thomas michael power

professor and chair

economics department

university of montana

missoula, montana 59812

406 243 4586

tom.power@mso.umt.edu

 

 

 

mill closures: rational but painful adjustments to low prices and excess supply

the shutdown of the mill in republic is not an isolated event tied to the particular timber supply problems associated with northeast washington. in fact, timber supply has little to do with the problems that have led many mills in the pacific northwest to shut down. in most cases, it has been the mill owners that have made clear that inadequate supply of federal logs is not the problem but an excess supply of lumber products.

one way to get a more accurate perspective of these local mill closures is to look outside the region and to national business analysts who do not have particular local political axes to grind.� what we experience in the pacific northwest often does not have its origins within our region.� because we are integrated into the national and international economies, we are regularly buffeted by economic forces that have nothing at all to do with particular decisions made in here.� blaming local policies you happen to disagree with for changes that are driven by economic forces originating in international markets is simply self-interested scapegoating.

 

lumber mills are shutting down across the nation. both areas and mills that do not rely on national forests for timber supply are being negatively impacted. in maine, where there is almost no reliance on federal timber, mills are closing and timber-dependent counties are losing population.[1] or consider california.� in early january, sierra pacific, california�s largest timber company and timberland owner, announced the shutdown of three of its 14 mills.� sierra pacific pointed to plummeting wholesale lumber prices that in early january were half what they were in 1999 and honestly explained that �it just didn�t make sense to be cutting up high-value logs and then selling the lumber at low prices.�[2]� jim hurst, mill owner in eureka, mt, must have been thinking along the same lines since he explained, as he temporarily closed his mill, that �the mill has too much rough lumber on the shelves and must reduce inventory.�[3] clearly he could sell it, but probably only at a loss.

 

in late october of last year, the stinson mill in libby, montana, announced that it was shutting down. in making the announcement the president and ceo of stimson, andrew miller said that the decision to close the libby mill had little to do with the amount of logs coming off the kootenai national forest. rather, in the last 45 days, miller said, the market for plywood has been thick with cheaper imports from brazil and scandinavia that libby simply could not compete with. economics, specifically cheaper imported products made the closure inevitable, he said. "there is simply no economic scenario by which we could keep this plant operating profitably," he said. miller added that no one, from environmentalists to forest leaders, was to blame for the closure. [4]

 

rather than blaming the us forest service for the problem, timber industry analysts have pointed the finger at private forest landowners like sierra pacific.� resource information systems inc., an international forest industry analysis firm based in massachusetts, put it this way: rising national timber prices during the 1990s created incentives for private forestland owners to begin managing their land for commercial harvest and for timber companies to expand their own forestland holdings and accelerate their harvest of them.� that increased private harvest when combined with reduced exports of american timber to asia �completely replaced� the declining federal timber sources.� national timber production capacity on private lands rose pushing prices downward, according to these forest industry analysts.� that private timber �capacity is going to continue to increase over the next couple years while demand is likely to decline.�� that may keep lumber prices low for some time.[5]� wall street analysts are projecting continued mill closures, layoffs, production cutbacks, and low prices for much of the year 2001 across the nation. this is not a problem unique to montana or to firms dependent on federal timber.[6]

 

we in the pacific northwest are used to industrial firms responding to over-supply and low prices by temporarily cutting back or shutting down.� regional aluminum plants do that, paper mills do that, mining and smelting operations do that, farmers and cattle producers do that, and, of course, lumber mills have always done it too.� in the face of excess supply and low prices, the appropriate strategy is not to continue producing, but to cut back.� the reduction in supply brings demand and supply back into balance and prices ultimately begin to recover and� at least some of the mills can return to full production.� our forest products industry has been though these market driven closures for as long as we have sold our lumber products into national markets.

 

despite efforts to link the difficulties that lumber mills are currently facing to reduced federal timber harvests, such partisan political bickering makes two fundamental economic errors.� first, it assumes the problem lumber mills face is lack of access to raw material rather than a surplus of raw material that is driving prices down.� second, it assumes that gaining access to the most costly sources of supply at the very time that the prices mills can get for their products are at record lows would some how help the mills.� logging the timber in roadless areas is costly because it is located in isolated, steep, remote timber stands that require new road systems and special harvesting techniques; to compound the problems with these areas, in general, they are dominated by relatively low valued trees.� this is the opposite of the type of supply that would currently be useful to mills, at least if they were asked to carry those costs rather than shifting them onto us taxpayers.

 

riding the roller coaster of international commodity prices is an unavoidable feature of a natural resource economy.� our farmers and ranchers, our mines and smelters, and, of course, our forest products mills have been doing it for a century or more.� the consequences are not pleasant for any of us.� the economic instability and insecurity that these commodity price cycles bring to our communities ultimately make them and their residents poorer.� that is the reason that most of those over-specialized communities are currently focused on trying to diversify their economies.

 

sacrificing the natural landscapes surrounding these communities in a last desperate attempt to keep mills operating even when market conditions indicate that reduced production is appropriate, undermines those diversification efforts by making the community less attractive to new businesses and residents.� it is part of a death-spiral strategy rather than a path to revitalizing our communities.� yet that is the direction in which the current political scapegoating is committed to carrying us.

 

 

 

the impact of changes in federal timber harvest in the pnw on regional economies

 

one would expect that increased local harvest levels from federal lands will be partially offset by either a reduction in imports to local mills or an increase in log exports from the area.� the history of the pacific northwest over the last decade illustrates the connection between local wood fiber markets and trade in raw logs.� as wood fiber values rose steeply in the early 1990s in the pacific northwest, exports of unprocessed logs declined dramatically.� those logs, instead, became available for processing in regional mills.� the net result was to stabilize the timber supply available for processing in the region (figure 3.8).

 

other market responses to changes in wood fiber values can be expected to reduce the impact of the increase in harvest levels on federal lands on wood products industries in those counties.� as local harvests change, so, too, do local stumpage prices.� markets can be expected to adjust fairly quickly in a manner that weakens the link between local harvests and local wood products jobs.� for example, during the 1990s when wood fiber values were high, the use of round wood in paper production declined as the round wood flowed to lumber mills first and then the waste products from those mills flowed to pulp and paper mills.� in addition, the use of recycled paper fiber in regional mills increased.� as a result, despite the dramatic declines in federal timber harvests, both lumber and paper production remained relatively constant during the 1990s in washington.[7]� for the three states of washington, idaho, and montana combined, the 82 percent decline in national forest harvests was associated with only a 5 percent decline in lumber production (figure 3.9).

 

in oregon, lumber production also increased after 1994 despite ongoing declines in national forest harvests.� across the pacific northwest, the higher stumpage prices justified more labor-intensive efforts to increase wood fiber utilization, helping to stabilize wood products employment.� this pattern was especially clear in montana and idaho. wood products employment in montana in 1999 was only 9 percent below the 1988 level of employment despite a 65 percent decline in the federal harvest and a 25 percent decline in total harvest.� in idaho, forest products employment was the same in 1999 and 1988 despite the 72 percent decline in national forest timber harvest and 24 percent decline in total harvest.� for montana and idaho combined, the loss of 72 percent of the national forest harvest had almost no impact on the overall level of employment in the forest products industry.� the decline in federal timber harvest was 827 million board feet, almost 30 percent of total harvest in those two states in 1988.� yet forest products employment declined by only 2.5 percent (figure 3.10).�

 

though the changes brought about by an increase in federal harvests would be opposite in direction as these examples of market adjustments to declines in federal harvest, clearly it is not possible to be confident about making projections of future employment impacts by simply multiplying a change in the number of board feet harvested times some employment or income �multiplier.�� the relationship between harvest from one source of supply and forest products employment is not a fixed arithmetic relationship that can be captured though the use of such multipliers.� although the region expected that, as a result of the decline in federal timber harvests, it would lose over 100,000 jobs and become impoverished.� yet nothing of the sort happened.� timber multipliers have been dramatically shown to be an inaccurate way of modeling how a local economy adjusts to changes in one source of timber supply.

 

january 10, 2003