The seeds of tomorrow's forest products industry lie in what was planted or grown over the past 5-10 years.
While pallet companies are a few steps removed from the forests, what happens in the woods directly affects what resources pallet companies can utilize in the future. That's why the National Wooden Pallet & Container Association (NWCPA) asked researcher Brooks Mendell to speak at its annual meeting earlier this year. Based on this speech, Pallet Enterprise inquired about some of the points Mendell made and recent research conducted by his firm, Forisk Consulting. This Q&A covers key issues focusing on available timber resources and overall industry challenges.
Brooks Mendell, Ph.D., has three decades of consulting, operating, and research experience in the forest products and timber industries. This includes roles in harvest operations and procurement with Weyerhaeuser, in consulting with Accenture, and as a faculty member in forestry and finance at the University of Georgia. Mendell is the president and founder of Forisk.
Pallet Enterprise: What is the current situation for U.S. forestlands in terms of productivity, availability and location to sawmills?
Brooks Mendell: The United States is about 2.1 billion acres in size. About a third of that land is forests. And about two thirds of those forests (nearly 500 million acres) are productive timberlands. But some of that timberland is not operable or located near a mill. Once you whittle it down, the investable universe for big firms or institutions in the United States is about 85 million acres. In addition, you have some public forests and a couple hundred million acres of small ownerships that periodically generate timber for mills.
The dominant region in North America is the U.S. South. It has been for a while and continues to be the top timber producer. Also, there's only one region where production and capital investment in mills is going up in a meaningful way, and that's the U.S. South.
Pallet Enterprise: What is the current timber supply situation in the Pacific Northwest?
Brooks Mendell: The Pacific Northwest regularly deals with wildfires. Hundreds of thousands of acres burned in Southwest Oregon over the past couple of years. These fires impacted the supply going to sawmills. So, what's the implication going forward? Inventory is declining due primarily to the wildfires. The softwood grade inventory in Western Oregon declines about 1% over the next ten years. On the other hand, Western Washington's forest inventory grows about 1% per year over the next 10 years.
Pallet Enterprise: Why do we have so much wood in the South today?
Brooks Mendell: Several reasons. We have improved seedlings and grown our forests more intensively in that region. We manage these forests very actively. For decades, the federal Conservation Reserve Program (CRP) funded tree planting across the region. Also, wood usage dropped in the 2000s due to The Great Recession and significant declines in housing starts.
During that period, home construction activity dropped 72%. Also, harvesting activity declined by nearly 40%. Meanwhile, wood growth, like money in the bank, compounds. Not only did we reduce our harvesting and leave a bunch of trees out there to grow; we left them right when all those federally funded plantings from the eighties were ready to harvest. So, we had a glut of wood coming into the system right when we didn't need it. Forests in the South are 30 to 40% bigger on average across the region than they were during the recession in 2007-2009. We have a ton of wood; we grow more wood in the South than we harvest every year.
The U.S. South is swimming in sustainable, cost effective wood fiber, and the iron goes to the resource.
Pallet Enterprise: Your NWPCA talk explored the data behind the South becoming America's wood basket. The South is the only area growing. Do you believe this trend spells trouble for sawmills and pallet producers in other areas of the country? What can pallet companies do to better secure supply in this more volatile environment?
Brooks Mendell: I believe that every U.S. region supports productive niches and sectors. However, the facts on the ground directly affect the ability to scale and grow by region. For example, the Pacific Northwest produces over 30% less lumber than it did thirty years ago because of reduced harvests on public lands. Despite lower lumber totals, the region remains productive and profitable and is expected to remain so into the future. The big 'trouble' in forest products occurs where end product demand disappears, and we see more of this in certain paper grades likes newsprint and printing/writing papers.
Pallet Enterprise: Forest fires are causing major challenges, especially in the West. Do you have any data that looks at what areas are most prone to fire? Any information or data on treatment methods and what is working?
Brooks Mendell: Wildfire frequency and severity in the United States has been tracked in detail since 1983 by government agencies. Over the past forty years, the annual number of wildfire events averaged around 70,000 in the United States. While the frequency has been somewhat stable, the severity, measured by total acres burned, has increased. Average annual wildfire acres burned in the U.S. have more than doubled since the 1980s. Over the past five or six years, the Pacific Northwest accounted for about one-third of the average annual acreage burned in the United States.
With respect to relative risk, we see higher levels of wildfire activity on public versus private land. For example, from 2016 through 2020, 39% of burned acres in the country were on private land despite accounting for 78% of the wildfires.
Previous research and our understanding of risk management for timberland owners suggest that private lands may have less severe wildfires due to the use of specific, operational approaches such as using developed road systems common on private forests that (1) allow for wildfire response personnel to reach wildfires quickly before they grow and (2) function as fire breaks, which limit forest connectivity. This slows wildfire spread. The bigger message here is that road systems remind us how private forestlands are more likely to be 'working forests' with reduced fuel loads. In comparison, public forest land typically has not maintained consistent, systematic forest management practices like harvesting or prescribed fire to reduce fuel levels.
Pallet Enterprise: Based on your NWPCA talk, I was surprised to learn that the real shortage of workers is among truck drivers, not loggers. But we continue to hear sawmills say that loggers are struggling to survive and that there aren't enough young loggers to continue some operations. Some pallet companies are even hiring their own loggers. How can we reconcile your data with some of the comments that we still hear from industry contacts?
Brooks Mendell: Yes, I think this is more of a 'both' are in trouble situation as opposed to 'either/or.' Research from Dr. Shawn Baker, Forisk's vice president of research and an expert on forest operations, recently broke down data on the logging capacity issue by region across the United States. He notes how the forest industry seeks efficiency and productivity through scale. Larger, mechanized logging operations lower per unit costs by moving more wood volumes. Smaller owner-operators fill a niche for small landowners across the country and in hardwood regions. And the success and constraints of these business types vary significantly by region (Shawn posted a good summary of the issue here: https://forisk.com/blog/2023/04/20/logging-capacity-and-the-lonesome-loggers.)
On the flip side, everyone – big and small mills – and the entire supply chain (from in-bound raw material to outbound finished goods) are exposed to driver shortages.
Pallet Enterprise: Overall, softwood is outpacing hardwood in growth and reforestation efforts. What impact will this trend have on the future of hardwood markets and production?
Brooks Mendell: While it's true that we actively reforest softwood, the United States also grows way more hardwood than it consumes. The challenge here is the location of the forests. Many hardwood forests in the primary manufacturing regions are located in less accessible areas, such as wet areas and lowlands, or on upland hills in less operable areas. From a pure economic efficiency standpoint, softwood tends to be easier to plant, grow and harvest. That said, in regions such as the Lake States/Midwest or New England, with deeper hardwood forests and less softwood manufacturing capacity, hardwood provides a viable sustainable business, just on a smaller scale.
Pallet Enterprise: Based on a recent blog post, Forisk projects that housing construction activity will drop this year compared to 2022 and then slowly work its way back up toward 2021 levels over the next ten years. Does this mean a steady market, or one with anemic growth, or both? How should this affect hardwood and softwood demand over the next five years?
Brooks Mendell: Demand from residential housing, both construction and repair/remodeling (R&R), is the backbone of our forest industry. So, we're very focused on the level versus the growth rate. When housing falls below 1.3 million starts, we have meaningful excess capacity and folks start looking for places to reduce production. When we're above 1.4 million, our industry has plenty of good things to do.
Pallet Enterprise: What does the latest data on mill openings and closings tell us about the health and viability of the U.S. sawmill sector?
Brooks Mendell: Amanda Lang, our COO and vice president of client services, published a really nice blog that summarizes the status of the softwood lumber sector in North America and the United States. Here's the link, https://tinyurl.com/3cbc4kzj, and it includes the top 10 producers for the continent and country. One observation I would make is that once you consider continued closings in Western Canada, the industry continues to move its capacity to locations that have better margins and are nearer to their end markets. These are related in part because being closer to customers means lower transport costs. Overall, this shows why firms move to the U.S. South.
