Surveying Costs

Pellet Mill Magazine shares the results of a producer survey evaluating inflation and increased commodity prices in the wake of the pandemic.
By Anna Simet | November 24, 2021

Most consumers have been impacted in one way or another by surging commodity costs as a result of the pandemic. From the price of food, fertilizer, energy, lumber, wages and the extensive list goes on, it has been no different for pellet manufacturers. In October, Pellet Mill Magazine conducted a survey to gain some perspective on what kind of cost increases domestic producers have experienced over the past 18 months. Respondents included 10 production facilities representing different companies located across the U.S, in all regions. The results are as follows. Some questions have been condensed for easier reading.

Question 1. During the past 18 months, how much of an increase in the price of packaging have you experienced?

Approximately 67% of respondents reported an increase of greater than 20%, with the remaining 33% indicating an uptick between 10 and 20%. Zero respondents saw an increase of less than 10%.

For context, a 40,000-ton facility using approximately 2 million residential bags annually, at a cost of 22 cents per bag, equates to $440,000 in bag costs. A 20% price increase would result in an additional annual expenditure of $88,000 for bags alone.

Question 2. During the past 18 months, how much have labor costs increased at your operation?

As in nearly every industry, labor shortages have been a thorn in the side of many pellet manufacturers, though it appears to be a case-by-case basis. The majority of respondents—nearly 56%—said labor costs have risen 10 to 20%. However, 33% reported little or no increase at 0 to 5%, and 11% said between 5 and 10%. As a follow up question, respondents were asked whether they operate with the same, fewer or more employees as compared to prior to the pandemic. Respondents were split at just above 40% for both less and the same, with the remaining 11% reporting more.

More employees may seem encouraging; however, one respondent’s remarks indicated lack of skill being the primary reason. “We actually have more employees, but less experience and less efficiency because of the ability to retain and hire experienced help,” they said. The majority of respondents who reported a smaller workforce—nearly 67%—said the inability to hire and retain employees was the reason, with higher labor costs coming in at about 17%.

Question 3. In the past 18 months, how much an increase in the price of pallets have you experienced?

Respondents experienced a variety of percentage increases, with roughly 33% reporting an increase of greater than 40%. It was an even split for the remaining three price ranges, with about 22% of respondents choosing between 30 and 40%, 22% between 20 and 30%, as well as 22% for between 10 and 20%.

A likely ripple effect of rocketing lumber prices, the price of wood pallets began a steady climb in January, according to U.S. Bureau of Labor Statistics data (Figure 1), reaching what appears to be a peak in July. Prices fell in August and September, with October data not yet available at press time. With lumber prices having come down this summer, it appears likely that pallet prices may also continue their descent.

Question 4. During the past 18 months, has the cost of fiber increased, decreased or remained stable?

Well over half of respondents—nearly 56%—said fiber costs haven’t changed. Approximately 22% reported modest increases but subsequent stabilizing, and 11% reported decreases in fiber costs. The U.S. EIA Monthly Densified Biomass Fuel Report tracks fiber consumption and costs, with the July report (released in October) not suggesting any significant price variations. Residual categories, however, varied substantially from 2020 to 2021. For example, in July 2020, producers reported using approximately 432,000 tons of wood product manufacturing residue. In July 2021, that number sunk to about 90,500 tons. At the same time, the “other residuals” category jumped from 514,000 in 2020 to 703,500 in 2021, sawmill residue use increased from about 248,000 tons in 2020 to 457,000 tons in 2021, and roundwood rose from 172,000 tons to 198,000 tons.  

Question 5. During past 18 months, how much have grease prices increased?

Most respondents reported modest increases, with just under 78% reporting between 5 and 10%. The remaining 22% of respondents were an even split between 10 and 20% and greater than 25%.

Many factors come into play with increased lubricant costs, and include rising base-oil and additive prices, the cost of packaging including pails, drums, pallets and freight. One grease/lubricant manufacturer told Pellet Mill Magazine there was a price increase with almost every step in the value chain of producing companies. “Lubricants are no exception, due to globally increased prices for fuel, chaos at harbors and resulting delays, as well as shortages of raw materials,” the company executive said. “We feel the pressure, especially with ingredients for our food grade lubricants and risen logistic costs. However, we have kept our prices stable so far, and did not raise prices for most of our customers. When thinking a bit further back than 18 months, especially large lubricant companies benefitted from very low base oil prices in 2019 and 2020.”  

Question 6. Has availability of trucking affected your operation?

Approximately 44% of respondents said trucking is, and continues to, affect their operation. Another 44% said it has not, and 11% answered that it had at one point, but was no longer.

A late October report, “Driver Shortage Update 2021,” conducted by the American Trucking Association, estimated that in 2021, the national truck driver shortage will hit a history high of more than 80,000 drivers and could surpass 160,000 by 2030. A multitude of factors are playing a role, according to the report, which include, but are not limited to, the pandemic causing some drivers to leave the industry; truck driver schools trained far fewer drivers in 2020; a high average age of current drivers and retirements; federally mandated minimum age of 21 to drive commercially across state lines; barriers to entry such as inability to meet hiring standards, and more.

The report notes that driver pay and earnings have risen substantially, but some drivers choose to work less at the higher pay rate, negating the impact of the increase.

Question 7. How often are you making price adjustments?

In the Wild West of commodity prices, product price adjustments are perhaps being made more frequently than ever for some operations. While about 33% of respondents have continued to make annual adjustments, most respondents are evaluating and making changes every three to four months. While average per-ton prices were about six dollars less in July 2021 than in July 2020—$162.50 compared to $168.75 (per U.S. EIA data), the difference from January 2020 to January 2021 was more substantial at about $15 more per ton—from $173.27 to $188.60, respectively. Data beyond July 2021 was not available at press time.

Finally, one question surveyees were not asked but was addressed by one respondent, was related to the challenges of insurance. They remarked, “All of our operational costs, other than fiber, are up significantly. Our plant insurance premium went from $85,000 annually to over $350,000 ... only a handful of carriers are willing to even consider insuring wood products manufacturers.”

While pandemic has brought on a series of challenges, the industry could be poised to have a strong season if the weather cooperates. With fossil heating fuels projected to increase the cost of home heating exponentially, consumers may increasingly be seeking stable, cost-effective alternatives.


Author: Anna Simet
Editor, Pellet Mill Magazine
asimet@bbiinternational.com
701-738-4961