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Prices, Costs Still Squeezing Loggers

Loggers, Mills Must Overcome Challenges Together

By Thomas G. Dolan
Date Posted: 12/1/2005


        In 1999, what was then called the American Pulpwood Association — now the Forest Resources Association (FRA) — commissioned an independent report titled, Wood Supplier Productivity and Cost Survey.  It was a two year study designed to measure logger productivity and economic efficiency.

        The report concluded, “Analyses such as this usually raise more questions than they answer, for they only report what happened, not why. Associated analyses to explore the causal agents at work have been done but are not included in the body of the report both in the interests of brevity, etc.”

        The study indicated that the situation of loggers could be summed up in a single word — dire.

        Have things changed since then?

        “As far as the health of wood suppliers go, since that study, things have gotten worse for loggers in several areas of the country as far as profitability goes,” said Steve Jarvis, the FRA’s  director of forestry programs.

        Markets have improved somewhat since the study, he noted. However, the market trends are not as positive as they might first appear.

        This is the same general consensus offered by several other industry observers.

        William Stuart, a forestry professor at Mississippi State University, was the author of the original study. Prior to the mid-1990s, he explained, lumber prices were determined by the domestic market, so they were relatively stable. However, mills were impacted by the arrival of global competition.

        “Many of the mills were major landowners,” said Bill, “and they wanted to keep the price of stumpage up. If the mill produces for, say $100, and the manufacturing costs $25 and the loggers cost $25, it can claim $50 against the company owned stump. But if because of international competition, the mill can only get $85 for the product manufactured, and the manufacturing still costs $25 and it still wants to hold stumpage values at $50, well the only option is to squeeze the loggers, who are outside the system, and squeeze they did. The mills said to the loggers, ‘Here’s what we’ll pay you. If you don’t do it, we’ll find somebody else who will.’ What that tended to do was cause deterioration in the logging force. It encouraged the advent of less than stellar contractors, people who would operate at a loss to cover the payroll.”

        The better businessmen, Bill continued, “knew they could take their money and do better somewhere else. So we’ve watched this depletion. Like most movements, it starts off relatively quietly, and then people don’t realize they’re gone until there’s nobody there to produce the wood.”

        Now that the mills are realizing they have fewer contractors from whom to get their raw material, “Things are turning around a little bit down here,” said Bill. “I was at a loggers’ meeting last night, and attendance was as high as it’s been in the past five years. Mills are being a little less mercenary in their contracts.”

        Does this represent a real turnaround? “It’s hard to tell,” Bill replied. “Things are a little better. But there’s been a tremendous amount of confusion over the past 10 years. Every time a good logging outfit is put out of business, you throw away a lot of experience and expertise. Mills are beginning to realize there are not enough loggers out there to do the job. But I’m not sure the mills have really learned anything.”

        Steve agreed that the reason that the markets are now improving somewhat is because there are now so relatively few loggers that demand has increased. “The long downturn has resulted in a shortage of wood suppliers,” he said. “Many logging companies have closed and those remaining have been unwilling to reinvest or expand their business. It bottomed out in 2003, and now there are increased demands in the South, Northwest, and Lake States.  Now mills are closing down production lines because they can’t get the wood in. I’ve never seen anything like it.

        “It’s funny,” he continued. “The wood suppliers that are now producing as fast as they can are now concerned that their competitors have gone out of business.  For they see that, in the long run, the shortage of loggers will mean that mills close. They are taking the long-term view.  Prices have gone up staggeringly high for wood in some parts of the country. This has loggers concerned.”

        Daniel Drucktor, executive vice president of the American Loggers Council, agreed with the consensus. “Some factors in the 1999 report haven’t gotten any better,” he said, “and we’re still seeing a general downward trend.”

        Where there is an apparent leveling off, there is really a vicious cycle, Dan said. “Mills cut rates so loggers go out of business. Then, with the logging capacity down, mills raise rates and encourage loggers to go into business. Then the mill shuts down, more loggers lose their jobs, and so on.”

        As an indication that the industry may be in an even worse position today, Bill cited the following. “The money that loggers put into equipment is always a good indicator of how viable the industry is. In 1999, loggers put 22 cents on the dollar into equipment.  In 2003, that was reduced to 16 cents on the dollar, a reduction of about one-third.”

        Also, the logging cost index tends to stabilize around the consumer index, according to Bill. “Between 1995 and 2003, costs went up for loggers about 20 percent, but what mills paid loggers went down 137 percent.”

        Fuel costs have gone up, Dan also observed. “A few years ago we could buy diesel at $1 a gallon,” he said. Now it is much higher. “That has a major impact. We used to spend $5,000 a week on fuel. Now it’s $10,000, and logging rates have not come up to absorb these added costs.”

        Another big cost, Dan noted, is equipment. “This is caused by the rising price of steel on the global market due to the demand from China and other countries,” he explains. “In 1999 the average skidder costs about $165,000. Now it’s close to $200,000.”

        Add to that, said Dan, is a shortage of labor for logging. “We haven’t seen young people want to get into this industry,” he said. “There is no promise for the future. We are battling all across the country to find a labor force, and it doesn’t seem to be working out.”

        Regulation adds costs, according to Dan, whether it be government rules or voluntary best management practices. “They just cause the price of production to go up.”

        The two main problems, the three say, are global competitiveness, and the response of U.S. mills. The first challenge appears to beunsolvable, at least at the moment.

        “Imports started as a small thorn and have grown to a tremendous ailment for the industry,” said Steve. “We have to find ways to do things smarter and more cost effectively. It’s a difficult problem, and no one has the solution. We’re commissioning a study at the University of Georgia to see if we can’t come up with some answers.”

        “It all goes back to global competitiveness,” said Dan. “Everybody is trying to find some way to deal with it. There should be uniform standards throughout the world, but there are not.  These other countries don’t have the same environmental standards we have, which are the most stringent in the world. When mills go down, loggers lose another market.”

        When mills react to price pressure from foreign competitors by reducing what they pay loggers for wood and without trying to work together to overcome a common challenge, the situation only gets worse.

        “The survey showed that we don’t have a good enough commitment by the mills to help loggers to invest in the equipment they need to expand their business,” Steve said. “There is the issue of long-term contracts, which, at that point in time, were nonexistent. A logger can spend $1 million in equipment to get started. It’s gotten that sophisticated. But you can’t throw someone off stage and expect him to perform.”

        Bill, who came from a family of loggers, said, “One of the big problems we have is that corporate people at the mill tend to treat logging as if it was a division within their company. An employee of the corporation can compete for capital money. But then the corporation wants the capital back, on a straight line depreciation. But when a logger goes out and invests money, it’s his wealth. He is interested in using it, not consuming his capital. Mills don’t understand how cutbacks affect a logger’s equity. We’ve watched the deterioration in equity positions. I offer a business program. My mantra is that ultimately any business goal is the preservation and growth of equity. What we’ve seen is an erosion of equity.”

        Loggers need stability, Bill continued. Mills, by emphasizing cost reductions to maximize their operational efficiency, fail to provide a stable environment in which a logger needs to operate. Whereas the mill wants to maximize shareholder value, the logger is trying to preserve his equity. “It’s the classic conflict between the corporation and the entrepreneur. Very few of the foresters who are advising contractors have ever been in business for themselves and have never dealt with the complexities of the Internal Revenue Service or Social Security system. They do what their superiors in the office tell them, and none of them understands the world of the logger.”

        Rick Meyer is Appalachian and Southeastern division forester for the FRA and works out of Roanoke, Va. The association is making efforts to reduce the strained relationship between mills and loggers, he said. At various workshops, mill representatives are first put in one room, and loggers in another. They talk about both positive and negative issues. Their comments are written up, with no attributions to individuals. The reports are shared, and then the two groups come together to discuss the issues.

        “Here loggers speak directly to management so both sides can understand the others’ concerns,” said Rick. The two sides find common ground on some issues. For instance, old wood yards, built a long time ago, cannot accommodate the high volume of trucks today, which causes loggers to spend long periods of time waiting to be unloaded. Some mills have become more accommodating by opening on Saturdays or making other adjustment to reduce the waiting time. On the other hand, mills are revising wood specifications, clarifying their requirements for a load of wood so the process can be speeded up, and loggers are responding.

                The steps are small, but they are a start. “I believe things are looking up a little bit,” said Rick. “But both sides have to really commit to the other’s survival.”


 






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