Over the last 10-15 years, the forest products industry has migrated away from the vertical integration model. This trend has created a number of challenges within the larger market that have also been more pronounced in the Lake States. Consider the situation in the region as we head into 2Q2016.
Regional Ownership & Inventory Challenges
- Regional paper mills are no longer integrated, which means they no longer own the timberlands that provided 10-30 percent of their raw material requirements. Initially, these mills sold much of their land to Real Estate Investment Trusts (REIT), which operate with the philosophy of generating annual income through the sale of both land and timber.
- The REIT model has generally been beneficial for timber supply and in some cases, Fiber Supply Agreements (FSA) were included with land sales.
- REITs are now selling land to Timber Investment Management Organizations (TIMO), many of which operate with a philosophy of generating long-term investment income; financial gain is realized at the time the land and timber are sold, which could be years or decades. Timber is harvested less frequently under this structure, which limits the regional timber supply.
- A large percentage (roughly 52 percent) of Lake States timberlands exists in Non-Industrial Private Forest (NIPF) ownership arrangements, and the percentage of wood contributed to the total supply generally follows this percentage. The number of NIPF landowners is also increasing, resulting in a larger number of smaller parcels; in Wisconsin alone, the number of NIPFs increased from 230,000 in 1997 to 362,000 in 2007.
- Timber removals on public lands have increased, but not significantly enough to replace the volume that originated from previously-owned paper mill timberlands.
Impact of these Changing Dynamics
As the forest ownership dynamic has changed, many FSAs have expired, and much of the available wood supply from previously-owned paper mill land is no longer asfrom TIMOs, as they are structured to allow more valuable timber to mature on the stump before harvesting. There is very limited, if any, opportunity to change TIMO management structure and objectives for land ownership to generate more timber from these lands.
With over 50% in NIPF timberland ownership arrangements, wood from these lands is critical to the regional supply. However, timber from the existing, fractured NIPF structure requires more sales and involves more landowners to generate the same amount of available wood.
The forest products industry needs to revitalize mutually beneficial landowner assistance programs (LAPs). Such programs ensure that affordable wood supplies remain available on the market, and they drive economic incentive for NIPF landowners to continue to manage their working forests.
The industry has gotten away from investing in LAPs because of the associated costs required to properly maintain forestlands. However, the potential advantages to the regional industry are greater than the maintenance costs. Consider the following benefits:
- Insuring that the NIPF ownership class continues to understand the value of their timberlands, and provides a valuable wood resource to the market. This leads to increased opportunities to educate new generations of NIPF owners about the value of timberland maintenance, wildlife preservation, and timber harvesting.
- Increasing the supply of wood fiber from the hundreds of thousands of NIPF land owners ensures that a steady supply of fiber is available at market prices. Increasing the percentage of wood from small landowners stabilizes regional wood flows, improving costs and benefiting the industry in the long term.
The entire forest products community seeks the common outcome of maintaining healthy forests that will drive a vibrant forest industry. The Lake States is fortunate to have a diversified wood supply that is supported by the three primary entities: large landowners (institutional, formerly industrial lands), government land (generally county and state) and small landowners (NIPF). It is time to shore up support for the small landowners within the Lake States, as it will foster a stronger forest industry and a mutually-beneficial, valuable partnership for the future.