The future of the logging industry may be impacted by a reluctance to invest in new equipment because several conditions have reduced profit margins.
While there is optimism with investments by companies into changing products to meet the market needs and some in the industry creating a market for lower quality wood, the local logging community is facing a challenge, said Scott Dane, executive director of the Associated Contract Loggers & Truckers.
Low mill prices, high fuel costs and other expenses are resulting in a little more than half of the logging businesses nationwide operating at a loss or at best break even, according to the report 2011 Logging Business Survey: Big Squeeze.
The largest percentage of profitable logging operations — 21 percent — are operating on a 1-3 percent profit margin.
Dane said the future of logging must include change.
“Operating the way we’ve been operating, 10, 20 or even back 100 years we’ve been logging in Minnesota, has to change,” he said. “Unfortunately the change is not going to be within the capability of the loggers. They have already cut their operations down to the bare bones as far as being efficient and lean. There is no more room to cut.”
Instead, he said, change must come in the form of policy and from the way forest managers do business.
The conditions have been exacerbated locally with a long, frigid period causing machines and trucks to use more expensive diesel fuel, as well as a price cut by the Boise Paper mill, leaders in the industry said.
Dane said Packaging Corporation of America, which acquired in October the Boise Paper mill in International Falls along with the other Boise facilities, reduced the price paid to loggers by 1.5 to 2.5 percent for delivered wood.
“This price cut that PCA implemented ... just drove the other 20 percent of loggers into that break even or loss category,” Dane said.
The Jan. 1 price cut came at “the worst possible time when loggers go into the make or break winter harvest season and it puts loggers in a position that they may very well come out of the winter making no money,” Dane said.
Lori Lyman, Boise Paper public affairs manager, called the price cut a propriety issue and declined to comment.
Dennis Wagner, owner of Wagner Logging, said he wasn’t surprised by the price cut.
“The only loyalty they owe is to their shareholders,” Wagner said of PCA. “If I was shareholder, I’d say they were doing a good job; but if I’m a logger, I’d say they were doing it at my expense.”
But Wagner stressed he wanted to discuss the issue with management. Instead, he said local mill foresters contacted all the contractors to tell them of the price cut.
He credited the foresters for pleading the loggers’ case, “but probably not as hard as we would have,” he said. “I’ve worked 40 years for the company, and some loggers a lot longer, and when a decision is made like that I’d like to have a conversation with the person making that decision, not just the messenger.”
Dane, too, said no one holds the local paper mill employees and the company foresters responsible for the price cut. He said PCA has determined what it will pay.
Wagner said the cuts were reflected as a $3.50 cut per cord across the board, or $2.50 on open market wood and $1.50 on controlled wood. Controlled wood, he said, is wood the company purchases from the state, county or other private landowners and loggers cut it for them. Open market wood is stumpage purchased by the logger from the county, state or other source which is cut and sold to the company. Stumpage refers to standing timber.
He said the cut represents a loss of about one-third of the income of some loggers.
“This is definitely going to affect everybody’s bottom line,” he said. “It’s going to hurt.”
Wagner said he may be more fortunate than others in the local logging community because he has other market sources, while many loggers do not.
“Most loggers have no other choice but to cut the wood,” he said. “They have no other place to go. This emphasizes the need for another source.”
Wagner said he is no longer delivering wood to the Boise Paper mill because of the cut.
“We chose not to cut the controlled they gave us, but I think we’re the only ones,” he said. “But we had another choice with wood supply with International Bildrite, so we’re still delivering open market wood.”
He said the decision was tough, as his father logged for the local mill for 35 years before he began his 40-year logging stint.
“I have never turned down a contract,” he said. “Just the economics didn’t work out.”
One of the explanations for the price cut, Dane said, was the company wanted to drive the price of stumpage down.
Dane said Minnesota could take actions to make the state more competitive in the forest products industry by opening more lands to logging and driving the price of stumpage down.
“However, doing a price cut on Jan. 1 for wood that was purchased in the previous 12 to 24 months has no bearing on the price of that wood being harvested right now,” Dane said.
With no advance warning, loggers couldn’t plan for the cut when they purchased the wood, he said.
The extreme cold weather is compounding the effect of the price cut, he said.
“Loggers are behind on production, the cost of production has gone up and we’ve faced record high fuel prices because loggers have pretty much had to buy No. 1 diesel fuel as opposed to the blends, or No. 2, which do not operate in these extreme cold conditions,” Dane said.
The price puts loggers in a very difficult position when they evaluate the future of their business, he said. The cut represents a $600,000 to $1 million annual loss directly impacting loggers.
Wagner said many loggers are older and will choose to absorb the price reduction as long as they can and hold out to replace aging equipment down the road. At that point, he said new equipment will require a huge investment for operations that cost in the millions of dollars.
“If I were 70 years old, I would think twice about putting that money back into it,” he said.
He said the real struggle will come in three or four years when the average logger decides whether to make an investment in equipment and whether bankers will help them with that investment.
“I have never seen a harder working group of individuals than these loggers,” he said. “I know what they have to do to make the margins they have to. The local foresters know, too. But this is not their decision.”
Dane said he could not suggest other loggers to comment on the price cut because they are reluctant to voice their opinion for fear of having their supply agreements impacted.
The price cut combined with the other stresses of this winter will likely impact spending in the local community on just about everything — from trucks to groceries.
In addition, Wagner said Koochiching County’s will not get the maximum return for the wood it sells under the price cut, which impacts local taxpayers.