Chapter 1 - Introduction to the Timber Industry - Hardwood Timber Industry
DIFFERENCES BETWEEN SOFTWOOD AND HARDWOOD REGIONS
The United States can be divided into two primary forest regions, the forests east of the Great Plains and those west of the Great Plains including Alaska. There are many differences between these regions. Some of these are discussed below.
Hardwood timber species such as oaks, gums, maples, hickories, walnut, etc. are located primarily in the East, while in the West 97% of sawtimber is softwood. The common softwood species are Douglas-fir, Hemlock, true Firs, Pines, Spruces, Cedars and Redwood. In the West, the forests tend to be larger in tree size and have more volume of timber per acre than forests in the East.
A second major difference between the Eastern Hardwood Region and the Western Softwood Region is in the type of forest ownership. Nearly 70% of eastern forest lands are privately owned; only 15% of western forest lands are privately owned.
Another important difference is in how accessible forests are for loggers. The terrain in the East generally is not as steep and rugged as it is in the West, thus making the harvest of eastern timber easier.
Also, a difference exists in the way a forest regenerates after being harvested. Hardwood forests tend to regenerate themselves; softwood forests usually require some artificial reforestation actions.
Finally, the products and by-products made from hardwood and softwood forests are different. For example, hardwoods are more commonly used for making furniture, flooring, veneer and pallets. Softwoods are more commonly used for making construction lumber and plywood.- Also, hardwoods generally are used for making printing grades of paper and softwoods generally are used for making paper and paperboard items requiring strength, such as, bags and boxes.
HARDWOOD LUMBER PRODUCTS AND BY-PRODUCTS
Hardwood lumber has been estimated to account for about one-third of the value of all domestically produced lumber, both hardwood and softwood. One reason for the difficulty in estimating hardwood lumber production is the fragmented nature of the industry. Some mills are part of major forest products corporations, but most are independent operations. With a few exceptions, most hardwood sawmills are small operations Which draw resources from a relatively small area. In fact, the three largest hardwood lumber producers in 198'9 accounted for only 4.1% of the hardwood production in the United States.
Hardwood lumber producers are concentrated close to the major hardwood forests in the eastern and central United States. Of the total hardwood production, 97% is produced in the eastern United States. This area is often separated into three regions: northern, southern and Appalachian.
A brief study of the industry shows the proportion of total hardwood lumber production has increased in the northern region; while southern region production has decreased. This change is attributable to higher sawtimber quality in the northern region, access to markets for low-quality lumber products, and emphasis on and availability of softwoods in the southern region.
While a relatively Simple product, hardwood lumber is manufactured in a surprising variety. Commercially traded hardwood lumber varies by species, level of process, thickness, and length. Hardwood lumber also varies in the number and types of defects that are present. To account for this! variation and provide a level of product standardization, grading systems have been developed.
In the United States, hardwood lumber is graded according to three basic marketing categories: factory lumber, dimension parts, and finished market products. Factory lumber grades differ from dimension and finished market products in that the former are based on the proportion of the lumber that can be cut into smaller usable Pieces. Dimension parts and finished market products are graded assuming each piece will be used as is rather than cut into smaller pieces.
The majority of hardwood lumber is sold under the factory grade rules developed by the National Hardwood Lumber Association (NHLA). Standard NHLA lumber grades and the general requirements of each are provided in Exhibit 1.
Hardwood lumber is traditionally sold by the thousand board feet (MBF) in random-length, random-width loads. Standard lumber thickness varies from 3/8 inch to 6 inches and standard lengths range from 4 to 16 feet in I foot increments. Hardwood lumber is sold green (with a relatively high moisture content) or kiln-dried, Kiln drying is a process of using a heat source to extract moisture from lumber. Most hardwood must be dried prior to using in a final product. Kiln drying adds value to the lumber, and may reduce shipping costs since the weight of the lumber is reduced. However, some buyers prefer to purchase green lumber and dry it themselves. Hardwood lumber is also sold rough (the surfaces of the boards are unfinished) or surfaced. As with drying, surfacing adds value but is not desired by all types of buyers.
The furniture industry is a major and relatively stable market for hardwood lumber. The furniture industry (including the dimensions it buys) is the second largest market for hardwood lumber. Only the pallet industry uses more. However, the wood household furniture industry is the largest single user of high grade hardwood lumber and is one of the largest users of hardwood veneer. Usually only Non 1 Common and better grades of lumber are used in exposed solid wood parts of furniture and kitchen cabinets. Since these higher grades of lumber command high prices, the furniture industry is very important economically to the hardwood industry.
The hardwood dimension lumber is machined parts for furniture, cabinets, etc. The hardwood dimension lumber market segment is an important market for hardwood lumber. The furniture industry is the largest user of hardwood dimension materials, although its share of the market has declined due to imports of parts and furniture. The second largest use of hardwood dimension products is in the cabinet industry. The kitchen cabinet industry has grown dramatically over the last few years. Demand for kitchen cabinets and bathroom vanities is closely linked to housing starts and residential repair and remodeling activity.
The millwork industry is comprised of firms primarily producing windows, window parts, doors, door parts, and wood moldings. It buys mostly higher grades of lumber and competes with the export and furniture markets for material. The majority of millwork firms are small and many use much more softwood than hardwood lumber.
The total amount of hardwood exported from the United States has grown tremendously. From the mid-1970s to the early 1990s world demand for hardwood logs, lumber and veneer from the United States more than tripled. This demand has resulted in a growth in exports to Europe and the Pacific Rim. Worldwide concern over the loss of tropical forests has caused many to seek our temperate hardwoods as substitutes for tropical species, further boosting demand for U.S. hardwoods.
The use of hardwood lumber for pallets has risen sharply, largely due to the increase in mechanization of shipping in the United States. This has occurred even though the actual amount of wood used in a typical pallet has declined. Although some softwood lumber is used in constructing pallets, the majority of lumber used in making pallets is hardwood. It is estimated that over 80% of the lumber used in pallets is hardwoods. Approximately half of the hardwood lumber used to make pallets is oak. Oak is used more often for the heavier nonexpendable pallets, while other woods are used for lighter expendable pallets.
The use of hardwood lumber for flooring decreased significantly from 1960 to 1980. However, a resurgence occurred in hardwood floor use in homes in the early 1990s because of appearance and durability. Interestingly, much of the earlier use of hardwood flooring was in effect mandatory because of mortgage lending policies concerning home construction. As these policies were eased and hardwood flooring was no longer required to qualify the home for a particular mortgage, use of hardwood flooring dropped dramatically and carpeting came into more widespread use.
There has been a moderate increase in the use of railroad ties. This occurred because railroads could no longer defer track maintenance; they started upgrading tracks to improve service and safety. There has also been an increase in the size of railroad ties because a greater portion of ties has gone to main lines rather than to secondary spur lines. Spur lines use smaller ties because they do not have to bear as heavy a load or bear loads as frequently as main lines. In 1950, there was an average of 38.4 board feet in each crosstie. By 1980, the average tie used by railroads increased in size to 41.0 board feet.
Sawmill by-products are also an important part of the industry. For example, sawdust can be used to make charcoal, compressed fire logs and compressed particle board. Bark slabs are used for firewood and in the construction of log homes.
The hardwood lumber industry, as we have already noted, is a fragmented industry consisting of many small firms. These small firms produce particular grades and species of lumber that are many times in quantities too small for efficient marketing. Most small hardwood lumber mills sell their lumber products through a broker, many of which are independent and operate out of an office with little or no storage facilities for lumber. These brokers arrange for the sale of the products from smaller mills and typically receive a 5% commission on the selling price of the lumber as their compensation.
Brokers and sawmill trading offices sell to a variety of customers including other intermediaries. These additional intermediaries include concentration yards and distribution yards. They differ in that concentration yards purchase lumber from sawmills, brokers, or wholesalers and may grade, sort, dry or surface the lumber to increase its value. Distribution yards may also process the lumber they purchase but they are oriented more toward the end user. Distribution yards are often located near lumber users in larger cities and provide a variety of lumber species and sizes (one stop shopping) for small lumber users. Distribution yards typically service small accounts that purchase less than boxcar lots of lumber. The typical channels of distribution for eastern hardwood lumber are shown in Exhibit 2.
Hardwood lumber prices are generally negotiated between buyer and seller from a common starting point for the species, grade and the thickness involved. This starting point is often the average price for the item published in trade publications such as Weekly Hardwood Review and Market Report. In fact, negotiations often take the form of the published price plus or minus a set amount to account for local availability, weather, buyer and seller relationship, price trends, and other factors.
Lumber prices vary greatly among species. For example, the average price for poplar (No. 1 Common, 4/4, kiln-dried) in March of 1993 was $520 per thousand board feet. The same thickness and grade of walnut lumber was $1,175 per thousand board feet. Prices also differ among the various grades of lumber within a species.
Several trends are evident in the U. S. hardwood lumber industry, including shortened distribution channels, increased specialization of orders, and the shifting of the inventory carrying function from the customer or intermediary to the producer.
The decreased use of channel intermediaries and the resulting shortening of distribution channels could represent a major change in the way timber producers do business. Customer requests are also becoming more specialized. Requests for specific lengths or mixes of lengths, specific widths, and specific grade mixes are becoming more common. The final trend involves the movement of the inventory carrying function back to the producer. Adoption of/just-in-time inventory systems and the increased cost of carrying inventory are pushing this trend. Movement of the inventory carrying function back to the producer may increase the competitive advantage of larger hardwood lumber companies that can provide the customer with prompt delivery of a wide variety of species and grades.
VERTICAL INTEGRATION OF THE HARDWOOD TIMBER INDUSTRY
The hardwood timber industry is a fragmented, vertically integrated industry. It begins with the landowner. There are three basic types of timberland owners: nonindustrial private, industrial, and government. Nonindustrial private landowners are primarily individual entities that own both the land and the timber. They normally sell their timber directly to a logger. However, in some cases, a consulting forester may be used to value and market the timber for a fee, usually 10% of the sale. In many cases, a forest products company will purchase both the land and timber. Finally, state and federal lands may be used for logging via a bidding process for the right to timber.
Standing timber is usually purchased in one of three ways: 1) Outright purchase of the land and related timber, 2) purchase at a specified rate per unit of timber actually cut (pay-as-cut), or 3) purchase for a set total amount or lump sum. Examples of contracts are included as Exhibits 3, 4 and 6. Exhibit 5 is a right of way agreement. For tax purposes, timber is the wood in standing trees that is available and suitable for exploitation and use by the forest industries. "Stumpage," a commonly used term in forestry, has similar meaning - the wood expected to be recovered from the forest on harvest of trees.
There are three basic types of loggers: independent loggers, company loggers, and contract loggers. Independent loggers buy timber, sometimes referred to as stumpage, cut the timber, and market the cut products. This allows for added profit and risk for the logger. In some cases, sawmills may finance the independent logger's purchase of timber. Company loggers are logging crews employed by sawmills. They are normally a separate division of the sawmill. However, this is becoming less common due to the high overhead of having employees. More and more contract loggers are being used. Contract loggers provide a service. They are paid a fee per 1,000 board feet for logs cut from the timber and delivered to the mill.
The logging process can best be described as the following: Timberlands are first cruised. Cruising is defined as a survey of forest lands to locate and estimate volumes and grades of standing timber. Access to the logging area from a public road is needed. This usually requires the construction of a landing area, permanent haul roads, and temporary skid roads. Timber harvesting begins when trees are cut down. This is known as felling. These felled trees are then delimbed and bucked (cross cut) into log lengths. Logs are extremely heavy and difficult to move. For example, a log containing 150 board feet log scale will weigh about one ton. Therefore, moving of the log from the stump to the landing area is an arduous task. This process is called skidding and is ordinarily accomplished by attaching a cable or chain to one end of the log and dragging it by means of a bulldozer or rubber-tired skidder to the landing area which is accessible to trucks. Substantial planning is necessary in logging due to various factors such as topography, size of timber, skidding distance, etc.
At the landing area, the logs are usually graded and sorted by species. Using a scale stick, the scaler measures the diameter and length of each log and records the number of board feet. As logs are graded, the smaller and lower grade logs may be set aside to be sent to pulp mills. The higher grade logs generally will be made available to veneer producers. The remaining logs will be either exported or sent to local sawmills.
From the landing, logs must be transported (usually by truck) to the concentration yards or sawmills. Loading equipment, such as an end loader or a cherry picker, is needed to load the logs on trucks. There are two basic types of truckers: company truckers and contract truckers. Company truckers are usually employees of forest products mills; while contract truckers are paid a fee per mile per load to haul timber. The contract truckers market segment tends to be very unstable with a high turnover rate.
A concentration yard primarily acts as a middleman in the selling and marketing of logs. Concentration yards tend to be located near hardwood forests. Truckers bring in mixed loads of different sizes, species, and grades. When logs arrive they are sorted according to these three factors. This allows a concentration yard to Create particular and specialized loads of logs to meet their customers' needs and to maximize profits.
Many sawmills tend to specialize in the type of logs that they purchase for processing (sawing, planing, and/or dry kilning) depending on their customers. For example, if a mill's primary customer needs cribbage for use in the mining industry; then that mill will purchase low grades of oak, poplar, etc. as opposed to purchasing veneer and furniture quality logs. Therefore, customer demands will set the type of logs a sawmill needs and what they will pay for a particular log. Loggers are aware of this and will market their logs to several mills, depending upon the grade and species of timber they are harvesting.
The logs or other products must then be transported from the concentration yards or. sawmills to the ultimate consumers mentioned previously. There are two primary methods of transportation used: trucking and rail cars. In most cases, trucking is the less costly and often used means of transportation. However, in the export market, it is becoming more common for companies to load their product in containers that can be sent overseas. These containers are somewhat smaller and less durable than traditional tractor trailers. Many companies use flatbed rail cars to haul these full containers to major U. S. coastal ports for shipment overseas.