On June 11, 2009, the Department of Agriculture’s Farm Service Agency (FSA), acting on authorization provided by the 2008 Farm Bill and on special instructions from the White House, published a Notice Of Funds Availability (NOFA) authorizing the Farm Service Agency to implement a feedstock incentive program for forestry and agricultural biomass directed to bio-energy facilities.

The intent of this Biomass Crop Assistance Program (BCAP) was to inject new liquidity into biomass markets, although information about its reach, scope, and application remained scarce for some time. There were questions about the real mission of the program. Was it pointed toward energy independence, carbon management, or just good, old-fashioned economic recovery? From the forestry side, the key question was: how well does the Farm Service Agency really understand the difference between agriculture and forestry when it comes to passing incentives around?

Between the date of the NOFA’s June 11 publication and October 29, when two Farm Service Agency officials participated in a conference call with two hundred forest industry stakeholders, certain terms and definitions emerged:

• BCAP would operate under the provisional NOFA, which would interpret the intent of the enabling legislation until a formal regulatory process should conclude, in the spring of 2010.
• In any case—with or without a final regulation— FSA would be able to make discretionary allocation decisions out of an existing annual lending authority of $30 billion conventionally directed to agriculture, with regionally apportioned ceilings to be adjusted in view of experience.
• BCAP would “provide payments at a rate of $1 for each $1 per dry ton paid by the . . . qualified biomass conversion facility to the owner for delivery of eligible material to the facility in an amount not to exceed $45 per dry ton.”
• A qualified purchasing facility would have to use this eligible material to produce “heat, power, biobased products, or advanced biofuels.”
• Transactions would have to be “arms-length” (no claiming the subsidy for internal transfers), and rules would take care to avoid “double-counting.”
• The qualified facilities would not need to be new bio-energy start-ups but might also be existing ones, including forest products mills that use a biomass component for energy production, provided they are able to define the eligible stream separately from other, non-energy feedstocks.
• But FSA ruled not to accept pulp mills’ internally produced “black liquor” as eligible—no matter how subtly a pulp mill accounted for that component within a purchased biomass stream.
• The program would run for two years, at least initially.

As of October 29, 125 biomass-consuming sites had qualified themselves as eligible facilities, including numerous forest products plants. At that time, FSA officials estimated that that total would increase to “400 or 500” by September 30, 2010. In fact, the total had already reached 288 (including 71 pulp mills) by December 3, 2009.

A “biomass owner,” qualified to sell the biomass and apply for the dollar-for-dollar subsidy, could be a landowner, a logger, a broker, or a mill, provided the same portion of biomass was not counted twice.

Are Pulp Mills Happy?

The inclusion of pulp mills as potentially qualified facilities for the purchase of subsidized biomass for energy production seemed to acknowledge that denying a subsidy to established plants would unfairly and illogically direct a traditional fuel source away from them. In effect, if the subsidy did not substantially cover the existing universe of consumers before directing itself to new entrants, it would create a competitive environment largely at cross purposes with the intent of the program. The forest industry seems to have made that case successfully to the FSA administrators by the fall of 2009.

But pulp mills that have recognized the need to become BCAP-qualified to compete with new entrants to the biomass market have new overhead. As one Southeastern procurement manager puts it, “First, we have to go through a tedious process to get qualified. And then we have to provide bone-dry units, and we’ve got to supply tickets that have to be signed by the manager. We have to hire all these people, buy equipment to do the bone-dry testing.” To be sure, the subsidy is paid, not to the consumer but the seller. But is a procurement manager likely to absorb that kind of cost without trying to get some of it back in a price negotiation, over whatever slack the subsidy introduces into the biomass market? In fact, FSA officials acknowledge that “indirect” benefits accrue to consumers, although BCAP directs subsidies to sellers.

RISI’s Biomass Market Report was making note that some mills were negotiating for their piece of the “slack” by late summer 2009, but whether the subsidy actually placed mills in an especially sweet spot is disputed. In theory, pulling costs out of the supply chain lifts everyone’s position in it. But as that Southeastern manager observes, there is a difference between removing costs and inserting slack, and he sees inflationary impulses radiating throughout logging rates and stumpage—and doubts either will evaporate with the presumed expiration of BCAP in 2011.

We asked that manager whether he thought BCAP was actually bringing new biomass into the market.

“I think you could argue that it could bring less biomass into the market,” he commented. “I think that a lot of pulpwood-quality biomass is going to move into the chain.” For him, BCAP lets the power generation plants do less sensitive merchandising, and “an economic equilibrium that’s been there for years is being turned on its head.”

Composite Panels

One of the clearest “unintended consequence” cases is that affecting the composite panels industry, which—speaking through the Composite Panels Association— published an open comment on its situation on December 9. CPA observed that “industries dependent on composite panels” produce $68 billion in annual sales and support more than 350,000 manufacturing jobs—all based on a feedstock (residual wood from sawmills, including sawdust and shavings) which is not only fully qualified as a BCAP-eligible material but which qualified facilities, particularly pellet producers, value highly. CPA objects to the NOFA’s permitting “higher value industrial raw materials” (including wood chips and sawdust) among eligible materials and predicts that failure to amend that provision could “wipe out” the composite panel industry. CPA’s statement urges FSA to reform the NOFA before the current regulatory process concludes.

A Western-based particleboard manufacturer’s open letter is just as blunt. “A pellet mill can move into this market and, with the assistance of government subsidies, enjoy twice the purchasing power for wood of any competitor in that market.” Also: “When materials that are already at a 95% utilization rate are included in the eligible materials list of a government subsidy program, great inequities will result.” This manufacturer’s statement also expresses anxiety about the strength and clarity of restrictions on materials suitable for “higher-value products”—which currently apply to biomass originating on federal lands— since “suddenly, for the materials owners, the ‘highest value’ is to a pellet mill, even though the particleboard plant (and downstream industry) is producing 27 times more jobs and sequestering the carbon that the pellet mills are determined to release.”

And the Pellet Producers?

Does it sound like the pellet mills are right where they want to be? A senior executive for an established pellet-fuel facility in the Appalachian region has a different view. For him, the main effect of the BCAP program is to pull a large number of new producers into an oversupplied pellet market.

“The recent sawmill residue shortage kept pellet mills down,” he says. “Now the subsidy is creating an oversupply of wood pellets. They thought it was an incremental opportunity to bring more biomass into the equation; but first, they have to subsidize all the existing biomass use. We’re definitely not fans of BCAP, but we are forced to participate. It’s going to set up more failures than it will successes. If [a new project] doesn’t work without BCAP, it shouldn’t be done.”

A “bubble” of new entrants hurts his business more than temporarily lower feedstock costs help it. For him, if the government wants to create more pellet capacity, it should pull, rather than push: provide homeowners and institutional users with tax credits for furnace installations. He believes the beneficiary of BCAP was intended to be “new landowners,” to increase supply, but he thinks “loggers and sawmills” will reap the actual financial benefit. “You have this big carrot out from the government that is causing people to change their business plan. Will BCAP leave me in a better place two years from now than it would be without it? My answer is no.”

Loggers Reaping the Benefit?

But does the slack really go to the logger?

At least one logger doesn’t think so. A major Southcentral logger sees himself caught in a negotiation vise between a pulp mill customer—which has become a “qualified facility” and expects a lower price for biomass—and a landowner, who is also looking for a piece of the BCAP action, regardless of whether he or the logger actually claims the subsidy. This logger strongly implies that the subsidy actually leaves him underwater for the biomass portion of his delivery—but he believes it’s a cost of holding on to his pulpwood contract. (He has an appointment with his lawyer.)

“We thought it would be a shot in the arm. But as it is, it’s working out to be a thorn in the butt.”

A logging association executive adds, “When the money runs out two years down the road, you’ll have a lot of contracts negotiated on inflated terms. What will essentially happen, is that the operators were supposed to be able to buy new equipment, but since the value isn’t going to them, they may have less.”

What’s Next?

FRA’s admittedly noncomprehensive survey of its members’ experience with BCAP throughout the wood supply chain has detected (1) more misgivings about the program than support for it; (2) a common view that the main benefits are going to “somebody else”; and (3) no indication that the incentive has focused any new ingenuity on tackling logging slash or otherwise bringing new forest biomass into the supply chain.

As we write, the process of producing a formal regulation to replace the NOFA is still underway, and the Farm Service Agency is receiving copious comments, both in its formal docket and through less formal communications to its personnel. Whether the sum of those insights will be sufficient to remodel BCAP into an even-handed and effective means of growing the bio-energy sector, or whether the FRA Board’s misgivings about “government incentives” will prove to be a prophetic assessment of a systemic limitation, will be a test for our recovering industry in 2010.

THE AUTHOR

Neil Ward, FRA’s Director of Communications and editor of the Forest Operations Review, is also the staff liaison for FRA’s Bio-Energy Task Group.