the necessary work to bring us the material.”

Any other producer hoping to produce wood pellets for the specialty barbecue market must overcome this same fiber procurement challenge if they hope to preserve the promise of higher margins that led them to that market in the first place. Survey responses suggest that for most producers, significantly higher margins continue to elude them. Of the producers engaged in coproduct production, just 10 percent describe those products as significantly more profitable than heating pellets. That same percentage reported that margins on those products are slightly less profitable than their home heating product; 40 percent reported the products were slightly more profitable, and 33 percent report about the same level of profitability.

This isn’t surprising to Seeger. “Most producers aren’t comfortable filling orders of 1 to 2 tons,” he says.  “It’s too much overhead. Most folks are not set up to do it. We’ve spent six years developing these systems and we’re trying to stay ahead of everyone else.” While Seeger’s competitors may not be achieving the financial success that he and his team have, the survey clearly indicates that producers recognize the potential offered by coproducts to their operations. Nearly 90 percent of respondents engaged in coproduct manufacturing say they are important to their operations, and half of those report that the share of their business dedicated to those products as growing. 

Of survey respondents, 51 percent reported committing less than 5 percent of their annual production time to the manufacture of nonheating products. In this regard, GLRE is well ahead of the curve. Just 40 percent of GLRE’s volumes are heating pellets. “I want that 40 percent number to go down,” he says. Seeger notes that he isn’t running at full capacity and has room within his air permit to run his dryer much more. He says that because of the higher margins he enjoys from his barbecue and absorbent products, his monthly run time requirements to break even on the facility is nearly halved. “We have, with a purpose, looked to make heating pellets something that we fill in with now,” he says.

Perhaps by accident, GLRE deployed a press suite well-suited for the day-to-day, and sometimes hour-to-hour, product changes the plant has to make to fill orders and satisfy customers. GLRE puts three 3-ton-per-hour Munch presses to work, and often changes from one barbecue pellet recipe to another without shutting any of the presses down. “Between the 22 recipes we make for our Lumberjack line and the recipes we make under private labeling contracts, I sometimes make 30 different pellet formulations in a two-and-a-half day span,” Seeger says. “A 10- or 12-ton-per-hour single pellet mill wouldn’t work for us.”

The growth in absorbent, animal bedding and barbecue markets has made it necessary for GLRE to move warehousing and distribution to a dedicated facility. All of the facility’s orders that are less than a truckload are filled out of that warehouse, allowing for more complex pick-and-pack, mixed shipments to be received and fulfilled in a more efficient manner.

As the 2016-‘17 heating season approaches, North American producers making pellets predominantly for home heating are holding their breath and crossing fingers. For some, another warm winter might be more than their operation can financially withstand. For others, this past winter, or the winter of 2010-'11, were enough to move them to explore other markets. Now, the question is, will they be able to leverage those opportunities into the higher margins and operational surety that Seeger and the GLRE team have?

“We were looking to change our business model,” Seeger says. “The original business model presented to the bank eight years ago doesn’t look anything like what we are doing today. And if we wouldn’t have done it, we wouldn’t be here.”

In these market conditions, he adds, a producer can’t live on heating pellets alone. “Not a little mill like this. Look at the auctions. I feel very fortunate that we did what we did, when we did it and that we’ve become a good company here in northern Wisconsin.”

Author: Tim Portz
Executive Editor, Biomass Magazine