OZARK WOODLAND OWNERS

ASSOCIATION, INC. NEWSLETTER

Issue 32                                                                                                                    July 2004

President’s Notes

By Bryson Wood

          Events continue to turn 2004 into a year of setbacks, challenges, and opportunities. Informal discussions indicate that OWOA members appear to be doing a great job of avoiding the impact of the setbacks, overcoming the challenges, and seizing the opportunities. This newsletter will describe many of these situations so that members can continue to make informed forest management decisions.

          Our local forest product market remains strong; however, rising fuel prices are eating away at the increased revenue landowners might expect in the short term. Rising fuel prices, however, are setting into motion long term market forces that may create a biomass energy market for our forests. Harvesting and processing technology making these opportunities economically feasible is now visible on the near horizon. Our important role here is to help these companies head our way by clearing the market and regulatory barriers which impede them. Government decisions involving authorization and funding for various forestry, conservation, and energy programs, while ponderous and imperfect, are continuing to evolve and will have far reaching effects on both our forest product markets and our forest management behavior.

          OWOA members have much to look forward to the next year. Shortly OWOA members with email service will be offered an opportunity to receive more timely information. The University of Arkansas has added new cooperative extension foresters, is reactivating its experimentation and demonstration program throughout its north Arkansas forestlands, will be conducting more intensive research on hardwood diseases and insects, and is working with OWOA to establish a north Arkansas forest product and service marketing website. At their June meeting, OWOA leaders and partner agencies set our fall forestry workshop and field day for 28 and 30 October and approved the architecture for the March 2005 Forest Landowner Training Conference (March 23-26, 2005). If you attended our initial 2003 conference and found it to be a valuable training experience, you just haven’t seen anything yet!

          Don’t forget your role among the forest landowner population. You are the islands of infectious enthusiasm in a sea of rampaging apathy; and, when the call goes out your role is to rise up and seize the ramparts on the forestry issues of the day! This newsletter presents some very important issues. When our legislators come in to our communities this summer and fall on their pilgrimage for votes, demonstrate your interest in forestry matters by asking them some hard questions about their positions and actions on the issues.

Market Update

Past Events:  In our October 2003 newsletter we told landowners to expect the perfect economic storm during the 2003-2004 winter harvest season. It struck as expected! Independence County became the top timber producer in north Arkansas for 2003, and ranked as the sixth leading hardwood producer in all of Arkansas. Following are Arkansas Forestry Commission production statistics:

                   Year                 Independence County (tons)

2000                        155,181

2001                        164,302

2002                        207,601

2003                        282,551

          Many surrounding counties are having similar experiences. As predicted, hardwood sawlog prices rose 15-20%, hardwood pulp and pine sawtimber remained stable; and pine pulpwood markets remained nonexistent. Hardwood sawmills had customers lined up for their output but lived a hand to mouth existence in their search for sawlogs. Those landowners who heeded our prediction and sold into the rising market hit the sweet spot by receiving record prices for logs and standing timber before late winter fuel price rises took the edge off what mills and loggers could afford to pay. One late season complication, however, really threw a stick into the spokes. Both of our local pulp yards stopped accepting hardwood pulpwood by late spring. One stopped and moved its assets to southern Missouri to harvest and process a multi-thousand acre tract of pine timber. The other stopped because its primary buyer curtailed its north Arkansas hardwood pulp procurement for a period of time. This event had two adverse consequences. It decreased the sale value of tracts of standing timber, and caused some harvesters to have to leave standing poor quality hardwood trees that needed to come out to allow for future quality hardwood growth. This event illustrates the unreliability of south Arkansas based purchasers, identifies the need for multiple hardwood pulp buyers, and emphasizes the importance of growing quality hardwoods for the more profitable, reliable north Arkansas hardwood market.

The Present:  Normally the market slows a bit during the summer months to catch its breath and digest its winter intake. That is not the case this year. A strong economic recovery coupled with strong overseas sales of hardwood products is keeping the industry running at capacity. Pine sawlog timber tracts are still moving (a recent tract sold for $32 at ton) and one pulp procurement point has opened back up for Tuesday and Thursday hardwood pulp deliveries. Hardwood sawlog prices continue to inch up. One local mill has just installed a more automated, efficient milling line and is now offering $700 per thousand board feet for high grade sawlogs. (For a basis of mental comparison a 10 foot long, 30 inch diameter sawlog meeting that standard will scale 422 board feet with a value of $295.40. A good tree farmer should aspire to produce two such logs in every hardwood crop tree!)

The Future:  At this point we think that our local markets will continue to inch forward over the next several months. There are still some uncertainties involving fuel costs and hardwood pulp markets that are just too early to call right now. We will give members a more specific short term market condition update in the October newsletter.

FUTURE FORESTRY:  PART II

          In April and June OWOA volunteers attended two Arkansas forestry events, the Arkansas Forest Inwoods Exposition near Benton and the National Forest Health Conference in Little Rock. Although the first was designed to showcase heavy harvest equipment for corporate forestry activities and the second emphasized issues associated with management of national forestlands there were intriguing streams of new forestry tools and emerging markets driving their creation that have great applicability to north Arkansas forest landowners.

          Although individual vendors at the Exposition were unaware of the situation, OWOA members observed that we are now one component of one hand held tool away from a technological package that would allow a landowner or consultant to walk up to a tree in the forest; through imaging and scanning technology, scan the tree for grade and volume and assign it an identification number; through GIS technology, identify its geographic coordinates; and through marketing and communication technology, inventory and immediately market individual trees or entire tracts to buyers anywhere in the world. This evolving situation has great implications for high value stand producers.

          There are also some stunning developments unfolding for low value forest products. At the Expo we observed a biomass baler. This specialized machine is designed to take all forms of pulpwood and otherwise unmerchantable harvest residues (limbs to leaves), bundle them into biomass bales ten feet in length, 3-4 feet in diameter, and weighing 1200-1500 pounds green. When asked about the possible markets for the product, the exhibitor explained that undried bundles are designed for immediate shipment to biomass energy fuel producers who would use the material to produce bio oil (similar to diesel) and ethanol. Alternatively, bundles could be stacked and allowed to air dry down to 20-30% moisture content, then transported for use as fuel at electrical power or steam generation plants. Our minds reeling, we went back to our hotel, propped our feet up and began to ask ourselves the following questions: Will there be a market for this material? Who are the potential customers? Who are all the other players? At what point does production become profitable? Who and what are the foreseeable obstacles to the eventual development of this market? At this point, our minds turned to all the local cities plumbed for a finite and dwindling pool of natural gas; the electric utilities whose boilers are fired by  finite and dwindling sources of natural gas, coal and uranium; and a transportation industry dependent on increasingly uncertain and expensive sources of Middle East oil.

          A month later, during the biomass energy presentations at the Forest Health Conference, additional answers came to light. One dealt with the success of a group of investors, working cooperatively with the Louisiana Economic Development Commission, who purchased a fertilizer plant from the defunct Farmland Industries and are converting it to an ethanol production plant using wood chips as the raw material source. This venture presents a business model of converting a multimillion dollar plant attached to the nation’s natural gas pipeline infrastructure, which originally used natural gas as its fuel stock, now able to feed a new fuel into that infrastructure or ship it out by road or rail. Oh, by the way. The plant’s demands for raw material are forecasted to be 200 loads of wood chips daily!

          The second business model was that of bringing the production plant to the forest. An investment group in Alabama has engineered a working prototype plant designed to be a portable, inexpensive plant, costing less than $2million, which can be set up in the forest. The plant uses wood chips and other biomass as its raw material, and produces bio oil as its product (as a basis of comparison, think of granddad’s moonshine whiskey still on steroids!) The energy conversion ratios are stunning, providing 120 gallons of bio oil for every ton of dry matter. In both cases, hardwood chips are the most efficient raw material, and production becomes profitable when average gasoline prices reach $2.00.

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FORESTRY ISSUES:  GUNS AND ROSES

          The preceding article introduced the emerging new relationship between the forest product, transportation, and energy markets. Where consumers now flip a coal powered light switch to illuminate a room, pump middle east oil to fill their car, and utilize their forests for building and paper products; our forests are emerging as one renewable resource capable of, and necessary to do all three. For this market to evolve, however, there have to be winners, losers, and some who just break even.

          First let’s identify the potential winners. Forest landowners, as producers of a renewable resource, in demand by both old and new markets, are one group. Innovators and entrepreneurs in emerging energy production technologies are another. Consumers will benefit if their needs are met by alternative sources of renewable raw materials that replace the former, ever declining, ever more expensive, nonrenewable raw material sources. These benefits only occur, however, in a competitive free market!

          Now let’s identify the possible losers. Any industry heavily invested in oil, coal, or gas deposits; their specialized means of transportation; and the manufacturing assets to turn the product into energy could lose big if their assets suddenly become obsolete. Oil companies, and coal or gas fired electric utilities fall into this category. Pulp and paper producers and other low end forest product users could lose if they suddenly had to share their raw materials market with a new energy industry capable of consuming the entire sustainable raw materials output of the world’s forests to meet consumer demand for electricity and transportation fuels. Most corporations in this category have weighed the risks of sudden obsolescence and loss of raw materials markets against the possible long term benefits and have decided to throw much of their financial and political muscle into slowing this market evolution down until four conditions important to them are met. These are: (1) complete depletion of their current raw energy sources, (2) complete depreciation of their current manufacturing facilities, (3) ownership through acquisition or development of new production technology, (4) and market dominance by control of the raw materials source, the manufacturing processes, transportation of raw or finished goods, or the professional and legal standards of the market. In short, they are following the capitalist adage, “You can make a profit by being competitive; but you can’t make a killing unless you control the market.” (Think Standard Oil of the 1920’s and Enron of the 1990’s and early 2000’s)

          Other companies are already transforming themselves. Shell Oil and British Petroleum are examples of corporations redefining themselves from that of an oil company to that of an energy producer. Shell Oil is now advertising its heavy investment in its trademarked Eco Ethanol fuel production made from biomass. British Petroleum advertises its expansion into natural gas and bio fuel production and encourages consumers to think of it as an energy corporation that is now Beyond Petroleum.

          Congress has also entered this market fray by using a carrot and stick approach. In their version of the yet to be passed energy bill, the Senate inserted a provision, called the Renewal Resources Portfolio Standard, which mandated that public utilities must produce 10% of their electricity from renewable resources to include biomass by 2010. Not surprisingly the energy companies and coal and gas interests objected strenuously and prevailed upon the House and Administration to demand the deletion of that standard. (Remember those yet to be depreciated energy plants?) For a carrot, in the Healthy Forests Restoration Act passed last fall, Title II, Biomass Production, authorizes grants of up to $100,000 to innovators who develop new or value added markets for biomass and authorizes a subsidy of $20 a ton for the use of such materials. Having failed to strike the authorization for this program, old line energy producers and other potential losers are now lobbying Congress ferociously against appropriating funds for the program.

          Now what does this landscape hold for small forest landowners? We are a bit like the small mammals existing at the twilight of the age of dinosaurs. It’s a dangerous place out there as some of these industries survive for a while by devouring each other but ultimately fall and thrash around their death throes: but time and events are on our side. Since there are 10 million of us out there, we will never work together to capture the market as sellers. Our best interests are served by ensuring that no buyer does either. A free market with multiple buyer’s and sellers, lubricated by appropriate government incentives to aid in its evolution, protects both our landowners’, and nation’s best interest. What 10 million landowners, controlling 20-30 household votes can do, however, is to make our positions known on this issue to our legislators and use our votes to counterbalance the corporate PAC monies which attempt to tip the market scales in the opposite direction.

FLEP NEEDS HELP!!!

          Responding to a covert lobbying effort by a small group of large institutional forest landowners and timber corporations, Congress is poised to eliminate FLEP funding permanently. The Forest Land Enhancement Program is that small, flexible forestry cost share program targeted to assist small forest landowners in beginning the long journey to becoming competent forest managers. Recognizing that this program was creating unwanted raw materials sale competition from small landowners, associations representing large landowner interests have privately told Congress that FLEP was ineffective and that we have too many trees anyway. Therefore Congress just needs to eliminate this program. While lobbying to eliminate the cost share program beneficial to small landowners, it is worth noting that corporate interests didn’t volunteer to give up their reforestation tax credits, and other tax provisions beneficial only to themselves in order to further discourage overproduction.

          During 2003 FLEP was the safety net that assisted small landowners whose applications were too small to be funded under EQIP or other conservation programs. This year no such net exists; and many small landowner applications will go unfunded. It is also worth noting that while FLEP is being eliminated, no other conservation or farm subsidy program is being amended. Mention this to your congressmen the next time you talk or write to them.

OWOA FLASH MAIL COMING SOON!

          Over the last two years we have asked OWOA members having email capability to provide us their email addresses. We have assembled a member email directory and will soon begin using it to provide more timely information to our members. Invariably just as soon as we send a newsletter to the printer, a sudden market development, cost share program, or other issue will appear. Short of another laborious, expensive mail out, we had no way of sharing the information with our members in a timely fashion.

          It is our intent to limit our emails to no more than 3-4 monthly. They will most often come as a message with our OWOA forwarding comments, or come with an attachment which will often contain market reports or national forestry newsletters. We will also be able to transmit our OWOA newsletter electronically upon request for those who would like to forward it to others.

          If, after receipt of our initial email, you would prefer not to receive mail, simply respond electronically requesting deletion from the directory. Conversely, if you have not previously provided your email address and would like to be included, simply drop a short note to our mailing address on the newsletter or provide your email address to:  rbellowoa@cox-internet.com.