Course: BFM 101 Biofuels Fundamentals

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Cost-benefit Analysis in Farm Decision-making
Federal & State Incentive Programs

Analyzing Potential Markets
Analyzing Potential Markets

Farmers in numerous regions of the country have the potential to supply large quantities of biomass (see Figure 1). With respect to demand for biomass, federal policies, including the Energy Independence and Security Act of 2007, and a national Renewable Electricity Standard create important future market opportunities. Moreover, several state renewable energy initiatives foster additional regional demand. However, increasing federal and regional biomass demand does not always imply that those same market opportunities exist locally. Before individual farmers begin to establish a biomass crop, they are encouraged to research and indentify biomass market purchasers who offer them an economic return above production and transportation costs.

Two different markets for biomass are likely to develop in the future. One market will utilize chemical or enzymatic processes to convert biomass into liquid biofuels and other high value renewable products. A second market will use thermal or pyrolysis processes for production of heat or cogeneration, electricity, syngas, steam, and other forms of energy.

In both markets, the most important criteria buyers will utilize to determine the value of biomass delivered to a plant site are its weight in tons, its moisture content, and other specifications of fuel quality (size, chemical composition, ash content, etc.). Generally, biomass buyers prefer to purchase biomass that is tested and delivered on a dry matter (or “bone” dry ton) basis.

Most biomass buyers place an upper limit, typically 20 percent, on the biomass moisture content they are willing to accept before quality discounts begin to be applied. Several existing biomass buyers increasingly discount biomass that is between 20-35 percent moisture and 35-50 percent moisture. Again, farmers are encouraged to consider their time and transportation costs because steep discounts for over 20 percent moisture may make delivery uneconomical.

While all biomass purchasers measure weight and moisture, additional quality discounts may be applied, depending on whether the biomass will be used for enzymatic or thermal conversion. If thermal, the buyer is most interested in the amount of energy the farmer is providing in biomass delivered. The industry measures energy content in btu/ton. One of the most immediate markets for this is electrical utilities that co-fire coal with biomass and produce partially renewable electricity. Since coal is typically sold on the basis of btu/ton, biomass is usually priced accordingly on its ability to replace the heat content in coal. One biomass buyer, Show Me Energy Cooperative in Centerview, Mo., has developed a proprietary technology to instantly test and determine btu content upon delivery of biomass to their plant.

Additional quality criteria may be applied locally depending on the specific conversion technology employed. For example, alkali and various trace minerals may result in “slagging” within some older commercial coal boilers. Additional tests and quality discounts may result. Guides to help farmers determine bottom-line profitability of biomass contain information on alkali content. This, along with discount information from specific local buyers can be used to calculate true net returns.

In addition to commercial biomass markets, farmers with ample biomass resources should not overlook local consumer demand. Many rural residents and businesses have installed wood, corn or pellet stoves. Biomass can be pelleted or otherwise compacted and marketed locally. “Big box” retailers typically sell biomass pellets for nearly $200/ton. This can provide farmers with an attractive return on lower-quality biomass, with minimal additional processing cost.

Given the wide variety of biomass farmers are capable of producing, the market will likely be quite competitive. A number of biomass firms purchasing biomass utilize a “low-bid” buying scheme whereby farmers submit the lowest price they are willing to take for supplying biomass. Buyers then select the lowest submitted prices until they reach the desired quantity of biomass delivered.

As biomass markets expand in both volume and scope, trading disputes will occur. Eventually trading standards, such as those defining market criteria for commodity grains, will be established. In addition, resources such as independent testing labs will be created to mediate disputes. North Dakota State University has recently established a biomass testing lab to not only collect research data, but to facilitate growth of biomass trading, available at:

Link:
NDSU Biomass Testing Lab Available at: http://www.ag.ndsu.edu/news/columns/biofuels-economics/new-energy-economics-ndsu-and-usda-ars-partner-to-establish-biomass-testing-lab/

Figure 1. Biomass Resources of the United States, National Renewable Energy Laboratory, Billy Roberts, September 23, 2009.

Resources provided by the eXtension Farm Energy Community of Practice at http://www.extension.org/ag+energy

Cost-benefit Analysis in Farm Decision-making
Federal & State Incentive Programs