Abstract The consumption of wood pellets grew rapidly during the last decade. In this paper we compare the development of the production factors for wood pellet markets in Finland, Germany, Sweden, Norway and the US; we analyze how domestic market prices for pellet production factors as well as domestic market prices for pellets vary among the countries. The analyses are based on two model plants. The first represents common technologies for small scale pellet production based on dry residues from sawnwood production, while the second represents large scale production based on a blend of dry and wet materials. The results show how differences in costs of feedstock, energy and labor affect the profitability of pellet production and hence the development of pellet production in the analyzed countries. Pellet producers in the US have lower feedstock costs than producers in the analyzed European countries. The economic sustainability for European pellet producers depends to a large extent on their domestic markets as internationally traded pellets are priced lower than their production costs. Future pellet production will, to a greater extent, be based on wet feedstock such as roundwood and wet sawdust. These feedstocks are also demanded by wood-based industries (pulp and paper, particle- and fiber-board) as well as for traditional fuelwood. The transition from smaller pellet plants using dry feedstock to larger plants using wet feedstock in future pellet production, can be expected to follow comparative advantages regarding feedstock and energy costs, but also with respect to economies of scale.