In 2019, wood pellet producers in the U.S. consumed over 18 million tons of wood fiber, nearly 80% of which was the byproduct of upstream sawmilling and wood product manufacturing. Since 2012, wood fiber demand from pellet producers has steadily risen along with global demand for wood pellets. In 2019 alone, wood pellet producers spent nearly $500 million on residual wood fiber, greatly expanding the overall value of harvested wood while providing an offtake option for wood product manufacturers that, 20 years ago, simply was not there. Since 2016, the first year the U.S. Energy Information Administration began tracking wood pellet production and fiber procurement, wood pellet manufacturers have spent $1.6 billion purchasing over 50 million tons of residuals. The emergence of wood pellet producers as a steady and consistent buyer of wood fiber is a classic example of value-added forestry, but also highlights the difficulties of balancing the supply and demand relationship between markets that are simultaneously intertwined and disconnected.
Sawdust, wood shavings and wood chips are inevitably produced when whole logs are converted into dimensional lumber, wood flooring, cabinets and pallets. While efficiencies and innovation in sawmilling have reduced the amount of waste created in the conversion process, mountains of residues are created in the wood products sector, and manufacturers rely on steady and consistent offtake partners to move the material off their sites and bolster their bottom line.
This dynamic is not new. Stephen Faehner&rsquo;s family has been connecting fiber makers with fiber takers for longer than a century.Faehner, president and CEO of American Wood Fibers, notes that while the end markets may have changed, the challenges remain the same. &ldquo;My great grandfather, Eugene Faehner, was a brewer in New York City in the early 1900s,&rdquo; he says. &ldquo;When prohibition was passed, he found himself out of work with a growing family to feed. He got a horse and buggy and started picking up fiber in the city and finding buyers for it.&rdquo; Building a business of diversified buyers, Eugene Faehner sold the city&rsquo;s robust fiber streams to furriers, livery stables and even as an abrasive to tumble-polish nails.
Over 70 years later in Goshen, Indiana, Fiber By-Product&rsquo;s Dale Schrock began sourcing wood fiber for his own farm&rsquo;s poultry operation from local wood product manufacturers. Schrock cemented himself not only as a consistent offtake partner for the wood product manufacturing base, but also as a reliable and trusted source of bedding for the other livestock operators in the area, and the phone was always ringing. The business grew throughout the 1980s and &lsquo;90s, and as the economy surged the late &lsquo;90s and mid-2000s, Schrock would eventually have to confront the same challenging question that Eugene Faehner faced in 1930s New York: What happens when the fiber supply doesn&rsquo;t synch up with fiber demand?
Faehner and Schrock both recognized the value they have offered to their suppliers is consistency. Sawmills cannot be impeded by growing piles of sawdust, and in those early days, it would often give it away so long as it was removed regularly.
Eager to remain in step with the fiber output of his supplier base and emboldened by low fiber prices, Schrock turned to wood pellet manufacturing to absorb some of the inbound fiber and grow his business.&nbsp; In 2006, Fiber By-Products moved off the Schrock farm, establishing itself in nearby White Pigeon, Michigan, and subsequently building a wood pellet manufacturing facility that produced 20,000 tons of product in its first year. Built as a remedy for more fiber than the facility could handle, it didn&rsquo;t take long before the script flipped on Fiber By-Products.
The economic downturn of 2007-&lsquo;09 hit the company&rsquo;s fiber suppliers hard, and inbound material slowed to a trickle. Fiber By-Products had already proved itself as a producer capable of producing tens of thousands of tons of product, and customers counted on&nbsp; its volume. Fortunately, perhaps in anticipation of such a scenario, Fiber By-Products had installed a drum dryer when its facility was built, despite having enjoyed steady access to premium kiln-dried secondary wood production manufacturing residuals for years. &ldquo;For the first few years, that beautiful new dryer just sat, and a number of times we wondered we had even installed it,&rdquo; says Cory Schrock, vice president of operations. The dryer was a hedge, the type of alternative that successful, experienced farmers like Dale Schrock learn to put in place before there&rsquo;s a problem. &ldquo;We had a couple of cabinet shops and mills close their doors during the recession and didn&rsquo;t have enough material coming in,&rdquo; Schrock says. &ldquo;We got that dryer running and it ran full time for a couple of years.&rdquo;
The dryer allowed Fiber By-Products to reach further up the wood products supply chain and brought green material into play for its operation. Without it, Schrock doubts the pellet business at Fiber By-Products would have survived. Inventory as Buffer While diminished fiber markets present real challenges for producers, diminished demand brings its own&mdash;and perhaps even greater&mdash;challenges for pellet producers. During the heating season of 2015-&rsquo;16, pellet sales lagged dramatically in the second half of the season. According to U.S. EIA data, January through April of 2016 was the lowest wood pellet sales total (364,628 tons) when compared to the same time frame in the report&rsquo;s five-year history, and by a wide margin. January to April sales exceeded 600,000 tons in 2018, 2019 and 2020. Interestingly, residual purchases during the same time periods over the 2016- &lsquo;20 timeframe do not correlate with diminished sales. Wood pellet producers bought 3.6 million tons of residual fiber during that same period time in 2016, 3.2 million tons in 2017, and 3.7 million tons in 2018. Wood pellet producers, rather than turn fiber away and create hardships for their longtime fiber partners, continued to take fiber and simply converted it into inventory. National wood pellet inventories climbed 150,000 tons between January and April 2016. The industry hasn&rsquo;t built that much inventory in late winter since then, averaging just half that amount each year.
&ldquo;When the pellet industry turned down in 2016, we could have pulled back from our vendors and turned our production down,&rdquo; Schrock says. &ldquo;We didn&rsquo;t want to ruin those relationships. We had 26,000 tons of wood pellets in our warehouse at once. Without that fiber being densified, we couldn&rsquo;t have stored it, and we would have had to dump it or turn it away. Then, once demand came back, we wouldn&rsquo;t have been able to run fast enough to catch up.&rdquo;
While wood pellets are an effective way to store wood fiber volumetrically, they can create cash flow challenges for producers. Inventory levels peaked in September 2016 as producers had amassed 630,000 tons of inventory. Except in rare instances, inventory doesn&rsquo;t generate revenue until it ships, and as the heating season began in 2016, producers had nearly $100 million worth of wood pellets sitting in warehouses as they waited and hoped for winter.
Inventory levels have declined steadily since, with monthly inventory averages falling from over 500,000 tons in 2016 to under 150,000 tons last year. Since October 2018, inventory levels have never climbed past 250,000 tons and the industry seems to have developed a comfortable, but perhaps temporary balance, between fiber supply and pellet demand. A Pandemic Disruption In mid-March as the coronavirus pandemic descended on the American economy, wood pellet manufacturers braced for a sudden tightening of fiber supplies. Hardwood sawmills across the country were already struggling to manage retaliatory tariffs from China, their largest export customer, when coronavirus began to accelerate, and manufacturers considered the possibility of government-mandated shutdowns. In mid-March, manufacturers across the country worked to establish themselves with state governments as essential businesses hoping to remain in operation. Later that month, they were offered a reprieve when the U.S. Department of Homeland Security and the Centers for Disease Control established wood product manufacturers as essential, and states quickly followed suit.
Still, what remains unanswered is the impact on demand for upstream wood pellet manufacturers, and in turn, their output of wood fiber. The do-it-yourself fervor generated by the pandemic created intense demand for softwood dimensional lumber, but the story around hardwood fiber inventories is less clear. The most recent EIA data is current through April, and the only indication the report offers in terms of a tightening fiber supply is in the category of sawmill residuals. In April, well into the coronavirus outbreak, wood pellet manufacturers purchased just 223,000 tons of fiber, more than 20% off of the 2019 monthly average of 301,000 tons. All other residual categories were above or near their category&rsquo;s 2019 averages. If the coronavirus pandemic is going to significantly impede wood pellet producers&rsquo; ability to get ample fiber, it hasn&rsquo;t yet shown up in the data.
Instead, EIA data suggests that 2020 may well see record wood fiber purchases by pellet producers since it launched its Monthly Densified Biomass Fuel Report in 2016. Even with six weeks of COVID-19 reflected in the available data, 2020&rsquo;s first four months saw producers buy 4.6 million tons of residuals, up slightly from 4.4 million tons last year and considerably up from the 3.7 million tons they purchased in January through April 2018. Additionally, wood pellet producers are beginning to hear reports from retail partners that pellet BBQ sales are up significantly, heating pellet appliance sales are also up, and that work-from-home and school-from-home mandates may increase daytime wood pellet usage this heating season. So long as upstream sawmills and wood product manufacturers continue to operate and produce fiber, they&rsquo;ll find no shortage of wood pellet producers willing to buy it. Author: Tim Portz Executive Director, Pellet Fuels Institute tim@pelletheat.org www.pelletheat.org

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While sawmills have become more efficient and innovative over time, a vast amount of residue is still generated. Wood pellet 
producers must find the delicate balance of buying the volume required to meet production needs, and buying what a supplier 

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Wood pellet producers face a difficult challenge in balancing fiber supply 
and wood pellet demand.

Connecting Fiber Makers and Fiber Takers

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