Since 1999, eastern U.S. hardwood production has dropped by almost 45.2%, led by massive reductions in demand from furniture, millwork, cabinetry and flooring markets. The only market that has grown over that period is crossties. But the hardwood lumber industry is not taking the eroding of its domestic markets lying down. The industry seems primed to accept a more coordinated response.
Two major initiatives to spur market growth are in the works. This includes a Blue Ribbon Committee (BRC) on Hardwood Check-off tasked with developing a hardwood checkoff program and the Unified Hardwood Promotion (UHP) designed to develop unified messaging for the hardwood industry. Although these are two distinct efforts, there are some strong synergies as well as potential for the Checkoff program if enacted to fund UHP marketing programs.
Let’s look into some specifics on these proposed initiatives to see what impacts they could have on the hardwood industry as well as major users of hardwood lumber, including pallets.
What is a Checkoff Program?
Quite simply a checkoff board is an industry-run cooperative designed to bolster markets via research, education and promotion programs. Checkoffs are organized by producers of commodities, from cotton to watermelons, who agree to band together to promote their products. These collective marketing efforts have proven to be successful ways to grow the market for many products. Most Americans know the programs by their public faces — for instance the “Got Milk?” and “Beef; It’s What’s for Dinner,” campaigns run respectively by the milk and beef check-off initiatives.
Currently there are checkoff programs for a wide array of traditional agricultural products but none for forest products. The softwood lumber industry is currently in the final stages of developing a checkoff program for softwood lumber in North America. The BRC for the hardwood checkoff has just announced its intention to seek formal approval from potential participants whereas the softwood program is expected to come up for a vote by industry members this year.
Once approved by the participants, a checkoff program is administered by the industry in cooperation with the U.S. Department of Agriculture to ensure that check-off monies go only for authorized research and promotion programs. The government merely provides oversight, monitoring and collection assistance (in rare occasions). One common misnomer is that checkoff boards are run by the federal government.
Development of the hardwood check-off is being jointly funded by the members of the BRC with matching funds provided by the U.S. Endowment for Forestry and Communities (the Endowment). Both the softwood and hardwood checkoff initiatives have received seed funding from the Endowment, which was developed under the terms of the 2006 Softwood Lumber Agreement between the United States and Canada.
The proposed hardwood checkoff program would be funded by industry participants who would then be able to approve the program every six to seven years. The estimated fee would be about $1 for every $1,000 in sales for hardwood mills.
The BRC hopes the checkoff will raise about $10 million annually from the industry to fund the promotional and research programs. For details on who is covered by the checkoff please see Table 1. The checkoff fee would apply to both green and kiln dried lumber produced by participants, including the material under the $2 million in sales threshold.
Sawmills under $2 million would not be covered nor would they have a right to vote on oversight of the program. Some have suggested that not including everyone creates a competitive advantage for smaller producers. Others point out that getting passage of the initiative gets harder as you try to include smaller producers. Plus, it is generally thought that big producers are the largest beneficiaries of checkoff programs.
The proposed program does not cover some value-added products, such as furniture and cabinets, nor does it apply to low grade products, such as pallets or crossties. Generally, most people in the hardwood sector agree that the industry needs to do a better job of promotion. But one of the big problems has been a lack of resources. The checkoff program would raise millions more than has ever been spent on hardwood promotion.
The formal application process has started with the government as the BRC rolls out a communication program to the industry. A vote to approve the checkoff launch is likely to take place in the spring of 2012.
Why Now?
The hardwood industry is reeling after large loses in domestic production. In 1993, the hardwood industry led by the National Hardwood Lumber Association (NHLA) considered a checkoff program. Members persuaded the NHLA to drop the idea citing fears of increased costs and government intervention as well as inequity of fee assessments.
But the times have changed as the hardwood industry needs to find a solution to the huge drop in demand.
Ted Rossi, president and CEO of Rossi Group, is also a co-chair of the BRC. He said, “In the mid-90s, the industry was in a different place economically…The numbers speak for themselves. We have been devastated.”
He added that the previous effort failed because there was a common misconception that the program was administered by the government, and that scared some producers who were concerned about government intervention. Rossi said, “A checkoff system is not administered by the government; it is administered by the industry.”
Jim Howard of Atlanta Hardwood Corp. co-chairs the BRC with Rossi. Howard said, “Sometimes pain forces you to reconsider the need for promotion. Today, the USDA has over 20 successful checkoff programs. The merits of an industry supported checkoff have been validated and are proven to be sustainable and transformative. To date, none of the agricultural checkoffs have been rescinded. Previously we had a more robust marketplace and the economic and environmental merits of using wood were not as compelling.”
Howard further stated, “When I started in the industry, MDF panels, veneer-wrapped mouldings, bamboo flooring didn’t exist. Today, the world is flat, wood is sourced worldwide and numerous synthetic and composite products have replaced wood. It’s also vital we confront the US public’s belief we’re running out of trees. Bamboo flooring is perceived by architects as a green product and often substituted for superior American solid hardwood flooring which is manufactured in the US from sustainable managed forests. American forest product manufacturers inject billions into the country’s economy. Shouldn’t we have a promotion campaign to educate consumers and specifiers about the intrinsic beauty of hardwood and America’s sustainable renewable hardwood forests?”
The checkoff proposal today differs somewhat from the one in the 1990s because it covers plywood and unfinished flooring producers, which creates a larger funding source. Additionally, the new proposal does not require the checkoff board to work through existing, national, industry-controlled organizations, such as the major trade associations. This gives the new program much more flexibility in doing what will be the most effective while avoiding the perception that the checkoff program is nothing more than a money grab for major trade associations.
The current effort is designed to launch a program not decide how checkoff dollars would be spent. That discussion would come later once a program begins. Howard said, “A wide range of activities could be funded, including consumer education, life cycle analysis, sustainability efforts, competitive materials studies, product production and/or product-related research, product development (new uses), international marketing, special initiatives/short-term programs, and program evaluation.”
It appears that a lot of the money could be spent on consumer education, similar to the “Got Milk” campaign. Some critics like the idea of a checkoff but are concerned about how the money will be spent.
George Barrett, editor of the Hardwood Review, is a well-respected expert on the industry. He said, “There is no Apple iPod out there in the lumber industry.” He explained that there is no revolutionary new hardwood product coming online that will lift the industry like the iPod did for Apple. Thus, the hardwood industry must do a better job of promoting existing products.
Barrett voiced concern that the amount of money in question might not be enough to move consumer buying habits using traditional Madison Avenue approaches. He called for a targeted approach that will really move the market and is measured to gauge effectiveness.
What Makes Hardwoods Truly Unique and Valuable?
That question lies at the heart of the Unified Hardwood Promotion (UHP) which seeks to give the hardwood industry a recognizable brand and a consistent marketing approach to drive awareness and sales. The UHP is a coalition of hardwood industry leaders who have come together to create a single campaign to raise awareness and promote the use of American Hardwoods in products for the home and building.
Trade associations involved in the campaign include Appalachian Hardwood Manufacturers Inc., Hardwood Distributors Association, Hardwood Manufacturers Association, Hardwood Council, Hardwood Plywood & Veneer Association, National Hardwood Lumber Association, National Wood Flooring Association, Penn York Lumberman’s Club and Wood Component Manufacturers Association. American Hardwood Export Council will also help disseminate the new message throughout export markets. The Hardwood Federation is providing administrative functions for the UHP.
“This unique effort combines the best practices of more than 20 hardwood trade associations and leading product manufacturers who have come together with the common goal of inspiring increased usage of American Hardwoods in products from cabinetry to furniture to flooring,” said Terry Brennan (Baillie Lumber), chairman of the UHP.
After conducting extensive focus group testing, the UHP has developed new brand messaging for the hardwood industry. Extensive focus group research with consumers showed that “more than 90 percent of respondents also agree that the strongest impressions of hardwoods relate to the durability and longevity of the material, and the ability to create a classic look that never goes out of style.”
As documented in the research, more than 90% of consumers and pros like hardwood as a material for furniture, flooring, cabinets or building materials. Consumers 45 years old and under showed a marked preference for hardwoods. This suggests that there are some positive signs for the future if the industry can take advantage of it.
The UHF survey was based on responses from consumers, builders, subcontractors, architects or designers. Surveyed consumers had an annual household income of $75,000 and were currently in the market (or plan to be within the next 6 months) for flooring, furniture, cabinetry or building materials. One problem with the survey is that a large percentage of respondents seemed to already be predisposed to prefer hardwood products, which means that those who are not already likely to buy hardwoods may not be sufficiently represented in the research. This suggests that additional research may need to be done in order to expand market acceptance to those who prefer other alternatives.
The new tagline developed based on the UHF branding research is “Treasured for Generations,” coupled with the logo showing three American Hardwood leaves including Maple, Oak and Ash. This is meant to convey the variety of choices available with hardwood and indicate the timeless beauty and enduring value that come naturally with this material.
“The research showed a deep appreciation for American Hardwoods among both consumers and pros and among all age groups. This offers a tremendous opportunity for the industry to come together and highlight American Hardwoods as the desired material in homes,” said Brennan.
Industry participants are encouraged to use the tagline and new hardwood logo in their promotions and marketing efforts. The goal is to develop in the minds of customers a recognizable identity to the whole industry from the forest to the finished product.
The UHP has also engaged a communications firm, New York-based Gibbs & Soell (G&S), to help roll out the campaign. The G&S team led the research and branding effort and is currently helping develop a branded website, literature and sales tools.
The next phase of the campaign will be to encourage more members of the industry to join the effort and to get everyone involved thoroughly familiar with the new brand and positioning and how it can enhance their business. The goal is to continue to reinforce the message, with each member helping to promote American Hardwoods through their individual companies and organizations.
What’s the Impact to You?
Both promotion efforts are designed to boost the domestic hardwood markets. This should help encourage some growth and stability for the hardwood markets, which is a good thing for low-grade users that depend on mills for supply. Hopefully, this will stem the tide of mill closures and provide for increased market potential to ramp up more capacity or at least reduce the amount of mills going out of business. Reduced capacity and mill closures remain a long-term concern for pallet, crosstie and other low-grade hardwood users.
Anything the industry can do to bolster demand must be seen as a positive to ensure adequate supply and stable business partners. Although the costs of the checkoff fees could be passed down the line to lumber buyers, the added cost burden is expected to be minimal. When you consider the fact that softwood lumber is considering a checkoff program as well, it looks like increased promotion dollars being added to lumber costs seems to be a given for the U.S. market if these initiatives pass. The softwood checkoff will likely cover both domestic and imported softwoods from Canada.
Howard, CEO of Atlanta Hardwood Corp., suggests that the benefits far outweigh any costs. Pointing to the biggest benefits of a hardwood checkoff program, he said, “The ability for a fragmented industry to sustain a unified promotion campaign, conduct industry sponsored research, and to provide public education. The American public believes we are running out of hardwoods. We must be diligent in addressing public misconceptions.”
Explaining the impact on low-grade markets, Howard said, “My personal belief is the incremental cost of a truckload is very minimal. The added cost could be similar to gas going up 1/10 of a penny. Collectively we will raise funds for promotion, but I’m confident the checkoff costs will not adversely impact the lumber markets.”
Table 1
What about integrated mill operators who buy green lumber, kiln dry it themselves, and sell kiln dried lumber products? Are these mills exposed to a doubled fee?
No, credits may be taken by these companies for fees already paid for green lumber.
Are value-added hardwood products included in the checkoff?
For eligible sawmills and kiln drying yards, value-added products including unfinished strip flooring and hardwood plywood panels will be subject to the checkoff fee. Other finished goods such as pallets, furniture or cabinetry will not be directly covered by the checkoff; however, lumber sold in the supply chain either at the sawmill producer or concentration yard will be subject to the checkoff fee. For integrated manufacturing operations such as molding companies and flooring plants the checkoff fee will be assessed at a lower value fee (0.0075) on the outbound manufactured hardwood product sold.
What is the definition of “value-added”?
The lower rate of 0.0075 is only applicable on substantially machined lumber such as dimension parts; gang ripped or finger jointed strips, moldings, S4S, etc. Lumber sold color sorted, pulled for widths or S2S does not qualify as substantially machined thus is not eligible for the value-added rate.
