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Facing the Challenge of Development

By Art Wiselogel
I am writing this column from the small Eurasian country of Armenia which is east of Turkey. BBI International is part of an international team of experts working on a study for the development of an ethanol industry in this interesting landlocked country. As part of the initial visit, I gave a presentation that was translated into to Armenian. Under the feedstock section I discussed commodity markets and risk. While working with the translator I was told that there is no direct translation for the word commodity in the Armenian language.

I guess first we need to define the term commodity. According to most references a commodity is any item that has demand which also has a consistent definable quality across its market. Most raw feedstocks are considered commodities for example corn, copper and oil while many final products aren't because they differ across their market such as corn chips and television sets. These products vary by manufacturer, price, performance and physical characteristics.

Another important characteristic of a commodity is that the price is determined by the market as a whole. Of course, a local price for a commodity is somewhat responsive to the local supply and demand, but these prices have a base relationship to the set market price. This local effect is known as basis. Basis is given as a deviation from the price at a given location. For corn the price set by the Chicago Board of Trade is the most commonly used standard from which basis is calculated. For example, if local demand is low the basis may be 5 cents a bushel under Chicago.

Based on this definition, biomass in general is not a commodity because of its inherent diversity. Wood chips from pine trees are certainly different from corn stover and switchgrass, and even from hardwood wood chips. So, biomass as a whole is not a commodity, but types of biomass definitely have the potential to be a commodity. Wood chips and bales of switchgrass certainly could become commodities.

For types of biomass to become a commodity several events need to occur. First, a national market needs to form. For wood chips there has long been a market from the pulp and paper industry, but this market has been local in nature and not national in scope. For any type of biomass to become a commodity there will need to be trade across the country.
Next, quality standards have to be set to control variability. Again, the pulp and paper industry defines the characteristics of a pulp chip based on physical conditions required to optimize the pulping process. Since a defined biomass industry does not yet exist the development of quality standards is off in the future.

Finally, a regulating body and location are needed. Biomass may develop its own trading structure, but most likely it will be traded on existing commodity exchanges such as CBOT.
It may be a while, but some day I can envision buying futures of No. 1 grade switchgrass bales for June delivery. It will be great when that happens and a true testament that the biomass-based industry has faced the challenge of development.

Art Wiselogel is manager of BBI International's Community Initiative to Improve Energy Sustainability. Reach him at awiselogel@bbibiofuels.com or (303) 526-5655.
 

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