Minnesota Timber Industry at a Crossroad

Will it be the Beginning of the End, or a New Beginning?

Minnesota is losing its timber industry. Seven major forest products mills have closed in the past six years. Numerous sawmills have closed. One mill has taken two paper mill lines off production and eliminated hundreds of jobs. Timber harvest volume is down by at least 35%. Many multi-generational logging companies have gone out of business. Thousands of acres of public and private land are not accomplishing their forest management objectives.

graph-update-sum2013Recent studies have strongly warned of irreversible threats to the long-term viability of the timber industry if the business model and industry / public policies are not changed. Timber Harvesting magazine published a report “2011 Logging Business Survey: Big Squeeze,” which illustrated that due to the razor thin profit margins, low mill prices, high fuel costs and other expenses over half (51%) of the logging businesses nationwide are operating at a loss or at best break-even. The largest percentage of profitable logging operations (21%) are operating on a 1-3% profit margin.

The Wood Supply Research Institute published a report “Supplier/Consumer Relationship Study –Lakes States Region Report” in which they interviewed loggers (suppliers) and mills (consumers). The number one issue of concern with loggers was, “An inability to earn a decent return on investment for their harvesting or trucking businesses.” In conclusion the study found that, “The industry is at a critical turning point.”

The Executive Summary of the Wood Supply Research Institute study finds:

  • What is known is that the general population of logging contractors has not been able to replace equipment for several years and each month more logging capacity demand is increasing. Logging company morale and outlook has been very low.
  • There is an urgent need for the consumer companies and logging/trucking company organizations to stabilize the situation to create a more viable business environment so the forest based industry can avoid long-term damage to the supply chain. Rebuilding trust between suppliers and consumer organizations must be a priority. There needs to be basic cultural change on both sides in order to make a lasting structural change in the system. Contracts need to be of value to both the consumer companies and the suppliers.
  • Contracts need to have credibility to the financial institutions and for business succession purposes to build a stable supply chain for the future,

The irony is that the WRSI survey found that the number one concern of loggers was the inability to earn a decent return on investment for their harvesting and trucking businesses. Similarly one of the top concerns of the mills was the adequacy and sustainability of logging capacity.

The good news is that the solution to both of these concerns is the same – consumers paying at a rate that will support profitable logging operations thereby allowing for reinvestment in equipment.  Problem solved!

The impacts of the downturn in the forest products industry to the logging industry is indisputable and threatens to result in permanent damage to the timber industry that will compromise; the ability of the remaining mills to remain viable; the capacity to support new or expanding mills; and the mechanism that public and private land management agencies utilize to accomplish their forest management plans and healthy forest objectives.

In Minnesota, the timber industry accounts for over 40,000 primary and secondary jobs and has a multi-billion dollar economic impact. All of this is contingent and supported by 1,300 – 1,500 in the woods loggers. Due to the state of the logging infrastructure, the entire forest products industry is in a very precarious position and risks total collapse if the logging capacity continues to erode and contract.

The timber industry is a partnership of loggers, truckers, mills and public/private land managers. All stakeholders need to work together to redefine the timber sale, production, and procurement model in order to establish a stable, sustainable timber volume supply that is competitively priced and will allow for the profitable operation of logging and mill businesses. Additionally, such action will position Minnesota as a potential site for new forest products industries based on the abundant resource availability and competitive, stable stumpage cost and volume.

As the leading woodlands land management entity, the State of Minnesota must take the lead and set the example for other public land management entities (counties and US Forest Service).

At a meeting in Grand Rapids attended by 75 loggers and other timber industry stakeholders it was suggested by Jack Rajala of Rajala Timber that the MNDNR eliminate the minimum bid at timber auctions. The process that the MNDNR employs to determine timber value is based on historical data but does not factor in permits that receive no bids. This skews the actual appraised value and results in an artificially determined value that is not reflective of current market values. The current method of “backing into” the value of stumpage also delays response to market conditions and changes. Potentially a change in the policy will result in the many previous “no bids” selling and thereby increasing the timber sale revenue and ensuring that the forest management objectives of the MNDNR are being accomplished. Eliminating the minimum bid is probably one of the simplest, yet figuratively one of the most profound changes that the MNDNR can initiate.

This action will send a message to the logging industry, existing mills and potential new forest products industries that Minnesota is serious about improving the timber sale model for loggers and industry.

The long-term the answer to stabilizing, retaining and expanding the timber industry is recruiting new industry to utilize the excess timber resource. This will require the demonstration that the resource is available and being offered. Due to the decline in stumpage value compared to the booming period prior to 2006, private timber offerings have declined dramatically. Without public policy incentives to encourage private forest management and harvest, there is very little motivation for the private sector to harvest their timber lands which account for roughly 50% of the timber lands in Minnesota. Therefore, it is necessary for the public sector (county, state and federal) to offer additional timber above their historical volume to off-set the void created by the reduced private sector timber offering. It is this lack of private sector timber and stagnant public timber volume offering that has resulted in an imbalance of supply and demand that is contributing to unreasonable and uncompetitive stumpage values.

The price of Lakes States stumpage is some of the highest in the nation and the world. If Minnesota is going to be competitive, it must lower the cost of stumpage, thereby maintaining the current forest products industry and attract new forest products partners.

Flooding the market with additional volume, with no artificial minimum bid, will: reduce the cost of stumpage; improve the profitability of logging companies and mills; position Minnesota to be more competitive in the regional, national and world forest products industries; and contribute to ensuring that the public land management forest plan objectives are being accomplished.

The future of the Minnesota Forest Products Industry will not be determined by the loggers and truckers. They have done all they can to remain in operation. The future, whether positive or negative, hinges upon decisions of the timber supplier (landowners), governmental economic agencies / policy makers and the consumers (mills). It is their choice whether they preside over a continued decline in the forest products industry, and consequential deterioration of forest health, until it’s total collapse (as has occurred in other states) or if they are going to step up and provide the strong leadership which can save a vital economic cornerstone of Minnesota’s economy.