Reading Between the Tree Rows
When my oldest daughter graduated from college in 2005, she moved to Atlanta to begin work with the largest subprime lender in the Southern U.S. After completing a six-month training program, she was transferred to their Orlando office.
In February of 2007, while in Orlando for a business meeting, my daughter and I went out to dinner. During small talk conversation, I asked her what she had worked on that day. She said she had worked on a $850,000 mortgage for a single lady and a second note that would cover her down payment. I asked her how much money this lady made, to which she replied, “We don’t verify income.” With a shocked look on my face, I informed her that her business was going to “crash and burn.”
It was no surprise when later that year, she called me in tears early one morning as her office had just been shut down, putting her out of work. Within a month of her office closure, the entire company closed and filed for bankruptcy putting more than 1,200 people out of work.
I tell this story not to illustrate any ability on my part to predict the future but to illustrate an ability to grasp the obvious.
What I am concerned about is the low level to which tree planting has dropped in the U.S. South. From the table of tree planting acres (see table on page 45) you can see that planting acres last winter were at the lowest level since 1969. If this trend continues, we may face shortages of pine pulpwood in the future.
According to the folks at the Auburn University Nursery Co-op, these acres are an average of 97 percent pine. Most planting acreage of pine as hardwood is naturally regenerated unless it is old bottomland agricultural sites, which accounts for almost all of the hardwood planting.
There has been some questioning of these acreage numbers. Each state has a different system for collecting their planting acreage numbers. I contributed to these numbers for several years and I can attest that some states do a good job of collecting data but I am not sure how others get their numbers.
Another indicator of this decline, however, can be found in seedling production numbers. In 2001, the largest seedling producer in the nation at that time, International Paper, said in its annual report that it shipped 425 million seedlings that year. In 2010, this same nursery group, now part of ArborGen Inc., reported that it shipped 218 million seedlings. This is a decline of 49 percent in seedlings shipped, which corresponds to the decline in planting acreage.
Also supporting these numbers is my personal experience. In 2000, in my former position, I was responsible for the production and planting of 45 million seedlings. That same company will plant 18 million seedlings this year, a decline of 60 percent.
There have also been a number of nursery closures across the South. While an exact number is difficult to determine, it has been estimated that at least 20 seedling nurseries have closed in the past 10 years. In addition, many of the nurseries in operation today have curtailed production over the past 10 years.
Where Did This Begin?
We hear a lot about unintended consequences and our current situation has its origin in this as well. In the late ’80s our federal government executed one of the largest Conservation Reserve Programs ever attempted. This led to the largest amount of planting acreage ever carried out in the U.S. South. In 1988, more than 2.5 million acres were planted. This was more than double what was planted just one decade earlier in 1978. In total, the CRP added an estimated 3 million acres of additional pine plantations.
During this period and on into the ’90s, pine pulpwood shortages, especially during periods of wet weather, were not uncommon and overcutting of pine timber growing stock was common.
In January of 1995, as the timber sales forester for the second-largest timberland owner in Georgia, we sold a tract of pine pulpwood just outside of Waycross for more than $35 per ton. Adjusted for inflation, this price would now be more than $50 per ton, or more than $100 per dry ton on the stump. Delivered price in today’s dollars would easily be more than $140 a dry ton. How many energy operations could pay this level of prices for their delivered feedstocks?
The increase in planting acreage helped to push pulpwood prices to new lows starting in the late ’90s as these stands had to be thinned to continue CRP payments. There were cases of landowners in Georgia having to pay loggers to thin their CRP stands. This glut of pulpwood also coincided with major changes in timberland ownership as many integrated forest products companies disposed of their timberlands.
Today many of these stands remain, as their high levels of small sawtimber make them difficult to sell in a market depressed by the downturn in housing.
The Current State of Affairs
At present, there are strong markets for pulpwood in many markets across the South. With the decrease in clean chips from sawmills due to the reduced operating hours, many pulp/paper mills are relying on roundwood to make up the shortage. To be able to supply this level of roundwood in a market with minimal need for sawtimber, many timberland owners have used thinning as their main form of harvest. This approach is creating larger inventories of sawtimber that are being carried forward for harvesting later and further reducing the demand for seedlings.
Planting densities have continued to decrease across the South. Most timberland investment management organizations (TIMOs) and real estate investment trusts (REITs) have decreased their seedlings planted per acre, with some reducing them to less than 300 seedlings per acre. They are also planting control mass pollinated and somatic embryogenesis (SE) seedlings. These high-priced seedlings are being grown strictly for the sawtimber market.
While our government has maintained a CRP program in recent years, the program has changed its focus from timber production to ecosystem restoration. This has resulted in a planting regime that promotes planting longleaf at no more than 500 stems per acre.
Accuracy of Forest Service FIA data
New energy startups have relied on U.S. Forest Service Forest Inventory & Analysis data for site placement. Having reliable data on forest inventories and removals is important in light of the major capital investments in these facilities.
John Morris, vice president of Foley Timber and Land Co., has examined FIA data in his recent report “Florida’s Pine Plantation Resource, Short of Sustainability.” Morris examined the pine resource in Florida by looking at both the plantation and natural pine stands.
He found that FIA data is not giving a current picture of removals from plantations. The FIA data uses an average of removals over a survey period of 12 years. Using this average FIA shows removals for 2007 of 14.9 million tons but a private source that tracks mill usage shows 2007 removals of 17.1 million tons. This is a difference of 2.8 million tons.
He also found a discrepancy in the removals from plantations versus natural stands. FIA estimates that 55 percent of pine removals in 2007 were from plantations, again using the 12-year average. However, an analysis of current removals from the Master Logger survey shows that 2007 removals from pine plantations were actually 90 percent of removals.
Based on his analysis, Morris estimates that Florida plantations were overharvested in 2007 by 3.8 million tons. He further forecast that this number would increase in the future as regeneration acreage continues to decline. Adding increased usage from bioenergy and biofuels operations “will further negate sustainability.”
What Might the Future Hold?
If the solid wood markets do not recover soon and planting acreage continues its decline, what will be the result? There are a number of possible scenarios.
There would be a continued decline in sawtimber pricing while pulpwood pricing increases. In spot markets recently, we have seen pine pulpwood prices near those of small sawtimber and in one case exceeding it. This is especially prevalent during periods of wet ground conditions.
The specifications that differentiate pulpwood from small sawtimber will probably change with the smallest of this sawtimber moving into pulpwood. We are already seeing this occur in some areas.
The volumes of forest residue will increase, as we all know that larger trees have larger limbs and tops. In addition, the current push to low planting densities will increase the amount of residue hardwood that invades these pine stands. These are both pluses for users of forest residue.
With the continued glut of sawtimber on the market, many in the forest products industry believe that we may see increased sales of timberlands by the TIMOs and REITs in an effort to prop up returns within these organizations. This could lead to further fragmentation of forestland ownership in the South.
Additional dangers to forest plantation acreage may be in our current commodity pricing. With corn and cotton at all time highs, we may see acreage revert from timberland back to farmland.
It is possible that we have seen the bottom of the pulp/paper mill closures in the South. In addition, almost all the new development in the energy markets is occurring in the pulpwood area. There have been no new developments in the solid wood markets.
What Can Pine Pulpwood Users Do?
All of the evidence points to a coming shortage of pine pulpwood. Users can wait until pricing and availability become a problem, or they can start to work on minimizing the impact. There are a number of approaches a user can implement to overcome this impending problem.
The first and most important thing a new user of pine pulpwood can do is to assure that their due diligence is exhaustively complete on their potential feedstocks. Looking at more than one source of inventory numbers should be a necessity. If one is going to spend hundreds of millions of dollars constructing an energy facility, then having a good understanding of the feedstocks now and in the future should be a requirement for construction and financing.
One of the more dramatic approaches would be the purchase of timberland. Just as the integrated forest products companies owned timberland, energy facilities could do the same. The advantages of this approach are the ability to harvest whenever needed and stands can be planted and managed to maximize pulpwood production. However, a company would face the same tax implication that contributed to the sale of timberland by these integrated forest products companies.
A less costly approach would be to work with the major holders of timberland. Private landowners hold 71 percent of the timberland in the South, so working with these owners to supply feedstocks is key. In the ’80s and ’90s, many of the forest products companies had landowner assistance programs. These programs had many different forms but most included the right of first refusal on all timber sold by the landowner. These programs offered seedlings and planting assistance at no- or reduced-cost to the landowner.
Providing seedlings to landowners has another benefit. Seedlings can be selected that maximize fiber production. Most tree improvement programs have focused on selecting trees for the production of sawtimber. Attempting to identify seedlings that maximize fiber production should be an objective of all pulpwood users.
The Biomass Crop Assistance Program may be an aid in this. One would need an understanding of the species and management regimes that will work. However, future funding of this program is a real question.
Energy grasses may be needed to fill the gaps that are sure to occur. These can give full productivity in as little as three years. Eucalyptus and fast-growing hardwoods may also work to fill the gap but they take a longer time, a minimum of seven years to begin harvest. Eucalyptus can only be used in the Deep South, usually defined as south of Interstate 10.
If the landowner’s objective were growing sawtimber, then promoting an intercropping approach would be beneficial. An example of this would be the planting of high-end seedlings such as mass control pollinated or SE on 20-foot rows and then planting between these rows with good quality open pollinated seedlings. This would give the landowner a harvestable crop of pulpwood in 10 to 14 years while still producing the sawtimber at a future time.
While we hear many economic development people referring to areas of the South as the Saudi Arabia of pine trees, this is not necessary the case. This future shortage will affect all users of pine pulpwood, the existing pulp/paper industry and the new energy start-ups. However, the pulp/paper industry can afford to pay more for feedstocks than the energy industry.
All is not lost, however. Users of pine pulpwood can become proactive and begin to plan for the feedstock market changes. If not, they face increased cost or possibly shortages of pine pulpwood.
The bright side is that forest residue users will see an increase in available feedstocks.
Author: Dean McCraw
President, McCraw Energy LLC