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UM Economic Expert: The Ongoing Troubles in the Forest Products Industry

by: Matthew Koehler

Thu Sep 30, 2010 at 06:22:11 AM MST

( - promoted by Jay Stevens)

This commentary from Dr. Thomas Michael Power, Research Professor and former Chair of the Economics Department at the University of Montana, was on Montana Public Radio earlier in the week.

Dr. Power's piece is a good history lesson, as well as a lesson in Economics 101. Hopefully Senator Tester, his staff and those supporting his misguided Forest Jobs and Recreation Act (here and here) take heed.

Power's piece is below the fold...

Matthew Koehler :: UM Economic Expert: The Ongoing Troubles in the Forest Products Industry
The Ongoing Troubles in the Forest Products Industry
By Dr. Thomas Michael Power

Earlier this month, the Western Wood Products Association released the 2009 statistics on the overall economic performance of the 170 lumber mills in the Western United States. Lumber production at those mills was the lowest it has been in sixty years. Just since 2005 production has fallen by almost 50 percent, dragging total output almost 25 percent below the previous low that occurred in 1982. To compound the problems faced by lumber mills, low lumber prices led the total value of lumber production to fall even more drastically over the last five year, with almost two-thirds of the lumber value disappearing. Almost all lumber mills across the West have either shut down for periods of time, eliminated shifts, or reduced employment and payrolls in other ways.

Across much of the West the difficulties of our wood products mills have regularly been blamed on the U.S. Forest Service and the dramatic reduction in the contribution that federal lands have made to total timber supply since the early 1990s. This diagnosis of the problem has even been embodied in proposed federal legislation that would mandate that the U.S. Forest Service harvest a certain number of acres of trees each year to boost the available timber supply to feed local lumber mills. That is, the problem has been portrayed as one of inadequate timber supply due the failure of National Forests to keep timber production at the high levels of the past.

That diagnosis of the problem is clearly not accurate. In the southeastern United States where private timber lands dominate timber supply, lumber production has followed the same steep downward trend. The flow of wood products from Canada that had been effectively competing with production from Montana and other Western lumber mills has also plummeted. Of course, the dramatic decline in lumber prices clearly does not suggest a shortage of wood products but, rather, an inadequate demand relative to the capacity of our mills to produce.

A glance at housing starts across the nation tells us the real story. Five years ago over two million new homes were being built each year. In 2009 only half a million houses were built, a quarter of the previous number. The result has been a level of housing starts lower than in any year since the end of World War II. In 2005 the lumber going into residential construction was almost 28 billion board feet. In 2009 it was just over 7 billion board feet. The demand for lumber was clearly tracking the building of new homes with both plummeting to modern era lows.

This was not the first lumber market collapse in Montana and across the West. During the early 1980s, another period of deep recession, most of the nation's lumber mills also shut down as housing starts slipped dramatically. The lumber industry has always been cyclical because of its connection with the demand for new residential housing. As housing starts fluctuate, lumber prices, production at lumber mills, and employment in wood products also fluctuate. In addition, there is a much longer cycle tied to the timber industry's tendency to over-cut regional timber supplies, forcing mills in over-cut regions to shut down while new mills open up in virgin forests or in areas where second or third growth is reaching maturity. As a result, timber production has hop-scotched across North America from New England into Pennsylvania and from there into the South and then back north into the Great Lakes region and then into the Pacific Northwest including Montana and, currently, back towards the South.

On top of these short run cycles tied to cyclical fluctuations in housing and the failure of the lumber industry to operate sustainably in any particular area, there has also been a long run trend to replace workers with capital investments in machinery and expenditures on non-human energy sources. Axes, saws and horses gave way to chain saws, bulldozers, and diesel motors. Now gigantic feller-bunchers do the work of six workers with chainsaws. Lumber mills have increasingly reduced the variety of products they produce so that the mills can be automated, further reducing employment in the industry. As a result, even when production was stable, employment tended to decline.

During the early 1980s, many mill owners took advantage of the mill shutdowns to retool their mills to make them more productive and less labor intensive. Other companies built brand new large automated mills closer to population centers in the West. The huge new mills were more competitive once housing and wood products demand bounced back. Those new mills took market share from the smaller, older, mills that either did not reopen or reopened but then failed when cyclical hard times hit again in the form of low lumber prices.

The depth of the recession out of which we are trying to claw our way and the extended period that most economists expect before housing markets bounce back are likely to discourage any such confidence in lumber markets in the near future.
There is not much investment taking place to upgrade the West's lumber mills. That may signal another permanent ratcheting down of the number of mills and wood products employment opportunities in the Western states. That may help lumber prices to bounce back as they seemed to be doing during the first half of this year, but will not bring back even the relatively low levels of employment in forest products that we saw before the Great Recession struck.

Like it or not, the Montana and other Western economies are going to continue to shift away from their historic land-based natural resource ties. That will renew the anxiety many Montanan's feel about ongoing economic change. But just like our grand-parents and great-grand-parents, it is highly unlikely that anyone or any public policy can freeze the economy in some imagined golden age of the past. We like our forbearers will have to adapt to a constantly changing economy whose economic base is regularly evolving in ways that are initially uncertain and not easily comprehended. Whatever our druthers, as the Chinese proverb suggests, we may be condemned to always live in "interesting" economic times.

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