The Timber Industry - a Look Back at 2008

In 2008 the timber industry saw a decline in revenues due to a slump in the housing market and, more recently, a global reduction in credit through bank loans and lending policies. Consumer spending, employment levels, and currency exchange rates, also had an influence on this down turn. Tariffs imposed by the US affected profits on lumber imported from Canada. This had a bearing on profits realized from sales of products exported by subsidiaries in Canada of US based corporations. Not only were these global companies being charged a 27% tariff on products entering the US, they were also fined in accordance with anti-dumping laws (dumping is the practice of selling product under the market value, or without profit) (Meacham, 2003). Prices are elastic for many building materials. For essential items, prices are inelastic due to shortages of supply. As new home construction tapered off, builders substituted cement based materials and metal studs. Less demand lowered prices, but only slightly.

Profits declined for most materials except for engineered products (oriented strand board, for instance) (Weyerhaeuser Annual Report, 2007). Availability of product has put in question the sustainability and profitability of wood products in some US states. Texas, for example has seen a steady decline in production and employment in the timber industry due to shortages in supply of saw logs. This is the result of land being bought up by investors to take advantage of tax laws that encourage these practices. Since 2003 real estate investment trusts (REIT's) and timber investment management organizations (TIMO's) have reduced the timber industries' timberland from 32% to 16% of available state supply. The industry is a $21 billion a year industry for the state. Without state investment, sustainability is not possible (Combs, 2005). Some ways the state could help would be in relief through tax credits for investments in new plants that utilize byproducts to create such products as oriented strand board and "lower-value" products such as pallets.

It is possible to see the positive and negative affects of monetary and fiscal policies, both state and federal, in the examples stated above. Tariffs, tax policies, and incentives illustrate the principles of economics as pointed out by Mankiw. Governments can sometimes improve market outcomes (Mankiw, 2004) Governments can also make matters worse. In an attempt to protect the industry, the US government imposed a tariff on imported goods. This was a good idea, but failed to solve the problem. Finished products made of wood were allowed to be imported without this restraint, damaging the local industry because the Canadians were able to produce these products at a lower cost. The problems facing the Texas Timber industry alludes to the principle that "a country's standard of living depends on its ability to produce goods and services." Mankiw also goes on to say that "...policymakers need to raise productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available technology." Paul Krugman, winner of this years Nobel economics prize, has been a long time critic of the Bush administration and has stated that its economic policies have helped spark the current financial crisis (BBC, 2008).

To further emphasize the long term affects of monetary policy we need to look at the Feds (Federal Reserve) actions since 2001. Fed Chairman Alan Greenspan kept real interest rates at near 0% for four years and at the same time running large cash deficits at more than half a trillion dollars a year. This made it necessary to borrow from abroad. Consumer debt increased and savings plummeted. The housing market took a big hit and did not fully recover before the current downturn hit. As a result, the timber industry that relies on new home start-ups has seen a depressed market and reduced revenues. The US dollar has lost 30% of its value from 1970's. The Canadian dollar is steadily catching up with the US dollar (Sherman, 2008).

Weyerhaeuser, in 2007, implemented policies that ensured fair practices, sustainability, and protection of human rights, including equal pay and non-discrimination in hiring and pay. This policy was imposed on all employees both at home and abroad. This is not an industry trend. In Latin America, for example, there are no such guarantees. There is still a destruction of the rain forests in South America. This stresses the negative externalities of the industry. Other externalities include: habitat destruction which affects recreational and commercial fishing and tourism; ecosystem damage; risk of flooding; and a decreased quality of life if the environment is destroyed. Some positive externalities include opening up the back country to recreation and allowing for forest service managers to control fires (ECONorthwest, 1993).

Employment in the timber industry has been impacted by government policy. The tariff instituted in 2005 against imports of Canadian lumber saw a decrease in employment in manufacturing (lumber users) and at the same time an increase in employment of lumber producers. This did not produce a net loss in jobs but did create uncertainty and a disruption in the labor force (Holland, 2005). Immigration and trade agreements (NAFTA) also affect the supply and demand of labor. The recent crack-downs on employers hiring undocumented workers have meant a shortage of labor. Employers are now reluctant to hire guest workers for fear of fines or imprisonment. This has also reduced the numbers of workers needed to replant forests.

Weyerhaeuser Company (WY) has made adjustments to ensure success by diversifying when practical and liquidating when necessary. Wy recently sold its fine paper manufacturing arm to generate cash to enable it to pay down debt and put itself in a more favorable financial situation. This sale increased quarterly earnings by $1.4 billion.

The Farm Bill of 2008 included passage of H.R. 1937: Timber revitalization and Economic Enhancement (TREE) Act of 2007. This act gives special tax incentives to real estate investment trusts (REIT's) to encourage long term investments in timberlands. This bill relaxes the rules for the taxation of qualified timber gains. TREE ensures a supply of product for the timber industry in the future and at the same time giving investors an alternative to land development (H. R. 1937, 2008)

Finally we conclude with the acknowledgement that economic policy and the general health of the economy affects this industry and most others. When wage earners (workers) do well; are paid at least a living wage; and the economy is stable, products are more in demand. When corporations and the workforce pay their fair share of taxes, the government is encouraged to improve the infrastructure This, in turn, puts more money into the economy. When the Fed keeps down inflation and unemployment by regulating the money supply, the economy hums along. And when policymakers weigh the costs and benefits of proposed programs effectively, producers and consumers both benefit. Granting banks and lenders to use questionable financial instruments such as derivatives, when no one really knew how they worked, was probably not a wise decision. Maybe some economic scientist will create a model that prevents this from happening again.

We have seen from the examples above that monetary policy does not always do what it is intended to do. This is either the result of poor decision making or inaccurate information. It could also be attributed to the fact that economics is not an exact science. There are many variables that make economic models flawed or undecipherable. Shocks, like the ones we have witnessed recently, have no precedence. They are a new phenomenon. Economic advisors are experimenting to see what works and what doesn't. Maybe this is not total guess work, but something close to it. It is a fun to watch everything unfolding (unless your investments went up in smoke like many of those large firms). Who would have expected Morgan, AGI, Washington Mutual, Wachovia, or any of the other stalwarts to crumble so quickly?

The basic concepts of economics point out the importance of the simple principle of supply and

demand. When supply and demand reaches equilibrium, there is stability in the system (suppliers are delivering all they care to at a profit that they are happy with and consumers are buying at a price that they are willing to pay). This balance is easily upset by many variables. Sometimes the imbalance benefits the supplier; sometimes the consumer. Factors that affected the timber industry in 2005 were the implementation of the 26% tariff on imported softwoods from Canada (mentioned above by Meacham) and fines imposed by the US for supposed dumping infractions. This negatively affected the industry by increasing input costs to the manufacturers and at the same time reducing supply. Canadian producers were not willing to sell their product at a reduced profit. Some of these producers were actually subsidiaries of US multinational corporations.

References

`Combs, S. (2005). Wood's too good. Fiscal Notes. Retrieved October 23, 2008, from http://www.window.stste.tx.us/comptrol/fnotes/fn0506/wood.html

Global Forest Products, (2008). Datamonitor. Retrieved October 20, 2008, from www.datamonitor.com

Holland, D. (2005). Tariffs on Canadian lumber affect Washington State. Impact. Retrieved October 20, 2008, fromhttp://impact.typepad.com/articles/2005/05/tariffs_on_cana.html

H. R. 1937. (2008). H. R. 1937: Timber Revitalization and Economic Enhancement (TREE) Act of 2007. GovTrack. Retrieved November 2, 2008, from http://www.govtrack.us/congress/bill.xpd?bill=h110-1937&tab=summary

Krugman wins Nobel for economics. (2008). BBC News. Retrieved October 13, 2008, from http://news.bbc.co.uk/2/hi/americas/7667190.stm

Mankiw, N. G. (2004), Principles of Economics (3rd ed.). Mason, Ohio: Thompson/ South-Western

Meacham, B. (2003). Lumber tariffs nail state's wood-products plants. The Seattle Times. Retrieved September 28, 2008, from Http://community.seattletimes.nwsource.com/archive/?date=20030106&slug=truss060

Sherman, H. (2008). The high price of easy money. MarketWatck. Retrieved October 24, 2008, from http://www.marketwatch.com/news/story/us-fiscal-policy-laying-groundwork/story.aspx?...

University of Georgia Report. (1993). Retrieved September 20, 2008, from http://cwt33.ecology.uga.edu/Publications/62_3.adf

Weyerhaeuser 2007 Annual Report. (2007). Retrieved October 23, 2008, from http://www,weyerhaeuser.com/annualreport/wyar07/letter.html