Ramble On

Thursday, March 4, 2010

Fibrowatt's "Squeeze" on Local Poultry Farmers

I found an article (linked below) in the Winston-Salem, NC paper about Fibrowatt’s failure to negotiate a sales agreement for their power with Progress Energy and Duke Power, the two major utilities in the Carolinas. (Full disclosure: my family owns Progress Energy stock). Here’s an excerpt from the article:


“…the utility companies didn't mention Fibrowatt by name, but indicated that the "single poultry waste" generator proposed prices that would consume a significant amount of the companies' money that they need to buy other types of renewable energy such as solar and wind power.”

Readers will recall that earlier this week I posted an excerpt from a Page County farmer’s analysis of the negative economic impact Fibrowatt could have on poultry operations – basically, because they would seek long-term agreements with poultry farms to buy up used litter, they would seek discounts over current market prices, which would reduce this source of revenue for our farmers. 

This development in the negotiations with the NC power companies means that Fibrowatt will put a lot of pressure on local farmers in order to have better control on its own costs, disregarding the interest of those very farmers - who they also refer to as "partners!"

In fact, the farmer’s letter I posted went on to discuss that the Fibrowatt offer was lower than current market competitive rates, a market that is supported by state and federal level agriculture agencies, which will pay a benefit to farmers outside of Page County for buying and spreading the local litter. The farmer closed his letter with this note:

“As far as poultry growers getting more in terms of total sales dollars for their litter [from Fibrowatt], I don't really see that happening because of the current price of litter. I see a profit margin decrease happening for poultry growers instead of an increase.”

So that is part one of Fibrowatt’s squeeze on poultry farmers – hitting the revenue side of farmers’ litter operations, reducing their total sales dollars. There is also a squeeze on the cost side, which Terry Walmsley discussed in the Page County BOS presentation last Tuesday.

Terry mentioned a couple of things that needed to be done with the litter to ensure that it was a high-quality fuel for the burn process – and that one of the things that is done in the fuel storage room is to mix it with other “biomass” sources, including various raw materials that litter is produced from. In Minnesota, this can include sunflower seed hulls – so you have Fibrowatt actively competing with Minnesota farmers to buy these raw materials from the plant.

It is basic economics that when competition increases on the demand side, prices increase in the short term. Over the longer term, they may level out, but if production is increased to meet the new demand there will be pressure to keep market equilibrium at the higher price, or supplier/producers will switch to other commodities.

Here in Virginia, a large portion of litter comes from wood shavings, which are apparently already in short supply within the Shenandoah Valley region. This product was specifically mentioned as an example of what would be in the mix at the proposed Valley plant.

So once again, Fibrowatt will compete with local poultry farmers for resources, in this case, driving up raw materials costs.

For a company that claims to partner with the poultry, this “squeeze” – raising the costs of inputs and reducing total sales revenues – is an ironic concept. I’ve heard one of the leaders of the local poultry association tout Fibrowatt as a long-term savior of the industry in Page County. It is more likely that these costs will put the smaller operations out of business by making them economically unsustainable!

http://www2.journalnow.com/content/2009/aug/31/302350/fibrowatt-price-high-utilities-say/news-regional-surry/

1 comment:

Terry said...

Jim

Renewable Energy
With regard to North Carolina and utility obligations - yes we do have to be competitive with the price for our renewable energy as the utilities that buy electricity from us have a responsibility to control costs – a requirement that is overseen by a State’s Public Utility Commission for the benefit of the ratepayer. Renewables might be more expensive than current fossil fuel-fired energy prices – though this could change if their fuel costs continue to rise, if they have to meet stricter emissions limits, or the utilities have to meet some form of national renewables requirement or greenhouse gas legislation. While renewables can be more expensive, biomass energy is considered a less expensive option than many other approaches, for example solar. Furthermore, biomass power is baseload power – meaning it is generated continually unlike wind and solar – providing a benefit to a utility that would not have to cover lost generation when the wind is not adequate or solar incidence is not optimal. The issue with the NC utilities is not really about the cost of Fibrowatt power as compared to other renewables. The issue in North Carolina concerns the structure of their renewables legislation, which provides relief for the utility from further renewable obligations if they reach a very modest cap on added renewables cost.

Price Squeeze?
Jim, could you please explain how there would be a squeeze on poultry farmers. There is no pressure on the grower to sign up with Fibrowatt. As I said at the March 2nd meeting, our relationship is directly with the individual poultry grower so if they do not value the services we offer they will not sign up. As an economist you should understand this simple fact. Not sure how this is a “squeeze” on them.

Furthermore, if this was such a squeeze, why were we able to sign up individual growers in Minnesota to supply adequate litter to our plant? You know why – because they found value in the services we offer. Likewise, we have been able to sign up litter in North Carolina even though fertilizer prices are high – again because they understand the value of having an additional alternative like Fibrowatt. There is more to this arrangement than simple field fertilizer economics for the poultry grower. A poultry grower is able to judge some of the challenges they have to deal with now and in the future. That is why so many have looked to the future of their operations and placed value in this long-term option. This is an aspect of sustainability that they understand.

Bedding Squeeze?
Finally, you have taken a simplistic look at the bedding side of the equation. What you are missing is the difference in quality between bedding and the woody biomass that we would use. The grower requires a very dry – low dust bedding material for the birds – a material that they pay a premium for. Some of the challenges they face with sourcing bedding are based on economic pressures. Bedding material has historically been a by-product of wood manufacturing operations that have been hit by the economic situation. We really couldn’t afford the purchase this high-value material. As I said above, we have to meet the strict cost constraints of our power contracts so again not sure how we would negatively affect the poultry grower as it relates to bedding.

Partner
You close with a sarcastic comment on partnering with the poultry industry. We are a natural partner with the poultry grower because without them we do not have a fuel supplier. We will not be in business long if we hurt our primary fuel supplier. Look again at the comment made by the poultry industry representative and consider the fact that maybe they have a far more expert ability to judge what is beneficial and sustainable for the poultry industry in Page County than you.

Terry Walmsley
Fibrowatt LLC