Forests Face New Threat: Global Market Changes

JERRY F. FRANKLIN

K. NORMAN JOHNSON

Forests Face New Threat: Global Market Changes

An overhaul of forest policy is needed to deal with the economic and environmental consequences of globalized production.

For the past 100 years, U.S. forest policy has been guided by the assumption that the United States faced an ever-increasing scarcity of timber. Indeed, at times during the 20th century, there were fears of an impending timber famine. Policymakers responded accordingly, taking actions such as subsidizing reforestation, creating the national forests, and protecting forests from fires.

Now, however, the world has been turned upside down. The United States today finds itself in a world of timber surpluses and increasing competition. As a result, this country faces a declining role in the global wood products industry. In the Pacific Northwest, for example, questions about the competitiveness of the region’s prized Douglas fir products have shaken the industry to its core; a situation that was unthinkable a few years ago.

At the heart of the matter, the globalization of capital markets is dramatically altering the socioeconomic context for growing and manufacturing wood-based products from timberlands. One key change has been the adoption of agronomic approaches to wood production. Particularly important has been the expanded use of intensively cultivated, short-rotation tree plantations in temperate and subtropical regions of the Southern Hemisphere. These “fiber farms” have proved to be extraordinarily productive. Capital investments by many North American wood products corporations have shifted to that hemisphere in response to such productivity, as well as to other competitive advantages that exist there. At the same time, these companies have been selling huge tracts of land in the United States. In the future, imports will likely supply a significant share of U.S. consumption.

A stabilization or contraction of U.S. timber production might seem a boon to the environment. After all, timber-cutting practices have often had detrimental effects. In our view, however, the loss of timber production may be too much of a good thing, for two reasons. First, most of the forested land in the United States is privately owned; yet private forests provide large public benefits, including watershed protection and wildlife habitat. How will we maintain these forests when the owners can no longer make money from selling wood? Won’t they be increasingly tempted to sell their land to housing developers? Second, various human activities have radically altered the structure and functions of forests, to the point where it’s inconceivable that Mother Nature alone can restore them to their desired conditions. For the past century, proceeds from logging on public lands have been used to help in restoring natural resources. How in the future will we obtain the money needed to carry out essential stewardship of public forests, including restoration efforts? In light of the new economic and social circumstances, we believe that it is time for a major overhaul of our policies regarding private and public forests.

The impact of globalization

The shift of wood production out of North America should not come as a surprise. In a capitalist society, capital flows to those who can extract the most value from it, measured in the long run by achieving an acceptable rate of return on investment. In today’s globalized marketplace, the competition for capital occurs on a worldwide basis. With the dramatic reduction in impediments to capital flows, corporations have more freedom to seek out locations where factors of production provide the best return for stockholders and then move appropriate operations to those locations. In addition, we would expect this capital to flow where there appear to be the fewest impediments to its effective use–where mill siting is easy and corporate decisions are not haunted by the potential for further regulation.

Publicly held wood products corporations are subject to these same competitive pressures and opportunities. Long-term decisions by these corporations are driven by return on investment, measured primarily by discounted present net value. Corporate forestry has tended to follow the plantation model because it offers the prospect of a large return in a relatively short period. Today, with competition at the global level, U.S. wood products corporations are both forced and free to find the most productive forest environments, with the ultimate measure being the lowest per-unit cost of delivered product.

This rationalization of the corporate wood products industry in North America accelerated with concentration of the industry during the 1980s. This period saw numerous hostile takeovers of corporations that had significant forest assets that could be liquidated. A depressed market for wood products in the early 1980s also contributed substantially to the process of industry consolidation. Plants were modernized and the work force was reduced.

Subsequently, trade agreements made the world the playing field and created new opportunities to take advantage of the extraordinary productivity of fiber farms in the Southern Hemisphere. These fiber farms typically are planted with non-native tree species, such as Monterey pine, radiata pine, or Douglas fir from North America, or several species of eucalyptus from Australia. Plantations generally are not located in the Third World or in tropical regions. Instead, they are found primarily in temperate countries with well-developed social structures and environmental awareness, such as New Zealand, Australia, and Chile, and in subtropical regions such as southeastern Brazil. Many millions of acres of fiber farms have been established, the majority of which are on abandoned agricultural and grazing lands. In general, they demonstrate high levels of wood fiber production on short rotations–productivity that can match or exceed the most productive of North American forestlands, including plantations of pines in the Southeast and of Douglas fir on the most productive sites in the Pacific Northwest. When biological productivity is factored in with lower labor and other social costs, few plantations in North America can compete with those in the Southern Hemisphere on a per-unit cost of production.

As a consequence, publicly traded wood products corporations are moving out of less productive regions and making large investments in new fiber farms below the equator. In the United States, the divestment of corporate timberlands began in the Northeast and can now be seen in the Southeast and the Pacific Northwest. For example, during the past two years the Weyerhaeuser Company sold 250,000 acres of timberland in the Pacific Northwest, 174,000 acres in Tennessee, and 170,000 acres in the Carolinas. At the same time, the company has begun a $1 billion investment in Uruguay to create 321,000 acres of pine and eucalyptus plantations and the plants to process this wood.

Lagging policies

Clearly, the growth of fiber farms is fundamentally changing the economics of wood production in the United States. But U.S. forest policy has not kept pace. When the basic policies were developed in the early 1900s, they made good sense. The nation’s forests were being logged and burned with little thought of reforestation. Thus, the government put in motion policies to increase the wood supply, including subsidizing reforestation, establishing cooperative fire protection, and reserving a portion of the forests to be managed under sustained yield. Even with these public policies, the hypothesis of increasing wood scarcity was confirmed by the rising real price of wood until recently. Economic projections and federal policies assumed that the real price of wood would continue to increase for the foreseeable future.

The nation now faces a very different wood products market. U.S. wood consumption is projected to significantly exceed production for the next 50 years. This circumstance might have been expected to stimulate increased stumpage values, but in fact softwood prices are projected to be fairly stable throughout most of the nation. This is the case even though the national forests have been effectively removed as a major supplier of softwood. U.S. softwood lumber production has been maintained with timber from private forests, especially in the south, and by improved milling efficiency, but there is little incentive for investment in U.S. forestland. The gap between consumption and harvest has been filled increasingly by cheap wood available from other countries. Much of this has been from Canada, and in some ways we have substituted Canadian old-growth wood for our own. For the future, we can expect that wood imports from Oceania will become increasingly important. Although some studies suggest that imports will provide about one-third of softwood supplies, we think they will provide significantly more.

The United States will likely become a minor player in the global production of common wood-based products, including lumber, pulp, and paper.

Compounding the problem, the market premium that generally has been paid for large logs also has largely disappeared. Engineered wood products, which use small pieces of wood glued together, are replacing solid wood in structural uses, such as large beams. This disappearance of the price premium for large logs reduces the benefit from holding timber stands for long periods, thus shortening rotations further and penalizing trees such as Douglas fir that start relatively slowly but sustain growth for long periods.

Moreover, wood that will likely be available from public lands will be of low value, the product of forest restoration and fuel reduction projects, in which younger, small trees are removed from forests in order to help prevent fires. The remaining old growth, which might bring higher prices, is largely reserved.

These conditions, in aggregate, suggest a very different world for timber production, one in which the prize goes to the low-cost producer. In such a world market, the United States is likely to be a marginal producer, with relatively high costs, that can compete most fully in times of high demand. Although some of our forest production will continue to be internationally competitive, much of it will not. And the competition will be ruthless in the free trade environment that is probable in the future. This situation is analogous to that in agriculture, in which U.S. producers are having trouble competing with imported crops on production cost. Of course, uncertainties associated with future energy costs compound absolute conclusions. Sharply rising fossil fuel costs could significantly increase the costs of wood products produced 5,000 to 9,000 miles away from U.S. markets.

In addition, timber production in the United States may become more trouble than it is worth. Many of the multinational corporations are expanding their vertical integration deep into retail markets, and the continuing controversies over sustainable forest management can significantly affect retail sales. Maintaining a marginal, unstable, and controversial component of their operation may be increasingly questioned at corporate headquarters.

Thus, the movement of forestry investment out of North America is likely to continue, as major wood products corporations are divesting themselves of land and processing capacity and investing in the Southern Hemisphere. The United States will likely become a minor player in the global production of common wood-based products, including lumber, pulp, and paper. It is possible, of course, that industrial firms with more of a regional or local focus will emerge or be revitalized and purchase some of the lands and mills of the multinationals, reversing current trends toward consolidation. However, much of the industrial forests around metropolitan centers are likely to be bought by developers to the degree that land use laws will permit conversion to such uses. Nonindustrial private forest landowners also will likely shift more of their forests to other uses.

New challenges

Does this shift really matter? In fact, might not this be a good thing, because the nation now can preserve its forests and consume cheaper wood products produced in fiber farms in other countries? Indeed, many participants in the national and global timber-environment debates believe that this division of the global forestry estate into fiber farms and unmanaged natural forests provides the solution to many forestry conflicts. Reducing management intensification on forest industry lands in the United States could certainly have a positive effect on biodiversity, especially in forests at an early stage of growth. A reduction in timber harvest rates also could lessen a variety of environmental effects. Finally, the reduction in timber value makes it less costly to leave trees standing in the woods to provide for wildlife habitat and other purposes.

Unfortunately, the potential loss of the wood products industry accentuates several major challenges. One challenge is retaining private forests in forest cover. Private forests provide large public benefits in the form of various goods and services, including watershed protection, wildlife habitat, and open space. Many private forest owners allow public access to their lands. Thus, it is in society’s interest to retain the majority of these lands in forest cover. For many societal objectives, even periodic clear-cutting is preferable to conversion to subdivisions or other nonforest uses.

In the United States, approximately 350 million acres, or 70 percent of all timberlands, are privately owned. Roughly 290 million of those acres are in small and medium-sized tracts belonging to 9.9 million nonindustrial private forest owners. Many of these owners maintain their forests with the proceeds derived from selling trees to wood products corporations. But with a decline of major markets for wood products, what incentives will these private owners have to retain or manage their lands as forest? Where timberlands are located in expanding metropolitan regions or in remote locations suitable for second homes, subdivision is a profitable possibility.

Indeed, major losses of forests to other uses have occurred already. Between 1982 and 1997, 14 states lost more than 2 percent of their forests. Losing the highest percentages were Nevada (16.7 percent), Massachusetts (10.6 percent), New Jersey (10.6 percent), and Colorado (8.4 percent). North Carolina lost the most in total forest area, more than 1 million acres. The nation can expect to lose as much as 25 million more acres in the next 50 years.

These issues are comparable to concerns about the loss of private rangelands in the West and their conversion to subdivisions. Many ranchers have small holdings, often centered on water sources and surrounded by public lands on which they have grazing permits. As the economic viability of these operations declines, the ranchers face the prospect of selling their land to developers. Yet in the Southwest and along the Front Range of Colorado, it is increasingly clear that ranching is preferable environmentally to subdivisions.

A second challenge caused by a shrinking wood products industry comes in maintaining stewardship of forests on public lands. In the past, revenues from the harvest of old growth forest, perhaps ironically, provided the money and the political support for management and restoration activities on federal lands. Without that revenue, national forest budgets have plummeted, with the exception of funds for firefighting. Recent concerns about wildfires may provide some help, but the focus remains primarily on protecting people and property rather than on restoring and managing forests.

All forests require periodic stewardship, including regular monitoring of their condition and protection from undesirable influences. Many people appear to believe that as the threat of timber harvest disappears, public forests can be left to take care of themselves. But this would be a mistake. Too many of the natural fundamentals have changed in public forests during the past century to leave management to nature. Climatic and other environmental variables such as air quality have been modified and are continuing to undergo significant change. Millions of acres of simplified forests and streams exist that need to be restored to fuller ecological function; for example, as spawning habitat for fish. In addition, virulent exotic pests and pathogens introduced during the past century have had devastating effects on many tree species and forests. The pace of these introductions has accelerated with increased global commerce.

Unsustainably high accumulations of fire fuels on many Western lands exemplify the need for active management to restore and maintain functional forests. These adverse conditions were created during the past century by activities such as fire suppression, grazing, logging, and the creation of dense stands of trees by planting. The effects of such activities on fuel accumulations and fire behavior have been greatest on the millions of acres of pine and mixed-conifer forests that evolved under a regime of regularly occurring wildfires of low or moderate intensity. Major programs are now needed to restore fuel loads to characteristic levels, and maintaining them at appropriate levels will require active management in perpetuity, using tools such as prescribed burning and periodic fuel removal.

Plans for response

A rational societal response to these challenges would be to adopt policies that will help maintain forest cover in private forests and restore desired conditions and sustain essential stewardship in public forests. (One bit of good news in this regard is that the economic expectations of many private forest owners often differ from those of publicly held corporations, making them more flexible about acceptable rates of return and definitions of capital.) Society has a variety of tools at hand to help accomplish these goals. These tools fall into six major categories, based on their purpose:

Reducing the costs of managing private forests. During the late 19th and early 20th centuries, abandonment of land by private forest owners was a serious problem. Property taxes were imposed annually on forestland, much like on residential property. But once the timber was cut, the owners had no revenues for many decades to pay the taxes. Consequently, owners abandoned their land in order to escape the property tax. Most states recognized this problem and adopted a yield tax, paid at harvest, as the primary property tax on forests. In addition, a variety of federal income tax provisions, such as lower tax rates for timber sales, recognized society’s interest in maintaining productive forestlands. Such policies arose from the desire for increased supplies of wood.

The nation now needs to revisit these policies, but with a new goal: the maintenance of forests across the landscape. Among other actions, this will require reconsidering federal income and estate taxes. Allowing income averaging in income tax calculations and allowing capitalization of more of the expenses associated with timber production could have major impacts on production costs. Continuing to ease estate taxes that allow families to pass forests intact from generation to generation could slow the conversion to other uses.

Changes also are needed in state regulations that currently are focused on increasing future timber supplies. Most states with extensive forestland, such Oregon and Washington, have significant reforestation requirements after harvest to ensure a new commercial crop of trees. But these regulations impose a financial burden on landowners, and in some cases they actually reduce biodiversity. These requirements could be adjusted to lower the cost of production and produce greater ecological benefits.

Finally, the regulatory environment should be stabilized. For many forest owners, expanded environmental regulations, based on the strictures of the Clean Air Act, the Endangered Species Act, and other federal and state laws, often seem to lurk around every tree. Although many of these regulations are needed, achieving a stable policy environment for investment must be a long-term goal. For example, landowners need assurance that improving habitat conditions in their forests and streams, which may attract endangered species, will not result in increased regulatory constraint on management alternatives.

Even adjustments in federal land management policies can have a beneficial (or negative) effect on the regulatory environment. For example, adoption of the conservation-oriented Northwest Forest Plan for federal lands in the Pacific Northwest had the unplanned effect of creating a more stable regulatory environment for managers of private and state trust lands. This plan resulted in the federal government taking the major responsibility for forest species conservation in the Pacific Northwest by making conservation the primary objective on nearly 80 percent of the federal forestland base. The consequence was that the conservation burden was dramatically reduced on private and state trust forestlands, as a result of mutually agreed-on Habitat Conservation Plans for millions of acres of those lands.

Creating markets for important forest goods and services. Forestlands provide numerous societal services and goods that have not been fully valued, in part because markets are lacking. As potential returns from wood production decline, economic recognition of other forest values, including the creation of markets, could provide incentives for forest stewardship. Two of these alternative values are watershed protection and carbon sequestration.

Watershed protection is arguably the most important service and water the most important good provided by forest ecosystems. Society largely takes the availability of water for granted. Yet the maintenance of a well-regulated high-quality supply of water is and will remain the most important function of forests in the 21st century. Active restoration and management programs will be needed to protect or restore streams and rivers that pass through forests. This effort will require activities such as reducing the impacts of existing road systems and restoring structural complexity to simplified water channels. The problem is that mechanisms generally do not exist that fully recognize the value of water as a good and that compensate forestland owners for their stewardship of this resource. Creating an appropriate market for watershed protection would seem to be a critical step in that stewardship.

The maintenance of a well-regulated high-quality water supply will be the most important function of forests in the 21st century.

Although the issue of water rights is certainly a legal labyrinth in North America, new approaches to water valuation will be critical in moving toward recognition of watershed values in forests and appropriate stewardship. Possible approaches range from treating water as a fully tradable commodity to using market incentives to increase the efficiency of water use and allocation. Although water markets are not new, the concept has not been widely applied in the United States.

There are complexities in applying market principles, however, as indicated by the experiences of other countries. For example, in 1981 Chile adopted a water law based on the free-market approach and substantially reducing the regulatory role of government. Although the law has had positive impacts on investment and flexibility in water allocation, major difficulties were encountered in dealing with issues such as social equity, environmental concerns, and integrated watershed planning–the types of issues typically addressed by governmental institutions.

Forests also can play a substantial role in combating global warming. The major greenhouse gas, carbon dioxide (CO2), has increased in the atmosphere largely because of the burning of fossil fuels. As forests grow, they take up large amounts of CO2 from the atmosphere and sequester it in their wood, often for centuries. Many forests, such as those in the Pacific Northwest, have a very large capacity to store additional CO2.

Carbon markets could provide incentives for forest managers to manage lands in ways that would either remove (sequester) additional CO2 or prevent its release in the atmosphere. Markets could stimulate such practices as creating forests on marginal agricultural lands; lengthening the rotation period (the time between harvests); altering harvesting techniques to leave additional carbon after harvest; and permanently reserving existing forests from harvest, a particularly effective approach in the short term. Until public policy requires control of carbon emissions, however, carbon sequestration in forests will have little market value despite the potential for forests to make a significant contribution to the control of greenhouse gases.

Wildlife is another forest good that can be monetized. Private forest owners can market game species by selling hunting rights. This approach is already widespread in the Southeast, where there has been a tradition of leasing private forests to hunting clubs. Compensating forest owners for providing wildlife habitat could be extended to nongame species and other biota as well by providing public incentives, including direct payments.

Purchasing land and conservation easements using public funds. The most direct approach to maintaining public values on private forest landscapes is by purchasing the land. Such an approach led to the creation of the national forests in the eastern United States in the 1920s and 1930s as a way to stem abuse of private lands in the headwaters of navigable streams. However, there are significant issues surrounding the purchase of private forests. Acquisition costs can be high because of the amount of land involved and the high value of competing uses. Opposition to public acquisition of private lands also can be formidable, as many people resist such a practice out of principle or fear of a negative impact on the property tax base.

Conservation easements are an alternative approach to ensuring that critical forest values are maintained, presumably in perpetuity. But such easements can carry substantial price tags that are as much as 90 percent of complete purchase. In addition, conservation easements are currently undergoing substantial public scrutiny as to their actual value to society and their long-term viability, particularly with regard to adequate trust oversight, issues that were brought into focus by recent investigations into practices used by the Nature Conservancy.

Acquisition and management of private forests by nonprofit organizations is a third approach. For example, in 2002 the nonprofit Evergreen Foundation proposed to acquire approximately 100,000 acres of forests near Seattle from Weyerhaeuser by issuing tax-free bonds; a portion of the acquired forest would subsequently be managed to pay the interest and, ultimately, the principal on the bonds. The foundation failed to obtain approval for issuing the bonds before the company’s purchase deadline, but the potential value of this approach is apparent.

These approaches and others might be combined in regional efforts to maintain functional forest landscapes where large divestitures of corporate forests are occurring. Approaches adopted in the Northeast, which first experienced this phenomenon, provide useful guides. For example, a project to conserve public forest values in northern New Hampshire and adjacent Maine combined purchases of lands and conservation easements by nonprofit organizations and governments with agreements by private landowners to practice ecological forestry.

Using zoning regulations to control land use. Society traditionally has used a variety of mechanisms to influence land use practices on private lands, with zoning, which allows certain uses and prohibits others, being high on the list. For example, Oregon passed land use laws in the 1970s that had the preservation of prime farm and forestland as a primary goal. These laws have been overwhelmingly successful in slowing the development of forest and farmland and in concentrating commercial and residential development in designated areas of the state. Over time, the state has allowed urban growth boundaries and rural residential areas to systematically expand to accommodate population increase. This approach does have its detractors, though, as the zoning often significantly limits the potential economic value of the property. To help adjust for that, land zoned for farms or forests is taxed at a lower rate. Still, the debate over the fairness of this approach continues.

Creating or maintaining a viable domestic forest industry. It will, of course, take time to work through the various public policy options, and therefore it will be important to maintain an industrial wood products infrastructure and skilled workforce. As is already evident in the Intermountain West, it is difficult to regenerate a capacity once it is gone. For example, there is no longer significant plant capacity to use small, low-quality wood from fuel restoration treatments for either wood products or biomass energy production in Arizona and New Mexico, where these treatments are badly needed, because plants have been closed or converted to other raw materials. Private capital is unlikely to recreate this capacity, given current market economics and uncertainties regarding a dependable wood supply.

One key to maintaining an indigenous forest industry is finding niches in the global marketplace. Focusing on special high-quality wood products is one approach, perhaps with brand differentiation. For example, mature wood from Douglas firs has special strength properties, and this trait might be exploited to create a variety of specialty products, which would then be promoted accordingly. There is, of course, the risk that niche markets will disappear, as many such markets have, with the advent of engineered wood products. More generally, attention might focus on the production of woods of species and qualities that cannot readily be grown on fiber farms. High-quality hardwood timber for use in quality furniture and cabinetry is an important example.

Stewardship of forests throughout much of the United States, including fire restoration programs in the West, will require the harvest of smaller trees in order to better protect large old trees. However, because of the federal government’s spotty track record in providing a steady supply of such mature trees, entrepreneurs will be reluctant to invest in state-of-the-art milling and biomass processing facilities geared to their use. Several steps can be taken to encourage necessary private investments in modern plants. For example, the government can absorb a significant amount of the risk of establishing new plants or revitalizing old ones by making technology grants and interest-free loans, and it can commit to providing a stable wood supply. Promises of a steady long-term supply of timber were routinely used to lure industry to the West during the 20th century. Both approaches have difficulties that must be overcome. Many people see the forest industry as part of the problem, not as part of the solution. Thus, the idea that the nation needs the industry to address environmental problems is hard for them to accept. The idea that society actually should subsidize this industry to rebuild may prove even more bothersome. Still, both approaches are critical to forest stewardship, particularly in the interior West.

Increasing local community involvement in the stewardship of public lands. In many respects, delegation of authority is only logical. Who better to manage lands than the people who are most directly affected by their condition?

There are some excellent examples of what can be achieved by local stewardship. Municipal watersheds, which supply domestic water supplies, may be particularly illustrative of the potential of this approach. The city of Seattle has adopted a plan for its Cedar River watershed that emphasizes ecological restoration of both the forests (many of which were clear-cut in previous decades) and the stream systems and fisheries. Many other municipalities, from small towns to large cities, depend on watersheds that are partially or wholly owned by state and federal governments; allowing these municipalities to accept stewardship responsibilities for those lands seems appropriate. This may also include significant obligations to pay some or all of the stewardship costs, given the local benefits.

Restoring and maintaining appropriate amounts of potential fire fuels present in publicly owned forests is another example where at least partial delegation to local governments and organizations may be appropriate. Recent congressional legislation provides a start on this approach on providing communities with more of a role in stewardship efforts. However, these are typically limited to specific types of activities, such as the focus on fuel treatments in the case of the Healthy Forest Act. It should be noted, however, that some environmental organizations have worked hard in years past to change the power centers of forest policy from the local to the national level, and hence they may be likely to oppose assigning such authority to local bodies. Thus, much proof of concept will be necessary before the approach is broadly accepted. The fact that the nation is entering an era in which major economic incentives for timber harvest no longer exist may make the transition easier.

Beyond boundaries

How useful will these policies be as the United States shifts from timber scarcity to timber abundance? We do not claim to have all of the answers or to see the future with perfect clarity. We do believe, however, that these suggested actions will be steps in the right direction, and we hope that they will pave the way to further discussion and action. The new world now emerging will certainly take some getting used to.

Nor is North America alone in facing the fundamental changes occurring in the economics of forest management. Much of Western Europe faces similar dilemmas. France and Germany are puzzling over how to maintain their traditional decentralized forest management activities as timber revenues decline. These changes not only affect forest conservation but undermine rural economies and communities that have existed for centuries.

Thus, a new day has dawned for forest management in the United States and worldwide, driven by the realities of the global marketplace. The implications will dominate forest management and forest policy for much of this century, and the vitality of forests will hinge on what actions are taken and how soon reforms begin.


Jerry F. Franklin () is a professor in the College of Forest Resources, University of Washington, Seattle, Washington. K. Norman Johnson is a professor in the College of Forestry, Oregon State University, Corvallis, Oregon.