Moving forest businesses to long term environmental and economic sustainability

Trouble in the the timber industry
By Craig Rawlings and Rosalie Sheehy Cates

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A new business plan: Moving forest businesses to long term environmental and economic sustainability

By Craig Rawlings and Rosalie Sheehy Cates*

The wood manufacturing industry is accustomed to historically large business cycle swings. Home starts go up, and the demand (and price) for finished product goes up. The cost of buying logs also rises, as many producers seek raw timber. Manufacturers make money, until home starts go down. Then demand and price for finished products sinks. Raw materials prices lag behind they stay high long enough to exacerbate the financial stress of the down cycle. The manufacturers slow down, hunkering down and minimizing costs while waiting for the cycle to turn their way again.

Everyone in the industry, including its bankers and financiers, is used to this rather dramatic timber business cycle. But in the past few years, Montana manufacturers have seen the downtimes lengthening and uptimes shortening. It is starting to appear that the money made on the up cycle is not sufficient to fund the down cycle.

Complicating the historical business cycle are changes in the sources of raw materials for wood manufacturers. Simply put, there is less wood available to the market than there was even ten years ago. The federal government has dramatically decreased available supply, and private lands have been cut beyond regeneration capacity. Lower supply has kept log costs relatively high in all part of recent business cycles. This has increased financial misery at the mill level.

A relatively recent (15 yr) development is the globalization of the wood economy. It is especially difficult for Montanas medium-sized manufacturers (single-location mills) to compete in markets that react to supply and labor costs in places as diverse as Canada, Russia, South America and Asia. Some of the largest multi-national timber companies have global reach and the financial resources to work with variables in other countries such as cheaper sources of labor, lower environmental standards and low-cost intercontinental shipping. National timber companies can achieve scale or financial efficiencies that keep them globally competitive. The smallest mills have few tools to adjust to global-scale market forces. The newest global wrinkle (2-3 years) is the dramatic increases in fossil fuel prices.

The final stress on Montana timber mills is a huge unknown called global climate change, which will affect every natural resource business in the world, and is already causing turmoil in the agriculture and energy sectors.
Some Montana mills are reeling from the cumulative effects of everything described above. They have sent out a call to action, saying that Montana wont have timber manufacturing capacity if this keeps up. We agree. This paper proposes a framework for thinking through an appropriate response, based on Montana Community Development Corporations experience with it Smallwood Utilization Network.

The need for a new timber business model

It will be natural and logical to hear and consider somewhat simple solutions to the woes facing Montana timber mills. One might be, open up the National Forest System timber treasure chest, and at very low cost. Another idea could be, provide financial resources to bridge mills through the current down cycle.

But these types of solutions ignore the perfect storm of globalization and new environmental realities that have changed the entire operating environment for Montana timber businesses. Unilateral supply solutions, or short-term financial aid packages, assume that the timber business hasn't changed. Therefore they are like a Band-Aid solution for a patient presenting a compound fracture. It may be important to stop the bleeding, but you won't save the patient.

It is critical to respond to the mills call to action. In addition, we should recognize that an entire logging industry co-exists with manufacturers. But that response has to address the fundamental question facing both mills and loggers: How can the Montana forest products industry thrive and survive in the complex global environment in which they do business? Examination of the factors listed above show that Montana needs a new forest industry business model, based on current and likely future market realities. Below we propose a framework for the new model.

Put the forest first

Sustainable forest products business models of the future will emerge as a result of proactive healthy forest management, not the other way around. This is a fundamental change from the past forest industry business model. That model emerged in an era of abundant wood supply that exceeded manufacturing capacity and that was strongly driven by market demand for timber products. That era is over. The demand in this era is for desirable forest conditions that reflect societys desires for fish and wildlife habitat, esthetics, recreation, etc. over wood production.

The new forest products business model will be based on supply that is the BYPRODUCT of proactive healthy forest management. This is a difficult business reality to absorb, but it is already a fact. Societal demands dictate wood availability in this new era. This has both quantitative and qualitative effects on supply available to business.

A new business reality is that forest products businesses exist in order to make healthy forest management possible. That means that an important question can organize our thoughts in revitalizing or stabilizing Montana wood manufacturers: What business models can be organized around the need to manage healthy forests on public and private land and still be profitable?

Be global in outlook

As described above, supply and demand for commodity products are now global in scale for the wood products industry. Montana timber companies and loggers have to weather global business cycles. Some Montana timber companies are well-funded, and may be part of entities that have flexibility and resources to adjust sources of supply, cost of labor, and capital inputs in order to respond to global markets. But few small companies can truly compete in this game. However, small and medium companies can design business models around real competitive advantages, and they can target markets in which they are competitive. These are critical elements in any business model that is economically sustainable.

What are we working with?

The framework above suggests that every Montana timber and logging business needs a business plan that is environmentally and economically sustainable. As Ezell Castleberry, president of the American Loggers Council, advises his members, Lets focus on those things we can control. Here are some realities and trends to work with in building those business plans:

750 MMBF Montanas public and private forestlands have consistently supplied about 750 million board feet of supply over the past 10-15 years. While there will probably be a moderate decrease in this number over the next 10 years, Montana has supply, and this supply will be used in one form or another by businesses who put together environmentally and economically sustainable business plans in Montana.

State and national push for new energy supplies The price of oil and gas have pushed policy and investment toward development of biofuels, heat and/or power. Manufacturing capacity could look like energy production capacity with the right business plan.

Changing wood supply Forest management focused on the desired condition left after treatment rather than the material removed is a reality that has not only reduced the amount of wood being sold today. It has also changed the supply to smaller logs and biomass broadly defined. Businesses oriented around these supply realities will have a competitive edge in the coming years.

Barriers to removal of harvested biomass It is still not cost-effective to remove the slash produces by healthy forest management regimes. Reducing the cost of harvesting will open up additional supply to new forest products business plans.

Complex global timber markets Already discussed, this reality has to be addressed as we design sustainable Montana wood processing capacity. Some Montana-based operations can be competitive in global commodity markets. It is in communities interests to seek balance and diversity in the mix of local v. international companies that make up the Montana timber industry, but all of the companies involved need business plans for environmental and economic sustainability.

High fossil fuel costs On the face of it, higher energy prices simply increase manufacturing costs for Montana mills. But high fossil fuel costs may be a positive for Montana mills in the medium and long term, as a market force creating demand for new bio-based products and new incentives for removal of lower-value biomass from the woods.

Climate change Fire seasons are longer and potentially more severe; insect infestations are widespread. Climate change drives social and political demand for active forest management.

Diverse appetite for change among Montana forest products players Some wood business are in tenuous financial condition; some are either global or are financially well-backed and can weather many storms. Some businesses have more stake in the status quo; others need change very soon. Policymakers should be aware that solutions to the current call for action wont be one size fits all and will affect different businesses in different ways. A guiding principal can be that all businesses need a plan for environmental and economic sustainability.

Transition in ownership of corporate timberland As Plum Creek and other REITs and TIMOs that dominate corporate land ownership implement development plans, the timber industry faces possible loss of wood supply or fragmentation of timberlands. There are also opportunities to forge new supply channels as land ownership transfers.

Global climate change No natural resource business can have a sound business plan without taking into stock the effect of climate change on its business. In Montana climate change is driving forest management to deal with wildfires and insect damage. Other climate change factors are part of new business models as well.

Some directions to explore

Below are just a few ideas that can be part of a diverse, multi-pronged approach that can stabilize the timber industry with businesses that have a plan for environmental and economic sustainability:

Renewable energy production at current or new Montana wood-processing facilities. In a carbon-constrained world renewable, carbon-neutral, energy production is a valuable asset.

Link community-managed forests to wood businesses.

Create or tap into a carbon credit system that allows Montana mills to market carbon credits throughout the United States.

Research in-woods handling methods that drive cost-effectiveness in removing slash and other low-value biomass from the woods. These methods can provide new biomass supply and facilitate forest restoration. There are examples of practical, in-woods research and demonstration projects available at www.smallwoodnews.com.

Research fuel efficiency improvements that can be achieved through efficiencies in the woods, through shared trucking to mills; and through more efficient truck unloading at mills.

Tie aid to mills with current financial troubles to business planning for long term economic and environmental sustainability.

Develop non-commodity products that provide a niche with fewer global competitors, by taking advantage of species and wood qualities that make a more unique product line.

Collect and use urban wood waste.

Maximize National Forest System stewardship contracts for business and environmental goals.

Develop new decision-making and dispute-resolution processes for federal lands that can better facilitate the full potential of the stewardship contracting authority.

A set of policies that recognize and encourage proactive healthy forest management. Such policies include goals for greenhouse gas emissions, and recognize the role of forests to sequester carbon in live trees as well as carbon stored in solid wood products. The policies also recognize the importance of forests that are resilient to fire, insects and disease, and that provide biologically diverse habitat and healthy watersheds, and also provide the basis for an industry that uses the by-products of these treatments.

The partnership puzzle

It will take a concerted effort and strong new partnerships to accomplish the vision of this paper. Montana is very lucky to have a tremendous amount of public and private capacity in place for achieving these goals. Some of the collaborators can include:

Extensive, diverse timber manufacturing and logging sector

Region 1 of the US Forest Service including National Forest, Research and State & Private Forestry programs

Smallwood Utilization Network - successful facilitator of innovation partnerships and education efforts

Research capacity USFS Forest Products Lab, University of Montana, University of Idaho, USFS Research Stations, USFS Technology Development Centers, Idaho National Lab

Supportive Montana state government its Department of Natural Resources and Conservation, DEQ, Commerce programs; as well as a supportive delegation in Congress.

Real Estate Investment Trusts (REITs) and Timber Investment Management Organizations (TIMOs)

Conservation organizations, those that own and manage land such as Blackfoot Challenge, The Nature Conservancy and Rocky Mountain Elk Foundation and those that advocate for sustainable management like The National Wildlife Foundation, Trout Unlimited, The Wilderness Society and others.

Conclusion

Montana timber mills are correct in issuing a call to action to businesses and policymakers, to address the financial issues they are facing. The logging companies of Montana are no doubt in agreement with the mills. MCDC agrees that Montanas timber processing and logging capacity is a critical part of the economy. The role of these businesses in making healthy forest management a reality in Montana is perhaps even more important. We offer the ideas in this paper as a framework that can help everyone involved focus on the right questions that will help us move toward a vibrant and healthy forest economy and environment, sustainable in the long term, in our state.

*This paper is authored by Rawlings and Cates with substantial contributions from Dave Atkins, USDA Forest Service, and through work with many business owners, collaborators and advisors who form the Smallwood Utilization Network nationwide. We welcome use of the ideas presented here with attribution to MCDC. Learn more about MCDCs SUN program at www.smallwoodnews.com.

Additional Information

Category: Forestry>Industry Trends

Region: Montana

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Craig Rawlings
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406-546-5977
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