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MARKET WATCH

The Implications of Forest Ownership for Wood Buyers

Posted by Suz-Anne Kinney on January 24, 2014
Why is it important that wood consumers know forest owners and forest ownership? Because supply chain strategies vary by ownership type.

The majority of wood consuming facilities take a portfolio approach toward their supply chains and use multiple models to balance costs with assurance of supply. The basic structure and process flow for forestry supply chains are relatively consistent across the US. The differences arise in operational details, primarily harvesting and processing. In general, mills follow two models when moving wood fiber from the forest to conversion facilities:

  • A model in which wood moves directly from the forest to a conversion facility. This model is typically referred to as Woods Direct.
  • A model in which wood moves from the forest to concentration yards or intermediate processing facilities before being transported to a conversion facility. For clarity, we will refer to this model as a Network model.

Woods Direct Models

In a Woods Direct model, trees are transported directly from the forest to the mill without any additional handling or processing steps. Three types of direct models are used in the US.

  • The Dealer System: In this system, a wood dealer generally acts as an intermediary between the landowner and the wood consuming facility. The dealer buys the trees from the landowner, contracts with independent contractors for harvest and delivery and sells the harvested trees to the wood consuming facility in order to generate an operating margin. The sale to the mill can be either a contracted sale or a spot (or “gate”) sale. In this system, the mill minimizes use of its working capital, shifting that burden to the wood dealer.
  • The Large Landowner System: In this system, the landowner executes sales contracts with the conversion facility and service agreement contracts with harvest and transportation contractors. Because the landowner must actively manage all of the processes within the supply chain, the landowner is typically a large corporate landowner, a TIMO or a REIT; these entities prefer to exercise some control over the contractors operating on their properties. More importantly, by contracting with the mills directly and removing the wood dealer from the equation, the corporate timberland owner can capture some of the wood dealers’ margin.
  • The Controlled Stumpage System: In this system, mill employees (procurement foresters) buy stumpage (trees bought in the woods “on the stump”) from landowners. The mill then executes contracts with independent contractors to harvest and deliver the wood to the mill. Typically, this system provides a small portion of any given mill’s supply portfolio; it is used as a hedge against cost inflation (buying stumpage when prices are low) and to minimize supply interruptions. In this case, the landowner is either paid for the trees when the contract is executed with the mill or at the time of delivery to the mill, or a combination of both.

Network Models

Network models add complexity and cost to the forestry supply chain. Companies in the US typically embrace network models in order to take advantage of perceived opportunities within the supply chain. The typical network supply chain will include either a concentration yard or a remote processing facility such as a chip mill. The reasons for adopting a network model vary broadly and are specific to individual mill circumstances. The following examples are hypothetical and demonstrate individual mill circumstances that require network models.

  • A coastal paper mill has no land at the mill site to add a woodyard and chipping operation. Instead, this mill uses multiple remote chip mills, some owned by the mill company and some independently owned. The use of chip mills solves several problems for the mill: the conversion of roundwood to chips, inventory management, and inbound logistics to the mill. In order to source roundwood to the chip mills, a portfolio of woods direct models is used.
  • A mill located in a mountainous region where the logging and trucking contractors use trucks set up for heavy loads on secondary roads but have no over-the-road trucks. This mill chose to operate a series of concentration yards where logs are received, inventoried and reshipped via truck or rail to the mill. In this case, the concentration yards are used for inventory storage as well as transportation optimization. As in the previous example, any of the woods direct models can be used to provide wood to the concentration yards.

Wood consuming facilities must have a mixture of supply chain strategies to minimize risk and manage costs. While harvests volumes are relatively evenly distributed between these large and small landowners, it’s important to understand that corporate and institutional owners control very large tracts of land, and therefore supply from these owners is fairly secure and requires fewer supply agreements. Small private landowners will generally require about 75 percent of all agreements and that’s why working with a dealer who enters into supply agreements with landowners is generally more efficient. When doing so, however, wood consuming facilities will want to keep these three essentials in mind:

  • Develop strong trading relationships with dealers
  • The 80/20 rule applies here—20 percent of the dealers control 80 percent of the supply—so find the right dealers
  • Take a conservative view of how much supply each dealer can deliver. Dealers compete with each other for the same stumpage contracts. Because they have no real control over the supply that will be available to them, they will be leery of long-term contracts as well.

Comments

Robert Crosby

01-28-2014

I am finding these series of reports you are providing very helpful in understanding the basics of commercial timberland management.

thanks


Comments

Ann Reiley Jones

02-03-2014

These articles are much appreciated for their clarity and factual basis.

Topics: wood supply chain strategies

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