The Table is Set

BY TIM PORTZ

As this issue of Pellet Mill Magazine is delivered to pellet producers around the country, it will find them wrapping up their 2021 fiscal year, but squarely in the middle of the 2021-’22 heating season. One of the unique aspects of our industry is how prime selling season lands astride two calendar years, evenly split by New Year’s. The fourth quarter finds pellet-burning consumers finally heeding their thermostats and building their inventory for winter. In every year since at least 2016, the highest-grossing month for pellet sales has been either October or November. The first quarter of the fiscal year coincides neatly with the back half of the pellet-buying season, and in years with an early onset to winter, consumers with pellet appliances realize they’ll have to augment their inventories to make it through the season. Conversely, for years with relatively mild winters, pellet sales in January and February can really tail off. As a result, first quarter sales numbers can fluctuate wildly from year to year. A lackluster back half of the 2020-’21 home heating season resulted in the slowest start for wood pellet sales since 2016. In Q1 of 2021, wood pellet producers sold 373,916 tons of product, a significant departure from the 500,000-ton first quarters of both 2019 and 2020.

With that kind of a start to the year, pellet producers could be forgiven for some pessimism. Why, then, are producers across the country generally bullish on what remains of 2021 and the 2021-’22 heating season? Participating in a market that is so impacted by variables beyond their control, pellet producers luxuriate in those variables that are available to them particularly when they are favorable.

In October, the U.S. EIA projected American homeowners could expect significantly higher heating fuel prices. Natural gas heating was projected to rise 30%, with heating oil prices forecast to be as much as 50% higher. One of the hallmarks of wood pellet heating has always been the discount on overall heating costs it offers to consumers, but in the recent past, these savings were all but erased by historically low competing fuel prices. This year, with fossil fuel prices ramping back up to pre-pandemic levels, the economic argument for burning wood pellets has returned. The impact of higher fossil fuel prices has always been difficult to measure, as the data on consumers who retain both fossil fuel and wood pellet appliances is vague at best. It makes sense that a consumer with both a heating oil appliance and a wood pellet appliance is more likely to choose the lower-cost option, but at what level of a discount? And how many consumers out there have maintained both appliances and regularly toggle back and forth based on fuel pricing? These are significant variables that are informed by anecdotal reports from retailers, at best.

If wood pellet producers get the kind of winter that only heating professionals can cheer, then the industry is well positioned from an inventory perspective. Producers build inventory through spring, peaking in July. This summer found the sector with over 300,000 tons of product on the ground, the strongest inventory position since 2018. If competing fuel prices remain high and Old Man Winter hangs around until April, these inventories will be gobbled up. Admittedly, that is a big “if.” So far, winter has been slow to come. Heating degree days (HDD) across most of the pellet-burning parts of this country are lagging well behind historical averages. The Northeast, Mid-Atlantic, Great Lakes, Mountain West and Pacific Northwest are all at least double-digit percentages off their normal HDD pace, with some locales off historical averages by 50%. If this mild winter persists, the industry will likely exit the 2021-’22 heating season with carryover inventory. Still, the last time producers had over 300,000 tons of inventory in July (2018), the sector experienced a massive drawdown bottoming out, at just 47,000 tons in February. There were some nervous moments in the early spring of 2019, and it has taken until July of this summer to push inventory levels back over 300,000 tons.

Three variables impact the strength of any home heating seasons, and two of three are already favorable for producers, inventory and competing fuel prices. The third, winter’s chill and it’s staying power, will determine whether this year’s home heating season will be a boom or a bust.

Author: Tim Portz Executive Director, Pellet Fuels Institute tim@pelletheat.org www.pelletheat.org