BACKGROUN

D

PAPER Fores

t Service

Timber Sales:

Their Effect on

Wood Product Prices

MAY 1980

Congress of the United States

Congressional Budget Office
FOREST SERVICE UMBER SALES:

THEIR EFFECT ON WOOD PRODUCT PRICES

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402
NOTE

Unless otherwise indicated, all

years referred to in this report are

calendar years, timber volume is

measured by local scales, and all

dollars are in current dollars.

11
PREFACE

Because of the rapid escalation of wood product prices, the Congress

has considered a number of options that would either increase the supply of

timber or decrease the demand for wood products. One option, which is

under the direct control of the Congress, is to increase the sale of timber

from the National Forest System. This paper, prepared at the request of the

Subcommittee on Forests of the House Committee on Agriculture, evaluates

the effects of several alternative levels of timber sales during the 1980s.

Specifically, it compares the effects of increased sales on prices of wood

products, on the sustainability of the increases, and on the economic health

of the affected regions. In keeping with the mandate of the Congressional

Budget Office (CBO) to provide objective analysis, this report contains no

recommendations.

Lawrence H. Oppenheimer prepared the report under the supervision

of Raymond C. Scheppach of CBO's Natural Resources and Commerce

Division. Patricia H. Johnston edited the manuscript and prepared it for

publication; Deborah Vogt typed the many drafts.

Alice M. Rivlin

Director

May 1980

111

CONTENTS

Page

PREFACE iii

SUMMARY xi

CHAPTER I. INTRODUCTION 1

CHAPTER IL TIMBER SUPPLY, THE WOOD PRODUCTS

INDUSTRY, AND RECENT PRICE BEHAVIOR . . 5

Timber Inventory 5

Supply of Sawtimber 6

Demand for Sawtimber 12

Prices 15

Summary 20

CHAPTER m. ALTERNATIVE USES OF NATIONAL FOREST

TIMBER AND CRITERIA TO EVALUATE

POLICY CHANGES 23

The Role of National Forest Timber 23

Criteria to Evaluate Policy Changes 26

CHAPTER IV. ALTERNATIVE POLICIES 41

Description of Alternatives 42

Evaluation of the Alternatives 47

Summary 55

APPENDIX. PRICE PRO JECTIONS 59

The FORSIM Model 59

Implementation of the Models 60

Summary of Results 62

TABLES

Page

TABLE 1. INVENTORY AND PRODUCTION OF SOFTWOOD

SAWTIMBER 7

TABLE Z. CONSUMPTION OF LUMBER, 1970 AND 1976 . . 13

TABLE 3. AVERAGE ANNUAL PERCENTAGE PRICE

INCREASES FOR SOFTWOOD LUMBER,

JULY 1970 TO JULY 1979 18

TABLE 4. WOOD PRODUCTION COSTS, 1970-1977 ... . ZO

TABLE 5. ESTIMATED MEDIAN COSTS OF A NEW SINGLEFAMILY HOUSE, 1979 AND 1978 Zl

TABLE 6. POTENTIAL ANNUAL PRODUCTION AND

AVAILABLE LAND IN THE NATIONAL FORESTS 31

TABLE 7. BASE CASE PRODUCTION FROM NATIONAL

FORESTS, 1985-1990 COMPARED TO 1979

FOR ALL HARDWOOD AND SOFTWOOD SAWTIMBER HARVEST BY REGION 43

TABLE 8. SOFTWOOD SAWTIMBER PRODUCTION FROM

NATIONAL FORESTS FOR FOUR CASES, 1985-1990

COMPARED TO 1979, BY REGION 45

TABLE 9. TOTAL NATIONAL FOREST PRODUCTION OF

SOFTWOOD SAWTIMBER FOR FOUR CASES,

1980-1990 46

TABLE 10. PRODUCTION AND EMPLOYMENT IN THE

PACIFIC NORTHWEST IN 1990 UNDER

DIFFERENT SCENARIOS 5Z

vn

APPENDIX TABLES

Page

TABLE A-l. U.S. INDICATORS OF DEMAND FOR LUMBER

AND PLYWOOD, 1979, 1985, AND 1990 61

TABLE A-2. COMPARISON OF 1979 AND 1990 64

FIGURES

FIGURE 1. PRODUCER PRICE INDEXES OF SOFTWOOD

LUMBER, SOFTWOOD PLYWOOD, AND ALL

COMMODITIES, 1970-1979 17

FIGURE 2. SOFTWOOD LUMBER PRICES AND HOUSING

STARTS, 1970-1979 18

IX

63-130 0-80- 2

SUMMARY

During the 1970s, prices of wood products escalated rapidly and

contributed to the recent high rate of inflation. Since 1970, the Producer

Price Index (PPI) for lumber has increased at an average rate of about 14

percent annually, almost double the PPI rate for all commodities during the

same period. Although wood product prices have been falling since the

beginning of 1980, most observers believe that prices will resume their

upward trend as soon as the housing market recovers.

The price escalation of wood products affects the prices of a wide

variety of industrial products because of the widespread use of wood in

many manufacturing processes. Furthermore, since wood products represent

about 14 percent of the costs of new housing, their price increases have

contributed to the rapid rise in housing prices during the last several years.

Since between 20 and 25 percent of the national production of timber

comes from sales of standing timber in the National Forests, the federal

government has some direct control over the supply and price of timber.

The recent price increases have brought pressure on the Congress to

increase the supply of timber from the National Forests, and thereby

moderate the price escalation.

If the Congress decides to increase the supply of timber from National

Forests, it could do so by:

o Increasing Forest Service investment in improvement of growing

stock which would enable sales of older growth timber to be

increased.

o Departing from current legislative guidelines on the maximum

allowable sale level.

o Amending current law to allow expanded timber sales.

The Forest Service is preparing a plan of alternative program strategies as required by the Resources Planning Act (RPA). This report

provides information through which the Congress can assess the effects of

different policies and funding levels. The Congress then implements its

desired strategy for resource management in the National Forests by

appropriating funds each year. Most funds for timber management are used

for road construction, environmental protection, reforestation, and administration.

XI
Two laws govern timber sale strategies. The National Forest Management Act of 1976 specifies that sales or harvests of timber cannot exceed

that level "which can be removed annually in perpetuity on a sustained-yield

basis." I/ The act does permit the Forest Service to exceed, or "depart"

from, this constraint for up to 10 years if the increase is consistent with

multiple use management objectives. The Multiple Use Act of I960

instructs the Forest Service that no single use of the National Forests should

dominate other potential uses but rather that resources should be used "in

the combination that will best meet the needs of the American people"

considering the "relative values of various resources in particular areas."

In June 1979, the Administration directed the Forest Service to

examine a number of forests to determine whether new data and more

sophisticated planning would enable timber sales to be increased above the

maximum sustainable levels. The President instructed the Secretaries of

Interior and Agriculture to take steps consistent with existing law and

environmental considerations to increase timber supplies by limited and

temporary departures from the current non-declining even-flow policy. This

effort has therefore been called the "departure" policy. The examination of

the first forests will not be complete until mid-1980.

ALTERNATIVE POLICIES

This study analyzes the major costs and benefits of alternative levels

of timber sales from National Forests during the 1980-1990 period. The

scope of the study is limited to these alternatives. Many other short- or

long-term alternatives are available to the Congress, and some of them

might have greater effects in some respects than increased sales. For

example, timber sale procedures and accounting methods could be altered.

Taxation of private timber holdings could be changed. Investment in public

timber stands could be increased. This paper, however, addresses only

timber sale levels and assumes that all other policies remain relatively

constant.

Three alternative timber sale policies are evaluated and compared to a

Base Case which assumes that current policies are continued. Under the

Base Case annual production of softwood sawtimber from the National

Forests would increase from its 1979 level of 10.1 billion board feet to 10.7

I/ This constraint is defined in terms of a "non-declining even-flow,"

which measures the quantity of timber that can be offered for sale and

harvested in any decade.

xn
billion board feet in 1985 and would remain at that level through 1990. 2J

The alternatives to the Base Case are:

Case I—General Expansion. Sales of softwood saw timber would

increase so that annual production in 1985 through 1990 would be 12.2 billion

board feet per year, an increase of 1.5 billion board feet per year (14

percent) over the Base Case level. The expansion would be balanced among

the several regions of the nation.

Case II—Expansion in the Pacific Northwest. Sales and production

would increase at the same rate as Case I, but would be concentrated in the

Pacific Northwest region.

Case HI—Maximum Expansion. Timber sales would expand as rapidly

as procedures within the Forest Service permit, so that production from

1985 to 1990 would be about 13.7 billion board feet per year of softwood

sawtimber. Annual production would be 3.0 billion board feet per year (28

percent) more than the Base Case level. Production would increase in all

regions, but the largest increase would be in the Pacific Northwest. Timber

production under Case HI would exceed that of the options presented in the

Forest Service's report under the Resources Planning Act.

EVALUATION OF THE ALTERNATIVE POLICIES

The primary benefit of increased production would be the restraint on

future price increases. The major cost would be that the increased level of

timber sales might not be sustainable; that is, the increases could temporarily reduce the potential production of timber from the National Forests

in the future. Other important considerations are the effects of increased

sales on regional economies, the environment, import reductions, federal

budgetary costs, and manpower requirements.

This analysis assumes that all current Forest Service policies are

continued, with the exception of timber sale levels. Specifically, it is

assumed that sale procedures, investment in growing stock, internal

accounting procedures, and priorities for nontimber resources are continued.

2/ This report is primarily concerned with softwood sawtimber, which is

the type of wood most widely used to produce lumber and plywood.

National Forest sales of all types of timber in 1979 were about 12.4

billion board feet. Most of this was softwood sawtimber. About 10.1

billion board feet of softwood sawtimber was harvested in 1979. Most

of the harvested material had been sold in previous years.

Xlll
If these policies were changed, many of the estimates of this paper would be

altered. The estimates are particularly sensitive to changes in investment.

A large increase in investment could increase the maximum sustainable

yield of many forests by about 10 percent by 1990, and perhaps by 30 to 50

percent by the time the next generation of trees is ready for harvest.

Price Effects

Wood product prices will escalate rapidly during the next 10 years,

regardless of public policy, because of increasing demand for wood products.

An increase in timber sales from National Forests would tend to retard price

increases, but not to a substantial extent. This study estimates that the

Producer Price Index for softwood lumber will increase an average of about

13.3 percent annually through 1990 if current policies for timber sales are

continued. This rate is equivalent to a 7 percent increase in real terms and

is approximately the same as the rates that occurred through the 1970s. A

moderate expansion in National Forest timber sales—Cases I or IE—would

retard price escalation to an average of about 12.7 percent per year. A

larger expansion—Case in—could retard price escalation to an average of

about 12.5 percent per year.

Prices are relatively unresponsive to Forest Service timber sale policy

for several reasons:

o Wood product prices are influenced as much by processing and

transportation costs as by costs of standing timber.

o The National Forests provide 20 to 25 percent of domestic supply.

A 20 percent increase in National Forest production is equivalent

to a 4.5 percent increase in total domestic production.

o Industries in the Pacific Northwest are reluctant to expand their

capacity to process timber because harvests from private land are

expected to decline. If public timber sales were increased,

industry would likely decrease its production from private land. As

a result, the total domestic increase in production would probably

be 40 to 60 percent of the increase in National Forest production.

o Similarly, another 20 to 30 percent of the increase in National

Forest production would likely be offset by a decrease in imports.

As a result of these factors, total domestic production would increase

by about 0.4 billion board feet per year, or less than 1 percent. An increase

in production of this magnitude will affect local prices of standing timber,

xiv
but is unlikely to change the fundamental conditions that will drive wood

product prices upward. A continuation of the recent price escalation,

therefore, seems inevitable as soon as the housing market recovers.

About 14 percent of the cost of new housing is attributable to the cost

of wood products, including transportation to the building site. If the

average new house costs $65,000 in 1980, the cost of the wood products in it

is roughly $9,100. In 10 years, the cost of wood products is projected to be

about $31,800 if current policies and construction practices are continued.

(The typical new house in 1990 is likely to cost $210,000 to $220,000 if

housing costs escalate at rates similar to those of the 1970s.) If sales are

expanded by 1.5 billion board feet per year, as in Cases I or n, the cost of

wood products in 1990 would be in the range of about $29,900 to $30,400.

The homebuyers would save about $1,400 to $1,900. If sales are expanded by

3.0 billion board feet per year, the homebuyers in 1990 could save $2,300 to

$2,400—equivalent to about 1 percent of the total value of a new house.

The savings to buyers of new homes would be small in the early 1980s,

but would exceed $2 billion per year at the end of the decade. Although

consumers of wood products would benefit from increased timber sales, this

benefit would come at the expense of timber producers. Increased National

Forest sales would mean that the value of timberland and standing timber

would not increase as fast as in the Base Case so that the value of

their sales would be reduced by about as much each year as consumers would

gain.

Resource Sustainability

The primary trade-off for the benefit of price retardation is the risk

that an increase in harvests could not be sustained. In the National Forest

Management Act of 1976, the Congress required the Forest Service to adopt

the relatively conservative policy of sustainability as a general guideline for

timber sales, although it realized that a somewhat more rapid harvest policy

could have greater economic benefits. Several of the reasons for selection

of sustainability over a policy more oriented toward economic objectives

were:

o It preserves options for the future.

o It makes some provision for error or for natural disaster.

o It ensures that the present stock of old growth and its noneconomic and intangible benefits are depleted at a relatively slow

rate.

xv
Forest Service data indicate that present sale and harvest levels are

sustainable.. In fact, a slight margin exists for expansion of sales in the

Rocky Mountain regions where economic factors and available markets have

limited timber sales. Virtually no capability for expansion exists in the

Pacific Northwest region.

The Base Case of this study assumes that production would increase by

0.6 billion board feet of softwood sawtimber by 1985. This increase is

expected to absorb most of the unutilized capacity that is now available.

Consequently, increases in timber sales and harvests of 1.5 billion board

feet—as in Cases I or II—would exceed sustainable limits and would require

use of the departure provision, or an amendment of current laws. It is not

clear at this point whether adequate capacity for departure exists to attain

these production levels without causing future production to dip temporarily

below the long-term sustainable yield levels.

Regional Effects

In the short term, an increase in timber sales would stimulate local

economies in the Pacific Northwest and Rocky Mountains. The effect is

likely to be small because private industry is expected to substitute new

sales of public timber for some of its own timber. The basic reason for this

substitution is that private timber reserves are limited and industry would

prefer to defer harvests of its own timber until second growth forests are

more mature. As a result of this substitution, total production would not be

increased substantially. Furthermore, because of gains in productivity,

employment per unit harvested is likely to decline.

Employment by the wood products industry in the Rocky Mountains

would increase over 1979 levels by less than 1 percent in 1985 as a result of

Cases I and n. Although Case n would increase National Forest production

in the Pacific Northwest by 38 percent, employment in that region is

estimated to be about 4 percent lower in 1985 than it was in 1979«

Employment in the Base Case would be about 9 percent below 1979 levels.

In the longer term, a temporary increase in timber sales could

adversely affect the economy of the Pacific Northwest. That region faces a

major reduction in harvests from private lands during the mid to late 1980s.

The timing and degree of this reduction is of paramount importance to the

economic and social health of the region because the wood products industry

is by far the largest employer in the region. Although most analysts agree

that the reduction in private harvests will occur, the extent and the effects

are unpredictable. Until recently, the general assumption has been that,

whenever the regional economy is greatly affected by a decline in private

xvi
harvests, the Forest Service could compensate by expanding timber sales.

Expansion through departure, however, is a 10-year measure, and this

analysis indicates that National Forest inventories are unlikely to support

repeated departures unless the departures are relatively small. An increase

in National Forest sales in the early 1980s would therefore reduce the

National Forests1 ability to compensate for a decline in private harvests in

the longer term. Accordingly, the key issue is whether it might be

preferable to hold whatever additional capacity is available for use at a

later time when it could be more effective.

Other Considerations

Environmental Effects. Expansions of timber sales and harvests are

expected to have greater adverse environmental effects per incremental

unit harvested because they would tend to be in areas that are more

ecologically fragile and have high recreational, watershed, and other nontimber values. Water quality, in particular, would be adversely affected by

increased harvests.

Budgetary Effects. Any expansion of timber sales and harvests would

require proportionately large federal budget increases in comparison to a

continuation of current policies, because the marginal costs of sale preparation seem to be several times higher than average costs. The amount of

increase, however, depends on the region. Generally, costs per incremental

board foot to prepare sales, construct roads, and mitigate adverse environmental effects are high in the Rocky Mountains, Alaska, and the Sierras.

They are relatively lower in the Pacific Northwest and the South. The

Forest Service estimates that budget costs would increase by $120 million to

$900 million per year for annual expansions of 1.5 to 3.0 billion board feet in

timber sales. A large, but unpredictable, proportion of these costs would be

offset by sale receipts. The Forest Service estimates that the costs of

Cases I or HI would exceed sale receipts. It is possible that marginal

receipts from Case n would exceed marginal costs.

CONCLUSION

This year, both the Congress and the Administration will consider

alternative policies to increase National Forest timber sales. An expansion

would tend to retard increases in wood product prices and have some shortterm regional economic benefits, but it would also have clear adverse

effects. An expansion contains a risk that future harvests would temporarily fall below present or sustainable levels, and an expansion now could

adversely affect the long-term economic health of the Pacific Northwest.

xvn

63-130 0-80- 3
An expansion would have a net adverse environmental effect, and Cases I

and IH would entail an increase in net cost to the federal budget.

On balance, this analysis concludes that current Forest Service timber

sale policies are reasonable. An expansion has both beneficial and adverse

consequences that affect different interest groups and sectors of the public.

As a result, it is difficult to compare the effects. Several alternative

policies are available to the Congress that might attain similar beneficial

effects. Since the scope of this study was restricted, it does not attempt to

assess whether other approaches could have the desired beneficial effects at

less cost.

xvin
CHAPTER I. INTRODUCTION

From 1955 through 1970, wholesale prices for lumber and other wood

products rose at an average annual rate of only 0.3 percent,, This was

considerably below wholesale price increases for all commodities, which

rose at an average annual rate of about 1 percent during the same period.

Since 1970, however, wood product prices have risen sharply—at an average

rate of about 14 percent per year, almost double that experienced for the

aggregate of all commodities.

This increase in wood product prices has resulted from a combination

of factors that have caused demand to increase faster than supply. On the

demand side, the housing construction industry, which consumes somewhat

more than half of the softwood harvest, has expanded its use of wood

products by an average of about 6 percent annually. When demand by the

housing industry is combined with that by other industries, transportation,

and the international market, total demand for U.S. wood products has

increased by 3 to 4 percent per year since 1970. In contrast, the supply of

domestic timber from both public and private sources has remained relatively constant. Domestic supply, therefore, has been insufficient to meet

demand. As a result, buyers have bid up prices in their efforts to obtain

supplies, and imports from Canada have increased sharply.

The current imbalance between domestic supply and demand had been

anticipated for 20 years or more. By the mid-1960s, private lands could no

longer increase production to accommodate growth in demand. Prices for

wood products remained stable because sales of timber from the National

Forests were doubled, and because mill productivity increased. \] After

1970, however, National Forest timber sales were limited because of market

constraints, limits on sustainable yields, and diversion of land to other uses.

Typically, prices have climbed very rapidly during the peaks of new

housing construction and, have declined somewhat between these surges.

Although most wood product prices are now declining, it is feared that

prices will climb by perhaps 20 to 35 percent per year as soon as the housing

market recovers.

These price increases are disruptive, but are not necessarily detrimental in an economic sense. Increases in prices are a symptom of

I/ U.S. Department of Agriculture (USDA), Forest Service, Forest Statistics of the United States, 1977 (draft, 1978).
scarcities—when supplies cannot meet demand, the market allocates

supplies according to consumers' ability and willingness to pay. Price

increases, however, may transfer income inequitably among social groups

and adversely affect the U.S. international economic position.

As a rule, economic analyses of shortages in supply recognize that

prices must increase in order to encourage investments to ensure that future

supplies will be sufficient. With respect to timber, however, growth periods

are so long that the effect of prices on supply is minimal for many years.

Accordingly, the Congress has shown interest in policies that could mitigate

the effects of the wood products shortage. Several alternatives policies

could affect supply or demand for wood products, in either the short or the

long run:

o Short-run supply alternatives

—increase sales of public timber

—restrict exports of timber

—increase utilization requirements

—provide tax incentives to encourage private harvests

—subsidize substitution of hardwood for softwood

—alter sale procedures and accounting conventions

o Short-run demand alternatives

—tax wood products

—provide federal encouragement for changes in local construction

requirements

o Long-run supply alternatives

—increase investment in public growing stock

—provide tax incentives for private owners to invest in their

forests

o Long-run demand alternative

—provide research on better utilization of timber or on substitutes

for wood products

To mitigate the short-run price effects, one of the most pertinent

options for Congressional consideration is to increase sales of public timber.

Because the National Forests are the largest source of public timber and

because the Congress has direct control over National Forest timber sales,

this option is the focus of this paper. This is not to say that other options
are either infeasible or unimportant; in fact, it is probable that the Congress

will ultimately use a number of the options.

This paper evaluates the degree to which an increase in the levels of

timber sales from the National Forests would moderate the rate of increase

in timber prices. Compared to a continuation of current sale policies, the

alternatives would expand sales by between 14 and 28 percent and would

either allocate sales evenly among several regions or concentrate the

increase on the Pacific Northwest. Sales would be expanded through 1985

and then would be held constant through 1990. The benefit, in terms of

price moderation, is then evaluated relative to the potential costs, which

include the risk of depletion of timber inventory below levels necessary to

sustain production, regional economic effects, environmental impacts, and

federal budget costs.

The focus of this paper on this one option should not be interpreted as

assuming either that timber production is the most important resource of

the National Forests or that other means of increasing the supply of or

decreasing demand for timber are less attractive options. Furthermore, the

means of increasing timber sales—either by departure from the long-term

sustainable yields or by modifying current laws—is not important to the

analysis. The analysis assumes that the Congress will select a particular

policy and appropriate enough funds to prepare and implement timber sales

in order to achieve the desired production target.

Chapter n describes the wood products industry and recent price

trends. The issues and trade-offs that affect management of the National

Forests are explained in Chapter HI. In Chapter IV, alternative policies that

increase National Forest timber sales are compared with each other and

with a continuation of current policies with respect to the trade-offs

described in Chapter EL A technical appendix includes a description of the

methodology used to compute price effects and patterns of investment.

CHAPTER II. TIMBER SUPPLY, THE WOOD PRODUCTS

INDUSTRY, AND RECENT PRICE BEHAVIOR

This chapter provides background information on timber supply and the

wood products industry. It also examines the demand for wood products and

their price trends in recent years.

TIMBER INVENTORY

Because statistics and descriptive terms for timber and wood products

are complicated, a brief overview of some salient information and data is

necessary. In the simplest terms, the inventory of standing timber is

categorized by:

o Type (hardwood or softwood). This study is focused on softwood

because it is the superior material for most construction purposes.

o Size (roundwood and sawtimber). Roundwood includes all sawtimber and other trees capable of providing logs, bolts, or other

round sections. Sawtimber is relatively mature timber that is

capable of producing logs of a specified size. This study addresses

sawtimber only.

o Ownership (National Forests, other public lands, private industry,

private nonindustrial). This study considers only the National

Forests, which are larger than the other public sources of softwood

sawtimber. The wood products industry owns extensive* timberland

and the remainder is owned by a large number of farmers and a

wide variety of other nonindustrial owners.

o Location. The three major regions considered in this study are the

Pacific Northwest, the Rocky Mountains, and the South. Other

regions, including Alaska, the Southwest, and the Northeast

(including the Great Lakes region), are of less importance to this

study.

o Cost (commercial and noncommercial). The wood products industry and the Forest Service categorize their land by various levels

of commercial attractiveness based on slope, soil, precipitation,

harvest method, and transport to mills and markets, all of which

affect the total cost of harvested timber. Some of what is called

commercial timberland does not contain economically marketable

timber at this time.
o Wood Products (lumber, plywood, pulp, and others). Sawtimber is

harvested and processed into a wide variety of products, of which

lumber and plywood are the most important in terms of value and

volume. Some sawtimber is converted into pulpwood or chips and

used to make various types of paper or specialty products. The

term "wood products," as used in this study, does not include pulp

and paper products.

The nation's inventory of commercial growing stock equals about 3,900

billion board feet (local scale), of which 1,665 billion board feet is softwood

sawtimber. About 37 percent of the softwood sawtimber is located in the

Pacific Northwest. I/ Most of the remainder is divided fairly evenly

between the Rocky Mountain region and the South. The National Forests

contain 51 percent of the softwood sawtimber inventory, although a portion

of that inventory cannot be harvested at current prices. Most of the

National Forest softwood sawtimber inventory is in the Pacific Northwest

and Rocky Mountains. Privately owned timber is concentrated in the

South. 2/ Inventory and annual production are summarized by ownership and

region in Table 1.

The most economically attractive and productive softwood inventory

is the old-growth timber in the Pacific Northwest. The Rocky Mountains

also have large quantities of old-growth sawtimber, but production there is

usually more expensive than that in the Pacific Northwest because of short

harvest seasons, difficult terrain, low volume of timber per acre, and distant

markets. Although the South has only a small supply of old-growth timber,

net annual growth of timber in the South is more rapid than in other regions.

SUPPLY OF SAWTIMBER

In 1976 domestic softwood sawtimber production was approximately

43.5 billion board feet. Of that, about 23 percent was supplied from

\J The term Pacific Northwest is used in this study to mean only the

states of Washington and Oregon.

2/ USD A, Forest Service, Assessment of the Forest and Range Land

Situation in the United States (review draft, 1979), pp. 308-11.
TABLE 1. INVENTORY AND PRODUCTION OF SOFTWOOD SAWTTMBER

(In billions of board feet, international #-inch log rule) a/

Pacific

Northwest b/

National Forests

Inventory

Production

Other Public Lands

Inventory

Production

Industrial Owners

Inventory

Production

Non-Industrial

Owners

Inventory

Production

Total Inventory

Total Production

387.0

5.1

140.0

3.7

135.0

8.6

64.0

1.8

725.0

19.1

Rocky

Mountains South

261.0

2.7

43.0

0.5

23.0

1.0

54.0

0.6

380.0

4.8

34.0

1.4

14.0

0.5

87.0

6.5

204.0

10.5

340.0

18.9

Other b/ Total

326.0

2.8

39.0

0.5

65.0

3.2

108.0

2.4

537.0

8.7

1,008.0

12.0

236.0

5.1

310.0

19.3

430.0

15.3

1,983.0

51.6

SOURCES: USD A, Forest Service, Forest Statistics of the United States,

1977 (review draft, 1978), pp. 40, 85, and 86, and An Assessment of the Forest and Range Land Situation in the United

States (review draft, 1979).

a/ Inventory is for 1977 and production (removals) is for 1976. Numbers

may not add to totals because of rounding.

b/ Pacific Northwest is defined as the states of Washington and Oregon

only. Alaska and the coastal region of California are in the "other"

category.

63-130 0-80- 4
National Forests and 37 percent from the forest industry's land. 3/ 4/ The

Pacific Northwest and the South provided roughly equal shares of softwood

sawtimber production. While the National Forests supplied about 30 percent

of the Pacific Northwest production, they were not an important source of

timber in the South. 5/

The Forest Service estimates that domestic production of softwood

sawtimber will increase by about 4 billion board feet by 1990. 6/ The

contribution from the National Forests depends on the policy and budget

alternatives selected by the Congress, and could vary between roughly 20

3/ Caution must be used when interpreting measurements of timber

because of different units and measurement scales. Standing timber is

usually measured in either cubic feet or board feet. This analysis uses

only board feet for simplicity. Finished products are measured in a

wide variety of units which are designed to meet the conditions of the

various products. Lumber, which is the largest single use of sawtimber^ is measured in board feet, as is standing timber. However,

measurements of "lumber tally" are not necessarily the same as the

units of timber which were consumed to produce the lumber. Furthermore, more than 50 different scales are used to measure timber or

logs. These various scales, sometimes called local scales, often differ

by 20 to 30 percent from each other, or from the "lumber tally" which

measures their finished products of lumber. For example, in the

Rocky Mountains, the local scale of timber and log measurement can

be 35 percent lower than ultimate "lumber tally." Very frequently,

statistics using different scales are combined or compared. Except

where otherwise noted, this analysis uses local scales to measure

timber and logs and is therefore consistent with most statistics used in

Forest Service budget reports including the Resources Planning Act

Alternative Program Directions (draft). Some data in this report,

however, are based on the international }4-inch rule because many

national statistics are so compiled. The international H-inch rule is

about 15 to 20 percent greater than the local scales. Frank Freese,

USD A, Forest Service, A Collection of Log Rules (1974).

4/ USD A, Forest Service, Forest Statistics of the United States, 1977

(draft, 1978), p. 86.

5/ Forest Statistics, pp. 85-86.

6/ USDA, Forest Service, Assessment of the Forest and Range Land

Situation in the United States (draft, February 1980), p. 337.
percent and 26 percent of total supply. The Forest Service expects that the

regional contribution of public and private suppliers in the Pacific Northwest (and the Northeast) will decline, but that production from other regions

will remain the same or increase. The largest increase in production will be

from the South. 7/

The National Forests provide timber through sales or auctions that the

Forest Service holds periodically in most of the individual forests. A timber

sale usually includes the right to harvest specified timber in a certain area

under specific conditions. The process of preparing and holding a sale of

timber is lengthy and complicated because of the necessity of evaluating the

effect of alternative harvest levels and procedures on the environment, the

local economy, other resources from the area, and future production of

timber.

Considerable inventory data exist regarding the amount of standing

timber and the potential productivity of forest land, but little information

exists that indicates how much timber on specific types of land has already

been harvested. Nor has the inventory of commercial timber been categorized by the expected costs of harvests. In general, most National Forest

land is on less productive and more remote sites than private land.

Furthermore, the National Forests are managed under different objectives

than private land. Therefore, the National Forests, with half the stock of

standing timber, provide less than a quarter of the annual domestic

production. 8/ As the more accessible stocks of private timber have been

harvested, the level of private inventory has declined, and in some areas

private harvests have also declined.

Interregional Trends

The share of timber produced by the South, and especially private

owners in the South, has been expanding, and is expected to continue to

expand. Production from the Rocky Mountain regions has been declining

slightly, because timber extraction in that region has become relatively

7/ USDA, Forest Service, Assessment (1979), p. 336.

8/ All commercial forest land is categorized by "productive capacity,"

meaning the growth potential of the land. These data do riot indicate,

however, whether the land has been cut-over or is inaccessible. The

data do show, however, that National Forest land is less productive

than industrial land but more productive than nonindustrial private

land. Report of the President's Advisory Panel on Timber and the

Environment (April 1973), p. 36.
expensive and the area is far from markets. 97 While total production from

public and private lands in the Pacific Northwest has been increasing in

absolute terms, this region's share of the national total has been decreasing.

In its most recent assessment, the Forest Service predicts that total

production in the Pacific Northwest is likely to decline between 5 and 15

percent by 1990 because of inventory depletion on private lands. 10/ Other

reports predict declines ranging from 2 to 11 percent for the Pacific

Northwest by 1990 and a further 25 percent decline by 2000. ll/

There are several reasons for these trends. First, production from

National Forests in the Pacific Northwest is limited by non-declining

even-flow to about 4.8 billion board feet per year of sawtimber at current

investment levels. 12/ Timber sales in the Pacific Northwest are at that

maximum level and therefore cannot be increased in the next 10 years

without either departure from non-declining even-flow or a major increase

in investment levels. National Forest timber sales in most other regions are

not at their maximum levels.

Second, much of the timber on land belonging to the forest industry in

the Pacific Northwest has already been harvested. Production from

industrial land in the Pacific Northwest will almost certainly decline, while

that in the South will probably increase. Third, softwood timber grows

rapidly in the South, so industry has been inclined to invest more in the

South than in other regions.

9/ Other explanations for the decline are that the privately owned

inventory of timber in the Rocky Mountains is very small and that

harvest methods and program objectives for timber on public lands

have changed.

10/ This projection assumes that National Forest production increases

somewhat and partially counterbalances the decline from private

lands, but the report does not specify Forest Service harvest levels.

Assessment (1979), p. 336.

ll/ John H. Beuter, K. Norman Johnson, H. Lynn Scheurman, Timber for

Oregonfs Tomorrow (Forest Research Laboratory, Oregon State

University, January 1976); Oregon Department of Forestry, Forestry

Program for Oregon (April 1977); General Accounting Office, Projected Timber Scarcities in the Pacific Northwest: A Critique of 11

Studies (December 12, 1978).

12/ Conversation with Robert Van Aken, Office of Timber Management,

U.S. Forest Service, January 18, 1980.

10
For many years, the wood products industry has been characterized by

a boom or bust syndrome resulting from price fluctuations and sequential

exploitation of new areas. Although interregional change is now somewhat

slower than in previous decades, a strong trend exists in which new

industrial investment is concentrated in the South rather than the Pacific

Northwest. More recently, however, net new investment in facilities in the

South has increased by about $50 to $100 million each year whereas net

investment in the Northwest has been negative. 13/ For example, between

1972 and 1977 the number of southern mills increased from 508 to 687. 14/

The Forest Service has often attempted to moderate some of the

effects of interregional change, and thus stabilize local employment, by

selling timber in areas where private stocks have been depleted. This policy

has been criticized on the grounds that it provides a disincentive for private

owners to invest in reforestation and management. The Forest Service has

never before faced, however, a private inventory shortfall of the magnitude

now projected for the Pacific Northwest.

Exports and Imports

Domestic sources of timber supply cannot satisfy all domestic demand;

furthermore all domestic production is not sold within the country. In 1979,

the equivalent of about 3.8 billion board feet of softwood sawtimber was

exported. Most exports are logs sent to Japan from the Pacific Northwest.

Net imports of softwood lumber in 1979 were estimated to be about

9.6 billion board feet. 15/ Most imports come from Canada and are used in

the Midwest or along the East Coast. The import markets are relatively

volatile compared to the domestic markets. Import fluctuations are

influenced by economic conditions and timber policies in Canada, the

availability and cost of transportation, and, most importantly, the price of

lumber in the consuming areas. Typically, the industry increases imports

when demand for wood products is high, and reduces imports when demand

decreases.

13/ Estimated from data supplied by Data Resources, Inc., February 28,

1979.

14/ Miller Freeman Publications, Annual Lumber Review (1972-1977).

15/ Robert Phelps, USD A, Forest Service, Outlook for Timber Products

(speech delivered at 1980 Agricultural Outlook Conference,

November 1979).

11
DEMAND FOR SAWTIMBER

Lumber constitutes about 65 percent of the demand for softwood

sawtimber, with the remaining 35 percent split between plywood, pulpwood,

and various fiberboards. 16/ Consumption of wood products in 1970 was

balanced fairly evenly between residential housing and industrial-commercial uses. Since 1970, however, demand in the residential sector has

increased at an average of about 4.5 percent per year, while the industrialcommercial sector has increased at an average of only 0.9 percent annually.

For example, Table 2 displays the various uses of lumber in 1970, and shows

how those uses had changed by 1976.

Because new housing construction depends greatly on money markets

and tax incentives, the demand for wood products in the residential sector is

strongly cyclical. Furthermore, since the housing sector is among the first

to feel the effects of both economic downturns and recoveries, its cycles

run somewhat ahead of those of overall business. The industrial-commercial

sector is somewhat less volatile and varies in phase with the economy.

Because demand by the housing sector is so much more variable than that of

the industrial sector, and because housing and manufacturing are often at

different points in their cycles, net national demand for wood products is

quite volatile. For example, in early 1980, demand for wood products for

new housing construction is falling rapidly, while consumption by the

industrial sector still seems to remain relatively high.

Demand for Wood Products for Residential Housing

Over the long term, the demand for wood products for new housing is

influenced by three factors:

o Family Formation. In the next 10 years, new families will probably

be formed at least as rapidly as in the last 10 years because of the

present age distribution of the population.

o Type of New Homes Being Bought. The proportion of new, singlefamily detached structures has increased from 55 percent of all

homes in 1970 to about 68 percent in 1979. IT/ Detached structures require much more wood products per home than multifamily

16/ USDA:, Forest Service, Assessment (1979), p. 275.

17/ Department of Commerce, Bureau of the Census, Housing Starts

(March 1980).

12
TABLE 2. CONSUMPTION OF LUMBER, 1970 AND 1976

1970 1976

Total Consumption (billions of board feet, 39.5 43.3

international H-inch log rule)

Per capita average 193.0 201.0

(board feet per year)

Percentage softwood 81.0 85.0

End Use (billions of board feet,

international H-inch log rule)

New housing

Renovation

Nonresidential construction

M anuf acturing

Transportation

Other

SOURCE: USDA, Forest Service,

Range Land Situation in

12.3

4.7

4.7

4.7

5.7

7.5

An Assesssment

the United States

16.2

5.7

4.2

5.0

6.8

5.4

of the Forest and

(draft, 1979), p. 276.

homes. In the future, it is likely that this relationship will change

due to increases in energy, transportation, and interest costs.

o Amount of Wood per Home. Many analysts have predicted that the

amount of wood per square foot in new detached homes would

decline as wood became more expensive. Because substitute

materials have also become more expensive, in part because of

increases in energy prices, builders have been reluctant to use less

wood per square foot. Similarly, analysts have often underestimated the increases in average size of new housing units. Since

13
1970, the average size of one- and two-family units has increased

by 14 percent.

The consensus of projections seems to indicate that demand for

construction of new housing units will continue to be strong through the next

decade because of the rapid formation of new families as a result of the

post-World War II baby boom. Projections seem to differ, however, with

respect to the composition of new housing. Some believe that the trends of

the 1970s will continue, and that demand for wood products will increase

rapidly. Others believe that increases in prices and mortgage rates will lead

to more reliance on new multifamily housing units and, therefore, a less

than proportionate increase in demand for wood products.

Demand for Wood Products for Industrial and Commercial Use

About 10 percent of wood products is used in nonresidential construction, and another 1Z percent is used in the manufacturing of a wide range of

consumer goods, such as furniture. About 16 percent of all lumber is used to

produce pallets and containers for transportation. The transportation

industry also uses a small percentage of plywood and other wood products.

Miscellaneous uses of wood products, including housing repairs, advertising,

and a variety of made-at-home products, account for about 15 percent of all

demand for wood products.

The Forest Service expects that demand for wood products for

nonresidential construction and miscellaneous uses will continue to grow at

a moderate pace, but that demand in other industrial sectors might be fairly

stable. As a result, total demand for wood products from the nonresidential

sector will increase at a much slower rate than that of the housing

sector. 18/

Projection of Total Demand for Wood Products

The Forest Service predicts that total demand for wood products will

probably expand by between 1.5 and 3 percent annually for the next 10

years. Some private estimates expect demand to grow at even greater

rates. Domestic supply, however, is likely to expand by only 0.5 percent per

year. 197 The Service has not published a projection of the cycles of

18/ USDA, Forest Service, Assessment (1979), pp. 272-78.

19/ USDA, Forest Service, Assessment (1979), pp. 276-78.

14
demand, however. In a separate study, Data Resources, Incorporated (DRI)

has predicted that consumption of lumber, for example, would expand by

about 1.5 percent per year on the average, but that the housing cycle will

cause significant fluctuations in demand. 20/ Total demand for lumber is

projected to increase by about 5 percent or more per year when the housing

market revives. DRI did not estimate the demand for wood products other

than lumber.

PRICES

Standing Timber Prices

Two types of prices exist in the timber/wood products industry:

stumpage prices pertain to standing timber, and product prices pertain to

finished products as they leave the mills. Stumpage prices usually represent

between 40 and 50 percent of the value of lumber, and about 10 to 30

percent of the value of other wood products. The balance consists of labor,

transportation, capital cost recovery, and profits. Stumpage prices for a

given quality of timber in a given location are largely a function of supply

and demand, and they often fluctuate over a relatively wide range as

economic conditions change. Between 1950 and 1970, stumpage prices for

National Forest timber in the Rocky Mountains and the Pacific Northwest

increased at an average of 2.5 to 5.0 percent per year. 21/ Since 1970,

National Forest stumpage prices for Douglas Fir—the most important

source of timber in the Pacific Northwest—have increased at about 22

percent per year and prices for Ponderosa Pine have increased at about 12

percent per year. 22/

20/ Data Resources, Inc., unpublished study for the Congressional Budget

Office (March 1979).

21/ USD A, Forest Service, Assessment (1979), p. 334; and USD A, Forest

Service, The Demand and Price Situation for Forest Products

(December 1977), p. 43.

22/ USD A, Forest Service, The Demand and Price Situation for Forest

Products (December 1977), p. 43; and Data Resources, Inc., unpublished study.

15

63-130 0-80- 5
The Forest Service estimates that stumpage prices will increase at an

annual average rate of about 12.3 percent between 1976 and 1990. 23/ The

Service projects that price increases will vary among regions as they have

through history. For example, in the next 10 years, stumpage prices in the

Pacific Northwest and South will increase at average rates of 10 to 12

percent per year, but prices in the Rocky Mountain region are expected to

increase by 16 to 17 percent per year. DRTs projections of stumpage price

increases are somewhat lower than those of the Forest Service for the

Pacific Northwest because the DRI base year is 1979. DRTs base stumpage

prices therefore include the large increases in prices which have occurred in

that region since 1976. For prices in the Rocky Mountains, DRI does not

forecast as large an increase as does the Forest Service because DRI is more

pessimistic about the access to markets for Rocky Mountain wood products.

DRI's projection of stumpage prices in the South is slightly greater than that

of the Forest Service. All the projections, however, depend on estimates

that demand will increase at 1.5 to 3 percent per year and that Canadian

imports will be available. If demand growth exceeds 3.0 percent per year or

if Canadian imports decline substantially, price increases could be much

higher than these projections.

Lumber and Other Product Prices

Before the 1970s, prices of wood products were relatively stable,

typically increasing at lower rates than the Producer Price Index for all

commodities. 24/ Since 1970, however, lumber and plywood prices have

increased at average annual rates of over 14 percent. 25/ These increases

are significantly above the Producer Price Index for all commodities, which

rose at rates just below 7 percent (see Figure 1).

23/ USDA, Forest Service, Assessment (1979), Table 6. This estimate is a

volume-weighted average. It combines the 5.3 percent real annual

average rate projected by the Assessment with a projected inflation

rate of 7 percent to arrive at an annual current dollar rate of 12.3

percent.

24/ Information on prices at the wholesale levels is now reported in the

Producer Price Index, which was formerly called the Wholesale Price

Index.

25/ The Producer Price Index for softwood lumber in 1970 was 113.3. In

1979, it was 379.9. The compounded annual rate of increase was 14.39

percent. (DRI file WP10811NS, which uses data from U.S. Department of Labor, Bureau of Labor Statistics.)

16
Figure 1.

Producer Price Indexes of Softwood Lumber, Softwood Plywood, and

All Commodities, 1970-1979

(Quarterly averages)

Index

1970 1971 1972

SOURCE: Bureau of Labor Statistics.

1973 1974 1975

Calendar Years

1976 1977 1978 1979

Random Lengths, a publisher of mill prices for wholesalers, offers

similar information. The range in average annual lumber price increases

since 1970 is 10 to 15 percent. Until last year, when the housing market

declined, Douglas Fir lumber prices had increased at more than 15 percent a

year. 26/ Table 3 details the actual unadjusted percentage increase in

prices from 1970 to 1979 for lumber studs, the type of wood used most often

in housing construction. In addition to the long-term trend, Figure 2 shows

that lumber prices are strongly influenced by the housing cycle.

26/ Random Lengths Publications, Random Lengths (Eugene, Oregon,

1978).

17
Figure 2.

Softwood Lumber Prices and Housing Starts, 1970-1979

(Four quarter moving averages)

Housing Starts

(Annual rate in millions of units)

2.8

Softwood Lumber Producer Price Index

(1967 = 100)

400

Softwood Lumber Producer Price Index

1970 1971 1972 1973 1974 1975 1976 1977

Calendar Years

SOURCES: Producer Price Index -- Bureau of Labor Statistics;

Housing Starts -- Construction Reports, Bureau of Census, C-20 Series.

1978 1979

100

TABLES. AVERAGE ANNUAL PERCENTAGE PRICE INCREASES FOR

SOFTWOOD LUMBER, JULY 1970 TO JULY 1979

Type of Lumber

Average Annual

Percentage Increase

Unseasoned Studs

Douglas Fir

Portland Rate

Eureka Rate

Fir and Larch

Dried Studs

Douglas Fir

Hemlock Fir (Coastal)

13.2

12.8

12.8

11.9

11.9

SOURCE: Random Lengths Publications, Random Lengths (Eugene,

Oregon, telephone conversation, March 5, 1980).

18
Production and Transportation Costs

Stumpage prices seem to be the largest of several contributors to

product price escalation, but other cost components have also increased at

roughly comparable rates. Production, transportation, and financial costs

seem at least equally responsible for price escalation. Accordingly, the

effect of a policy that addresses only stumpage prices will not affect these

other contributors to price escalation.

Table 4 lists nationwide production costs of lumber and other wood

products,' exclusive of transport and stumpage prices. These factors of

production have increased at average annual rates of 12.4 percent since

1970. The costs in Table 4 represent about 40 to 60 percent of the total

costs of the wood products as the products leave the mill. Transportation

costs (exclusive of road construction) for wood products have also increased.

The rail rate from the Pacific Northwest to the East increased by 8 percent

per year between 1970 and 1978. 27/

Effects on the Price of New Housing

The effect on total housing costs by changes in product prices are

modest. The National Association of Home Builders estimates that wood

product costs are approximately 31 percent of the actual construction costs,

and 14 percent of the total sales prices for new homes. These relationships

have remained fairly constant for the past 10 years. Table 5 compares

lumber, wood materials, and overall construction costs of new homes with

the other major cost components. These data indicate that wood product

costs were no more responsible than other factors for cost escalation.

Profits, land costs, financing, and overhead have escalated faster than the

costs of wood products or construction since 1970. 28/ However, to some

extent, the data in Table 5 might underestimate the actual increases in

wood product costs because of the substitution of other materials by

builders.

27/ Data Resources, Inc., unpublished study.

28/ National Association of Homebuilders data, as provided by Robert

Sheehan, June 1979- These data must be used with caution because

the definitions of prices and goods are different from those used

earlier in this chapter. Also, the composition of several of the

elements has changed during the decade.

19
TABLE 4. WOOD PRODUCT PRODUCTION COSTS, 1970-1977 (In current dollars

per thousand board feet) a/

Average

Rate of

1970 1971 1972 1973 1974 1975 1976 1977 Increase

Logging 33.42 36.77 42.33 47.40 53.54 60.62 68.39 77.84 12.84

Road Construction 7.11 7.24 9.71 11.43 14.17 15.75 16.64 16.50 12.78

Manufacturing 46.97 51.96 56.19 57.65 64.04 77.85 96.70 104.16 12.05

Total 87.50 95.97 108.23 116.48 131.75 154.22 181.73 198.50 12.41

a/ Compiled by CBO, from regional data used to determine minimum bid prices for

timber sales. Data are national weighted averages. Raw data were submitted

by the Timber Management Division, Forest Service, July-August 1978.

SUMMARY

The previous sections have shown that demand for wood products will

probably continue to increase at rates that are comparable to the rates of

the 1970s. If current policies are continued, production of timber from the

National Forests will not increase substantially. Production from private

land will increase slightly, particularly in the South, and stumpage prices

will increase at rates comparable to those of the 1970s. In the 1970s, prices

of wood products were forced upward in roughly equal measure by the price

of the raw materials—stumpage—and by increases in production and transportation costs. Both stumpage and production costs will be affected by the

policy selected by the Congress to provide timber sales from the National

Forest.

20
TABLE 5. ESTIMATED MEDIAN COSTS OF A NEW SINGLE-FAMILY

HOUSE, 1970 AND 1978

Average Percent of

Annual Total Sale

Increase Price

1970 1978 (percent) in 1978

Total Construction,

Including Labor and

Wood Materials

Lumber

Total Wood Materials,

Including Lumber

Land

Financing

Overhead, Profit, and

Other

Total Sales Price

Average Home Size

(in square feet)

12,700

a/

a/

4,700

1,500

4,450

23,400

1,566

26,100

4,100

7,700

12,800

6,100

10,600

55,600

1,691

9.5

9.4 a/

9.4 a/

13.3

19.2

10.7

11.4

1.0

46.9

7.3

13.8

23.0

11.0

19.1

SOURCE: National Association of Homebuilders.

a/ The average annual increase in costs for lumber and wood materials

has been calculated for the 1973-1978 period.

21

CHAPTER IIL ALTERNATIVE USES OF NATIONAL FOREST TIMBER

AND CRITERIA TO EVALUATE POLICY CHANGES

Under present law, the Forest Service has a limited capability to

increase timber sales from the National Forests through the departure

provision. Similarly, the Congress can adjust the level of sales through the

budget appropriations process. The issue now facing the Congress is

whether recent and projected price increases of wood products warrant a

change in strategy for management of the National Forests to allow

increased sales to ameliorate price increases. This chapter discusses the

current debate about the use of National Forest timber and criteria for

evaluating the alternative policies.

THE ROLE OF NATIONAL FOREST TIMBER

The debate about National Forest timber is influenced by different

views about whether commercial harvest of this timber is the most

important use of the National Forests, or whether it is only one of several

important uses. Industry considers the Forest Service as the custodian of a

vast amount of valuable timber which cannot be harvested at optimal

economic rates under current policies and laws. Several independent studies

have shown that alternative harvesting policies could increase the economic

returns from this timber. \J On the other hand, it is clear that such

alternative policies would sacrifice some benefits from other uses of

National Forest resources. 2/ Environmental groups contend that, even

under current law, timber production dominates National Forest policy and

that much timber now being sold in some regions is actually uneconomic to

I/ Yvonne Levy, "An Economic Alternative to Current Public Forest

Policy," Economic Review (Federal Reserve Bank of San Francisco,

Winter 1978); Thomas Lenard, Lumber Prices and the Lumber Products

Industry (Council on Wage and Price Stability, October 1977); Marion

Clawson, "The National Forests," Science (February 20, 1976); John L.

Walker, "Economic Efficiency and the National Forest Managment Act

of 1976," Journal of Forestry (November 1977), pp. 715-18; Peter

Berck, "The Economics of Timber: A Renewable Resource in the Longrun, TTie Bell Journal of Economics (Autumn 1979), pp. 447-62.

2/ USD A, Forest Service, A Recommended Renewable Resource Program

(March 2, 1976).

23
sell, but is being supported by timber in other regions. 3/ These issues have

escalated in importance because of price increases and the depletion of

private inventories. Industry argues that harvests from the National Forests

should be increased.

The debate hinges on the role of old-growth timber—that is, mostly

over 150 years in age—in western National Forests. The general guidance

expressed by the National Forest Management Act is that the harvest rate

in the National Forests should be more moderate than that on lands owned

by private industry in order to preserve the forests' recreational potential

and the maximum number of their optional uses. Many in the Congress

believe that the intangible benefits of a moderate harvest policy are

important, although not very easily quantified. For that reason, the

Congress has designated millions of acres as wilderness and the Forest

Service has stipulated harvest procedures that attempt to maintain many of

the benefits of old-growth timber. Furthermore, during consideration of the

National Forest Management Act in 1976, the Congress rejected an amendment under which timber production could dominate other uses on National

Forest land. Accordingly, management continues to use multiple-use as a

guideline.

Current Law. Current federal policy is embodied in two pieces of

legislation: the Multiple Use-Sustained Yield Act of I960 and the National

Forest Management Act (NFMA) of 1976. The Multiple Use Act states that

the forests "shall be administered for outdoor recreation, range, timber,

watershed, wildlife and fish purposes" and directs that the resources should

be developed for "multiple use" and "sustained yield." 4/

In the National Forest Management Act, the policy guideline for

timber harvest scheduling is specified in Section 13(a): "The Secretary of

Agriculture shall limit the sale of timber from each national forest to a

quantity equal to or less than a quantity which can be removed from such

forest annually in perpetuity on a sustained-yield basis. ..."

This policy is known as the non-declining even-flow policy (NDEF). It

limits the permissible harvest in any given year to the "allowable sale

quantity." This allowable sale quantity cannot exceed the long-term

sustained yield capacity of a forest. This quantity is determined by the

3/ Natural Resources Defense Council, "Sales Below Cost: A Summary of

NRDC .Analysis of Forest Service Sales Below Cost" (unpublished,

April 23, 1980).

4/ Public Law 86-517, 14 U.S.C. 528-531.

24
Forest Service's estimate of what level can be sustained through harvest of

second-growth or "managed" timber after all old-growth and unmanaged

stands have been cut, given the amount and quality of land available, the

intensity of management (investment in reforestation and timber stand

improvement), the utilization of growing stock, and conflicting uses of land,

such as the necessity to preserve water quality.

A provision in the NFMA allows the Secretary of Agriculture some

freedom to "depart" from NDEF constraints. Specifically, the law states:

That in order to meet overall multiple-use objectives, the

Secretary may establish an allowable sale quantity for any

decade which departs from the projected long-term average

sale quantity that would otherwise be established. Provided

further, that any such planned departure must be consistent

with the multiple-use management objectives of the land

management plan. 5/

The legislative history of this provision indicates that the Congress intended

it to permit some flexibility in timber sales without altering the overall

goals of sustainability. This flexibility could capture some of: the potential

economic benefits of short-term departures from policy. Departures could

be made in special circumstances, such as local economic hardships or

unusual conditions in the forest.

On June 11, 1979, the President asked the Forest Service to examine

several forests in the Pacific Northwest and northern Rocky Mountains to

determine whether, when, and to what extent a departure would be

warranted. Since the Service will not complete any of its examinations until

the middle of 1980 at the earliest, an increase in timber sales would not be

possible until late 1981 or early 1982. The Service has not estimated the

aggregate increase for the National Forest System because it cannot foresee

the results of its examinations. The only indication of the possible scope of

an increase in sales was contained in a 1981 proposed budget summary. That

document stated that it may be possible to prepare and offer additional

sales for any reason of 0.3 billion board feet in fiscal year 1983 and 1.3

billion board feet in fiscal year 1985. 6/ Although at this time it is

impossible to project the likely increase in sales as a result of departures, if

any are developed and adopted, this paper examines two increases in timber

5/ Public Law 94-588, Section 13, 16 U.S.C. 1611.

6/ USD A, Executive Summary, Forest Service Budget Estimate, 1981

(January 25, 1980).

25
sales that approximate the maximum level mentioned in the budget summary, and one option that increases sales to twice the projected maximum

level. It is not important to this paper whether the increases are secured by

a change in legislation, or an increase in appropriations to accomplish

administrative departures.

CRITERIA TO EVALUATE POLICY CHANGES

If the Congress wishes to retard price increases of wood products

through larger sales of National Forest timber, the principal trade-offs of

such a policy are that the timber sales would exceed sustainable levels and

that the long-term economic health of certain regions of the country might

possibly be adversely affected. Other considerations are environmental

effects, budget costs, receipts to county governments, and effects on

international trade. The balance of this chapter describes the intended

benefits and the projected costs.

Price Effects

The primary benefit of the policy options in this paper is constraint of

the current rate of wood product price increases. Although price escalation

is generally undesirable, it also is a valid market signal of a product's

increasing scarcity. If the value of a diminishing resource is increasing due

to a shortage in supply, then attempts to combat the price escalation

without either increasing supply or reducing demand are probably doomed to

failure. Additionally, if changes in public policy are used to influence the

market operations, they may only distort a market that might be working

and adjusting fairly well without them.

A steady increase in prices provides positive signals to private landowners to increase investment for fviture supply and, at the same time,

encourages conservation among consumers. If private owners of timberland

expect substantially higher real prices in the future, they will tend to

regenerate and reforest cut-over lands and improve growing stock by

cutting, thinning, and selective harvesting. Furthermore, tree purchasers

and harvesters will better use existing inventory to minimize waste if their

material costs rise. The Forest Service projects that a 12 to 13 percent

annual increase in stumpage prices would increase supply by about 5.5 billion

board feet per year in 1990 over the level it would be if prices increased by

9 to 10 percent per year. 7/

7/ USD A, Forest Service, An Assessment of the Forest and Range Land

Situation in the United States (draft, February 1980).

26
With respect to consumption, higher prices, relative to competing

materials, will encourage more conservative use of wood products for

residential construction and industrial purposes. The Forest Service

Assessment concludes that, under the higher price projection mentioned

above, demand by 1990 would be 4.7 billion board feet less than under the

lower-priced projection. 8/

The study by the Council on Wage and Price Stability concluded that

prices were being bid up because of scarcities, but that the degree of

scarcity was unnecessary. 97 It argued that the Forest Service could

increase production, and thereby reduce price escalation, without substantially adverse consequences. The study also stated that a feasible increase

in sales might be sustained with reasonable levels of investment in growing

stock. Its recommendation, therefore, was to depart from NDEF (or perhaps

to redefine NDEF).

The direction of the price effect is not controversial: if public forest

harvests are increased, more supply will lead to lower prices. The

controversy arises over the extent of new production and the resultant price

effect. Industry and the Council on Wage and Price Stability believe that

sales of National Forest timber can be increased and that the downward

effect on price escalation would be substantial. 10/ The Forest Service

believes that the effect of increased sales would be limited for several

reasons: ll/

o Since the National Forests provide only about ZO to 25 percent of

total domestic supply, a 30 percent increase in National Forest

sales would result in a domestic supply increase of only 6 to 7.5

percent, assuming no change in imports.

o Whenever the Forest Service increases its sales, private industry

tends to reduce its harvests because it cannot easily or cheaply

8/ Ibid.

97 Lenard, Lumber Prices and the Lumber Products Industry.

10/ Levy, An Economic Alternative to Current Public Forest Policy; John

Walker and John Keane, "Why Timber Scarcity and Plenty," Forest

Industries (September 1974); H.R. Josephson, "Economics and National

Forest Timber Harvests," Journal of Forestry (September 1976);

Lenard, Lumber Prices and the Lumber Products Industry..

ll/ Enoch Bell, Expanding Softwood Production from the National Forest

System Lands, USDA, Forest Service (draft, October 1979).

27
expand mill capacity and because the value of its own growing

stock appreciates as it grows. This substitution is expected to

erode the net potential increase by 40 to 60 percent. 12/

o Some multinational companies can reduce their imports from

Canada when National Forest sales are increased, depending on

their internal supply situation. The decrease in imports could

offset: 20 to 30 percent of increased National Forest production. 13/

The Forest Service estimates, for example, that, if its sales and

harvests increased by 1 billion board feet per year, private harvests would

decline by 528 million board feet and imports would decline by 280 million

board feet. Thus, the net increase in supply would be only 192 million board

feet per year, or 19 percent of the increase in National Forest sales.

Because of these counteracting factors, an increase in National Forest

timber sales would not appear to be an effective policy to increase domestic

timber supply. It would, however, have a positive effect on the balance of

trade by indirectly stimulating exports and reducing imports. On the other

hand, the increase in employment from incremental sales would be counteracted to some degree by a decrease in private employment on private lands

as industry substitutes public timber for its own. 14/

To the extent that stumpage prices are affected by a change in supply,

prices of wood products to the consumer would decline. This benefit to the

consumer, however, is offset by a loss to owners of timberland due to a

reduction in the value of their stumpage.

Sustainability of Harvest Levels

Perhaps the most controversial issue facing the Forest Service is

whether current production levels can be sustained after the inventory of

old-growth timber is depleted. In the past, private industry has, in

succeeding regions of the country, harvested without adequate reforestation. Only in very recent years has reforestation become accepted practice,

12/ USD A, Forest Service, Forest Service Analysis of Sierra Club Budget

White Paper, (unpublished, July 1979).

13/ Ibid.

14/ Conversation with John Sessions, Timber Management, Forest Service,

regarding analysis to support the Forest Service Analysis of Sierra

Club Budget White Paper.

28
and some observers fear that the industry still does not do enough. The

Forest Service itself has a backlog of unreforested land. Although many

forests regenerate naturally, much cut-over land has reverted to hardwoods

or brush.

The National Forests are composed of old-growth and second-growth

timber. Old-growth timber has never been cut and has a low rate of net

growth. Although only a small percentage of National Forest timberland

contains second growth, its volume is expanding as more old growth is cut

and the land reforested.

Gradually, the proportion of each year's harvest that is supplied by old

growth will decline and that provided by second growth will increase. In

time, annual harvests are planned to equal annual growth. That can be

accomplished by a forest which is virtually all second growth and which has

an even distribution of age classes. Most commercial timberland in the

National Forests today is, however, stocked with old growth. The objective

of timber management is to phase out this inventory (subject to many landuse constraints and to environmental and social considerations) and restock

in a way in which age distributions are as nearly even as possible.

Current law stipulates non-declining even-flow (NDEF) as a policy

criterion. This policy is somewhat more conservative than necessary to

achieve a smooth transition to managed forests. The legislative history of

the National Forest Management Act of 1976 indicates that NDEF was

adopted in order to preserve options for the future, particularly with respect

to allocation of land to uses other than that of providing timber.

The Forest Service has used the Timber Resources Allocation Method

(Timber RAM) to compute the maximum sustained yield, or "allowable sale

quantity," for each forest. This model computed the volume of second

growth that will be available under various conditions and then allocated

from the stock of old growth in order to establish the largest possible

sustainable level of harvest. In other words, the old-growth harvests are

programmed to "fill up" any production troughs due to age gaps of second

growth. The resulting harvest schedule provides the allowable sale quantity

for the first decade.

Scheduling timber sales is inherently complicated and difficult because

of a large number of variables and uncertainties. Different species of trees

require various growth periods in different regions to attain maturity.

Reforestation can fail because of drought or can be retarded by the growth

of brush or hardwoods. Fires or insect infestation can destroy timber.

Inaccurate data and withdrawals of land in the timber base can also upset

harvest schedules.

Z9
One sensitive issue is whether the amount of land available for timber

operations will be adequate to maintain either present or increased sale

levels. A second issue is whether volumes of second growth will attain their

projected quantities, and a third is whether the costs or investment requirements for future harvests will be so high that production will not be able to

achieve its planned level. Because of limitations in data, these issues

cannot be resolved in this analysis, but examination of them places some

perspective on the larger question of whether increases in sale levels can be

sustained.

The Land Base. The Forest Service is in the process of developing new

Land and Resource Management Plans for all National Forests as required

by the National Forest Management Act of 1976. Many of these new plans

could reduce the land available for timber sales, or could constrain the

amount that can be harvested from available land. The difference in

potential annual harvest can be significant (see Table 6).

Although the National Forests contain 183 million acres, only about 78

million acres are commercial timberland and can actually be used to provide

timber. 15/ The balance of land is mainly rangeland, as is forest that is

either unproductive or has been allocated to uses that are incompatible with

timber harvesting. Even the 78 million acres of commercial timberland are

divided into categories that affect production. About 48 million acres are

considered standard commercial timberland, of which only 36 million are

stocked in softwoods. This 36 million acres provides 70 percent of all

National Forest softwood sawtimber. The balance of commercial land is

categorized either as special or marginal and requires specific harvest

techniques that both raise the cost of the timber and reduce the output of

timber per acre. 16/ The effect of the new Land and Resource Management

IS/ The Forest Service definition of commercial timberland includes some

land that this analysis does not consider and so their estimate of

commercial acreage is slightly higher than that used here. This land

component, called "unregulated land," sometimes contains sellable

timber, but is not organized for timber production. It includes land

such as experimental forests, or sites for recreation or administrative

use.

16/ Special land requires specially designed treatment of the timber in

order to protect values such as water quality or recreation. Yields of

timber on some special land can be maintained; on others, they cannot.

Marginal areas include those with "excessive development cost, low

product values, or resource protection constraints." See Forest

Service Manual, Title 2400.

30
TABLE 6. POTENTIAL ANNUAL PRODUCTION AND AVAILABLE

LAND IN THE NATIONAL FORESTS a/

Acreage

Potential Yield

(billions of board

Type of

Tina her land

Standard

Special

Marginal

Total

(millions

1977

57.3

8.4

20.2

85.9

of acres)

1980

48.1

10.3

20.2

78.4

feet per

1977

10.1

0.9

2.3

13.4 c/

year) b/

1980

9.2

1.4

2.3

12. 9 c/

SOURCE: 1977 statistics were prepared from Timber Management Information System, USD A, Forest Service, Report 24,21 A

(TM-LUC-Area), (August 5, 1977, unpublished); 1980 statistics

were compiled on February 2, 1980, by Robert Van Aken,

Timber Management, Forest Service.

a/ These land adjustments include those made for wilderness classification. USD A, Forest Service, Roadless Area Review and Evaluation,

Final Environmental Statement (January 1979).

b/ "Potential yield" is a term that is being phased out of Forest Service

terminology, but it is still in frequent use. It is a measure of the

maximum harvest that could be obtained and sustained from a forest

assuming certain management intensities, markets, and technology

were available. The primary difference between potential yield and

allowable sale quantity is the extent of investment required. Potential

yield assumes an investment level far higher than that of current

policies, and therefore it exceeds estimates of allowable sale quantity

(or maximum sustainable levels).

£/ The average yield per acre in 1977 was 156 board feet per acre per

year. In 1980, it is 165 board feet per acre per year.

31
plans, including land set aside for wilderness, has not only been to decrease

the total amount of commercial forest but to increase the proportions of

commercial forest that have special harvest requirements or are marginally

economic. As a result, the amount of land in the standard category has

declined by 16 percent since 1977 (see Table 6). IT/

The overall statistics actually may understate the amount of disruption to sale schedules that may be caused by the new plans. The scale of the

revisions poses two questions: whether the reduction of the land base will

continue and whether estimates of potential yields and maximum sustainable

harvest levels (allowable sale quantity) have been sufficiently adjusted to

reflect the changes in the land base. It is probably prudent to plan as if

more land will be allocated away from timber production as recreational

demands increase. One estimate projects a 9 percent additional loss of

commercial timberland in the West by 1985 as a result of trends in land

allocation for forests with approved land use plans. 18/ Allocation away

from timber use can be reversed or investment in remaining timberland

could be increased. Allocation toward timber use is to some extent

irreversible, because once the timber is harvested the land cannot be used

for some recreational purposes.

It cannot be determined whether the Forest Service has sufficiently

adjusted the timber sale planning schedules to reflect the new, decreased

land base. During the same time that new plans were reducing the

availability of land, the Service made a number of changes in accounting

procedures and assumptions about future investment levels. These changes,

combined with increases in the value of timber, have led to an increase in

the estimate of recoverable volumes per acre of 4.5 percent. As a result,

although the land base has shrunk, the estimates of potential yield (and

probably the allowable sale quantity) have not declined proportionally. It is

not at all clear at this time which trend will dominate—that is, whether

future aggregate yields will be greater or less than current ones.

IT/ Bell, Expanding Softwood Production, p. 29; USDA, Forest Service,

Timber Management Information System, Report 24.21A (TM-LUO

Area), (August 5, 19TT, unpublished); personal conversation with

Robert Van Aken, Timber Management, Forest Service, February 9,

1980, from data of February 2, 1980.

18/ Carl Newport, "Commercial Forest Lands on Six Western Regions,

Exhibit B" (undated, unpublished).

32
The difference between the potential yield and the maximum sustainable yield (allowable sale quantity) is important. 197 Potential yield means

the maximum sustainable level that may be harvested with intensive

forestry methods taking into account conventional logging technology and

interrelationships with other resources. 20/ The key difference between

the allowable sale quantity and the potential yield is the assumption about

intensive forestry and the investment levels that such forestry requires. If

investments were increased by a large (but feasible) amount, the allowable

sale quantity would equal the potential yield. In the Pacific Northwest, the

level of timber sales is limited by the allowable sale quantity, which in turn

is limited by the level of investments that the Service, OMB, and the

Congress judge to be appropriate. The Forest Service projects that through

1990 the allowable sale quantity in the Pacific Northwest will be 90 percent

of the potential yield. 21/ If the ratio between allowable sale quantity and

potential yield that exists in the Pacific Northwest is assumed to be

approximately representative of the entire National Forest System, the

allowable sale quantity of the entire system would be about 11.5 to 11.7

billion board feet per year for hardwood and softwood sawtimber. In 1979,

about 11.1 billion board feet of hardwood and softwood sawtimber were sold,

and between 10.8 and 11.0 billion board feet are expected to be sold in

1980. 22/ Therefore, some margin for increases in sales remains. This

197 "Allowable sale quantity" is the term used in the National Forest

Management Act to represent the maximum sustainable yield. The

allowable sale quantity for one decade can change for the next decade.

20/ The technical definition from the Forest Service Manual is: "Potential

yield for the next ten years is the maximum harvest that could be

planned to achieve the optimum perpetual sustained yield harvesting

level attainable with intensive forestry in regulated areas considering

the productivity of the land, conventional logging technology, standard

cultural treatments and interrelationships with other resources and the

environment."

21/ The potential yield for future decades at high investment levels is

greater than that through 1990 because some time is required for

investment to take effect.

22/ In 1979, 12.4 billion board feet were offered for sale. About 0.8 billion

board feet were not bought by industry, and 0.5 billion board feet are

not chargeable against the allowable sale quantity. All these estimates include hardwood and the chargeable components of long term

(Alaskan), mortality, and salvage sales. Robert Van Aken, Timber

Management, Forest Service, phone conversation, February 4, 1980.

33
margin, however, is limited and probably does not exceed 0.5 to 0.9 billion

board feet per year including hardwood. As a result, the issue of

sustainabiHty will be a factor in any debate regarding an expansion of

timber sales.

The region most affected by the new Land and Resource Management

Plans is the Pacific Northwest. Acreage in the standard category has

declined by 2.7 million acres since 1977. Yet, as a result of a number of

adjustments, estimates of the potential yield for the region has actually

increased from 4.8 billion board feet per year in 1977 to 5.3 billion board

feet in 1980. 23/ The present level of sales in the Pacific Northwest is 4.8

billion board feet of chargeable sawtimber per year. Sales in this region are

already at the allowable sale quantity, and therefore cannot be increased

without use of the departure provision of the NFMA. As a result, the excess

capacity to increase sales within sustainable yields exists only in regions,

such as the Rocky Mountains, where the market for timber is relatively

weak and additional sales have been uneconomic.

Second-Growth Inventory. About 13 percent of the wood harvested

from the National Forests is second growth. 24/ Much of this is either

hardwood or timber that is not suitable for lumber or plywood. In future

years, the Forest Service plans to increase the proportion of total harvest

supplied by second growth until ultimately it will provide the entire harvest.

The transition will be slow, however. In 1983, for example, only about 15

percent of the harvest will be second growth.

Two different viewpoints about second growth in the National Forests

have been argued for many years. On the one hand, some evidence indicates

that reforestation of cut-over land usually is behind projections and expectations. Much land that contained softwood has reverted to less useful

hardwoods or is overrun with brush. In other cases, softwood seedlings have

failed or been set back because of drought, frost, animals, or other causes,

and this has led to poorly stocked areas. On the other hand, growth on some

young stands has exceeded projections.

Both sides probably contain some truth. The problem is that no

comprehensive attempt has been made to inventory and evalute second

growth on a national scale. Such an evaluation could perhaps put this issue

23/ Yield estimates were provided by phone conversation with Robert Van

Aken, Timber Management, Forest Service, January 23, 1980.

24 Letter from Max Peterson, Deputy Chief, Forest Service, August 18,

1978.

34
to rest. Until that data is available, it cannot be determined whether the

contribution from second growth can support an increase in harvests or

whether it will constrain future harvest levels.

Costs of Future Harvests. The costs of harvested timber are likely to

escalate in real terms because of four factors: inaccessibility, lower volume

per acre, more stringent requirements for harvest methods, and greater

investment required to manage second-growth stands.

Over the years, the Forest Service has tended to sell the best timber

first. Although 29 percent of National Forest commercial timberland is in

the least productive classification of commercial forest land, little of that

category has been logged, because of inaccessibility and attendant high cost

of harvesting. Most timber production has been provided by the higher site

classifications. As a result, a disproportionate percentage of the remaining

harvestable timber is on land that is less productive and more difficult to

reforest, and has higher costs per unit removed than that being harvested

now. Z5/ Much of the land in lower site classifications is of questionable

economic value and is assigned to the marginal category because of its

inaccessibility and low volume per acre. Clearly, timber harvested from

this land will on average be more costly than that now harvested, but it is

difficult to estimate the level of real cost increases.

Future requirements on utilization, extraction, and valuation are much

more likely to raise the cost of harvesting than to reduce it. Furthermore,

much of the land in the special classification will require restrictive

procedures to maintain water quality and a number of environmental

requirements. Often the harvests of the future will be on land that is more

vulnerable or sensitive to environmental effects than that now being

harvested.

The last factor contributing to increased costs is that, as the land base

is reduced, the level of investment needed to maintain production levels

increases very fast. This additional investment ultimately is reflected in

the cost of the harvested timber.

The Forest Service has computed the effects on its budget from a

reduction in the land base available for timber production in one National

Forest. In this case, a 10 percent decrease in land required a 10 percent

decrease in maximum production unless budget costs were increased. In

order to limit the reduction in harvest to about 5 percent, the Service

25/ Report of the Advisory Panel, p. 34.

35
increased its management costs for this forest from $3 million to $7 million

a year. As a result, output per dollar decreased by 56 percent. 26/

In a separate study, the Forest Service calculated the decrease in

value, in terms of stumpage prices, that the increased costs of inaccessible

areas are expected to have. Using an average of seven western forests, this

study expected that increased costs of harvest would decrease the stumpage

value of the resource to potential bidders by about 14 percent in real

terms. 27/ These prices did not reflect specially restrictive procedures or

more intensive management but simply the value of resources in more

remote areas, assuming that purchasers are reimbursed for specified road

costs and that reforestation will be done by the Forest Service. As a result

of two effects—the reduction of the land base and use of more inaccessible

areas—the real cost of future timber should be expected to increase,

although no comprehensive estimates have been made that predict the

extent of increase.

Overall Effect on Sustainability. This section has evaluated the

conditions under which an increase in timber sales could be sustained. The

analysis determined that a significant increase would require a departure

from non-declining even-flow guidelines or an amendment of current laws.

The Forest Service has not been able to market additional timber from the

Rocky Mountains, where sales are not at their maximum allowable sale

quantity, and the Pacific Northwest is already at its maximum sustainable

levels. Since additional investment would not increase sales through 1990 by

more than O.Z to 0.4 billion board feet per year, departures or changes in the

law, plus increased investments, would be required to increase sales by 1.5

to 3.0 billion board feet per year.

Regional Effects

For the last 10 years, private investment in processing facilities has

decreased in the Pacific Northwest and increased in the South, because of

the foreseen reduction in timber supplies in the former area. If the trend

accelerates, and if an increase in National Forest sales is only temporary,

26/ USD A, Forest Service, Alternative Policies for Timber Harvesting on

the Western National Forests (November 1977), p. 26.

27 / Roger Fight, Norman Johnson, Kent Connaughton, and Robert

Sassaman, Roadless Areas—Intensive Management Tradeoffs on

Western National Forests, USD A, Forest Service (revised, October

1978), p. 35.

36
production could decline rapidly in about 10 years. In that event, regional

employment could be rapidly and seriously affected.

The Pacific Northwest has a large inventory of old-growth timber in

the National Forests and a relatively small inventory remaining on private

lands. Several studies have concluded that the stock of second-growth

timber will be too small to replace the decline of old-growth inventories and

maintain production levels from private lands through the next 5 to 20

years. Consequently, allocation of a larger portion of the present inventory

of National Forest old growth to sales during the 1980s would greatly

increase the possibility of regional shortages in 10 to 30 years, if the

increase in National Forest sales cannot be sustained. 28/ The Forest

Service has projected that, under their base level assumptions, the decline in

Pacific Northwest production by 1990 could be about 3.0 billion board feet

per year—roughly a 15 percent decrease. 29/ After 1990, projections

become more speculative, and there is little agreement whether the decline

would accelerate or moderate.

Employment in the wood products industry has been at high levels both

nationally and in the Pacific Northwest until recent months. Increases in

productivity that have reduced employment per unit processed in some

facilities have been balanced by the manufacture of more sophisticated and

specialized products that has required more workers. In the future, it is

expected that employment in the Pacific Northwest will decline slowly as

that in the South expands.

If harvests in the Pacific Northwest decline precipitously, the effect

on employment will of course be exacerbated. In 1978, employment in the

wood products industries in the Pacific Northwest was 162,000 out of a total

28/ John Beuter, K.M. Johnson, and H.L. Scheurmann, Timber for Oregonfs

Tomorrow, Oregon State University, Research Bulletin #19 (1976);

Oregon Department of Forestry, Forestry Progam for Oregon (submitted to the State Board of Forestry, April 1977); General

Accounting Office, Projected Timber Scarcities in the Pacific Northwest (December 12, 1978); D.R. Gedney, D.D. Oswald, and R.D. Fight,

Two Projections of Timber Supply in the Pacific Coast States, USD A,

Forest Service, PNW-60 (1975).

297 Forest Service, Assessment, pp. 325 and 326.

37
workforce of 3.1 million. 30/ In 27 counties, the industry provided over 20

percent of the total employment directly and another 30 percent indirectly. 31/ The wood products industry employs more people in Oregon

than any other industry, except retail trade and government. One study

projects a decline in employment in the wood products industry in Oregon of

about 35 to 45 percent by the year 2000 from productivity gains if

production is constant. 32/

Although the government has little direct responsibility for maintenance of labor patterns, its policy on timber sales can cause a disproportionate impact in the Pacific Northwest. An accelerated harvest from

National Forests in that region could temporarily retard the flow of new

capital investment from the Pacific Northwest to the South, but the effect

on employment would last for only 2 to 4 years. Under a continuation of

current sale policies, southern lumber production would more than double in

20 years. 33/

On balance, an increase in timber sales in the Pacific Northwest could

have some short-term beneficial effects on the regional economy. The

potential problem lies not in the short-run, however, but in the next 10 to

30 years. If a capability exists to depart from non-declining even-flow, the

issue is when should that capability be used. This analysis indicates that a

need for departure will probably be greater in the future than it is now.

Virtually all projections indicate that harvests in the Pacific Northwest will

decline by several percent annually by 1990. Departures last for only 10

years, and can consume whatever excess capacity exists. It might therefore

be more useful to begin a departure in 1990 than to end one then.

30/ Florence K. Ruder man, Production, Prices, Employment and Trade,

USDA, Forest Service (1979), p. 15. U.S. Department of Labor, Bureau

of Labor Statistics, Employment and Earnings, vol. 26, no. 12

(December 1979). About 7.5 percent of total employment in Oregon is

directly employed by the forest products industry.

31/ Enoch Bell, Estimating Effect of Timber Harvesting on Employment,

USDA, Forest Service Research Note, INT-237 (1977). The employment multiplier for secondary employment usually varied from 2.5 to

3.3.

32/ B.R. Wall, Employment Implications of Projected Timber Output in the

Douglas Fir Region, USDA, Forest Service, PNW-211 (1973).

337 D.M. Adams, R.W. Haynes, and D.R. Darr, "A Welfare Analysis of

Long-Term Forest Products Price Stabilization," American Journal of

Agricultural Economics (November 1977), p. 669.

38
Other Considerations

An increase in timber sales would have some additional effects. For

example, an increased harvest should be expected to affect the environment

adversely, require more net federal budget expenditures, and possibly

adversely affect private investments in reforestation or timber stand

improvement. On the other hand, acceleration would stimulate employment

in the short run, transfer more income in the form of receipts to local

governments, and provide some positive influence on the balance of payments.

The Forest Service projects that the environmental effects from an

increased harvest would be declining water quality, additional stress on

certain threatened or endangered species, and degredation of the scenery.

An acceleration in the Rocky Mountain region would adversely affect soil

productivity and big game habitats. In the Pacific Northwest, air quality

and fish habitats would also be affected. In a draft report, the Forest

Service has concluded that the environmental "impacts would generally

become intolerable at an increase of 30 percent in harvest level above the

level of the mid-1970s (approximately 10 billion board feet of softwood

sawtimber per year). On some forests, any acceleration of harvest would

have unacceptable impacts on non-timber resources." 34/

Expanded timber sales would require increased federal budget costs

for more personnel to prepare and administer sales. They would also lead to

increased receipts from industry. By law, 25 percent of all receipts are

transferred to the local counties. These receipts are the primary source of

revenue for many of the affected counties. Projections of costs and

receipts for incremental sales above current levels have often been proved

inaccurate, but generally, future receipts to the Forest Service and local

governments would be greater than budget costs for incremental sales in the

Pacific Northwest region. Benefits would be less than incremental costs in

the Rocky Mountains. 35/

34/ Expanding Softwood Production, p. 66.

35/ Letter from Donald L. Funking, Assistant Director, Timber Management, Forest Service, January 11, 1980.

39

CHAPTER IV. ALTERNATIVE POLICIES

This chapter compares the effects of a continuation of current levels

of timber sales from the National Forests to the effects of three alternative

sale schedules that were designed to make more timber available to the

domestic market. Because the scope of this study is restricted to timber

sales by the Forest Service, the alternatives do not include other policies

affecting private industry, international trade, other public agencies, or

Forest Service programs dealing with nonindustrial private lands. Also

excluded are options that would alter current sale procedures and utilization

requirements for Forest Service harvests, or that would substantially

increase public investment in National Forest timber. Furthermore, the

options do not consider alternatives that would provide tax incentives to

encourage better utilization of harvested timber or to encourage investment

in timber stand improvement. These exclusions do not imply that such

options are unimportant—on the contrary, they could have substantial

effects; they are simply beyond the scope of this study.

The alternatives are compared to a Base Case which represents a

continuation of current sales policy, and are evaluated by the criteria

described in Chapter m. The three alternative sales schedules are:

o Case I—General Expansion: Increase of 1.5 billion board feet a

year over the Base Case.

o Case n—Expansion with Emphasis on the Pacific Northwest:

Increase of 1.5 billion board feet a year over the Base Case.

o Case Id—Intensive Expansion: Increase of 3.0 billion board feet a

year over the Base Case.

The Congressional Budget Office contracted with Data Resources, Inc.

(DRI), to use its FORSIM model to project the likely results of the

alternative sales schedules. The FORSIM model combines DRTs macroeconomic forecasts with a detailed model of the wood product and

pulp/paper industries. The FORSIM model has several advantages for use in

this study. It can incorporate the alternative sales schedules and compute

their effects on production from private land, Canadian production, and

investment in new facilities for each region. It can also calculate regional

stumpage prices, lumber production, and the effect on the Producer Price

Index. The model is described in the Appendix.

41
DESCRIPTION OF ALTERNATIVES

Several assumptions underlie all the alternatives:

o No substantial changes will be made in existing legislation or regulations affecting the Forest Service or the industry.

o The Congress will appropriate sufficient funds to cover the additional costs of preparing and implementing the increased timber

sales.

o Withdrawals of land for wilderness under the Roadless Area Review

and Evaluation process have been incorporated into the inventory

data. It is assumed no additional withdrawals will be made.

Litigation over wilderness is assumed not to delay timber sales or

harvests.

o Total ultimate harvest will be between 2 and 5 percent less than

the amount offered for sale in each year. Timber is harvested on

an average of two and one-half to three years after sale.

o Herbicides will be permitted beyond 200 feet from watercourses in

order to retard hardwood intrusion.

o Neither Canada, Japan, nor the domestic industry will change its

import or export policies.

Base Case

The Base Case represents a continuation of current policies. It

incorporates CBO's judgment of what is reasonable, given no major outside

shocks or changes in Congressional or Administration policy. It assumes

that between 85 and 95 percent of the recommended Resource Planning Act

(RPA) program would be funded, but it does not assume that all timber

offered for sale would be either sold or harvested. If In Table 7, production

by region under the Base Case for calendar years 1985 through 1990 is

compared to that of 1979.

I/ The Resources Planning Act of 1974 directed the Forest Service to

prepare comprehensive analyses of the requirements for an implication

of a variety of alternative program outputs. The RPA program refers

to the recommended harvest levels established in 1975. The Congress

has usually funded about 80 to 90 percent of that program. A new

report with new recommendations will be issued in 1980.

42
TABLE 7. BASE CASE PRODUCTION FROM NATIONAL FORESTS,

1985-1990 COMPARED TO 1979 FOR ALL HARDWOOD AND

SOFTWOOD SAWUMBER HARVEST BY REGION (In billions of

board feet per year)

1979

(Forest Service

estimate)

Base Case

1985 through

1990 (CBO

projection,

annual average)

Hardwood and Softwood

Maximum Sustainable Production

RPA Recommended

15.1

Softwood Saw timber Harvest d/

Rocky Mountain (Regions 1, 2, 4) 1.7

Pacific Northwest (Region 6) 4.5

South (Region 8) 0.9

California (Region 5) 1.8

Alaska & Other (Regions 3, 9, 10) 1.2

Total 10.1

15.1

Sale Level a/

Offered for Sale a/

Total Harvest from Past Sales c/

13.5

12.3 b/

11.5

14.7

13.2

12.3

2.3

4.4

0.7

1.9

1.4

10.7

a/ If fully implemented, the Resources Planning Act recommended program would have 14.75 billion board feet of timber prepared and

offered for sale in 1985. A continuation of current law, however, would

actually lead to somewhat less timber being offered than the original

RPA program recommendation because the Congress has not appropriated funds for the full RPA program.

b/ In fiscal year 1980, approximately 12.2 billion board feet will be

prepared and offered for sale. The President's budget proposes 11.9

billion board feet for fiscal year 1981. Because of this, the Base Case

might be somewhat too high.

£/ Harvests take place on an average of 2.7 years after the sale. The

delay is mostly due to road construction.

d/ Softwood sawtimber is the largest portion of timber sold; however,

some roundwood and hardwood is also sold.
The Base Case reflects CBO's assumptions that the Forest Service

successfully attained its goals for timber sales in 1979 and that increases in

harvests after 1979 will be slow but steady. Under the latter assumption,

production of softwood sawtimber in 1985 through 1990 would be 10.7 billion

board feet per year, 1.3 billion board feet per year more than the average

harvest level since 1970 and 0.6 billion board feet per year more than in

1979. A key assumption is that timber offered for sale in the Rocky

Mountain regions could be sold at appraised prices. Moreover, it is possible

that the Congress will restrict timber sales in Alaska. New regulations,

environmental opposition, and general economic trends might also make this

projected increase in sales and production difficult to attain.

The Base Case might be a slightly optimistic scenario. While it is

considerably below the RPA schedule recommended by the Forest Service, it

does assume that the Service will solve many of its present problems,

particularly with deficit sales, and that most Land and Resource Management Plans will be implemented. Some analysts believe that actual

production will be 0.5 to 1.0 billion board feet lower in 1985 than this

estimate.

Case I—General Expansion

This case would increase sales so that production of softwood sawtimber could increase by 1985 to about 1.5 billion board feet more per year

than in the Base Case (see Table 8). For comparison, the 1985 through 1990

level is 2.1 billion board feet per year over production in 1979* This case

would produce the maximum feasible amount of softwood sawtimber within

all existing constraints—legal, economic, environmental, engineering—and

would probably require fewer departures than would the other cases.

This case represents a balanced expansion—that is, increased sales in

all regions. Tables 8 and 9 compare the Case I production that would result

in 1985 through 1990 to that of 1979 and to that of the other cases. Table 8

shows that all regions (except Alaska and the Northeast) would increase

production as a result of increased sales by at least 0.3 billion board feet per

year over the Base Case.

It is possible that this scenario could not be attained through increased

appropriations alone. The projected sale levels were designed to meet

NDEF restrictions, but some other constraints might occur. It is not clear,

for instance, that sales, particularly in the Rocky Mountains, could be

increased to the projected 1985-1990 level without changes in sale accounting procedures or discount rates.

44
TABLE 8. SOFTWOOD SAWTIMBER PRODUCTION FROM NATIONAL

FORESTS FOR FOUR CASES, 1985-1990 COMPARED TO 1979

BY REGION (In billions of board feet per year) a/ b/

1985-1990

(CBO projection, annual average)

Case H

1979 Case I Expansion Case HI

(Forest Service Base General Emphasizing Intensive

estimate) Case Expansion Pacific NW Expansion

Rocky Mountains

(Regions 1, 2, 4) 1.7 2.3 2.8 2.2 2.9

Pacific Northwest

(Region 6) 4.5 4.4 4.7 6.1 6.1

South (Region 8) 0.9 0.7 1.0 0.5 1.0

California

(Regions) 1.8 1.9 2.2 2.1 2.2

Alaska & Other

(Regions 3, 9, 10) 1.2 1.4 1.5 1.3 1.5

Total 10.1 10.7 12.2 12.2 13.7

These estimates are for harvests that would result from sales of

softwood sawtimber. Total sales increase at rates similar to those of

harvests. These tables do not imply that what is sold in any given year

is also harvested in that year, since harvests actually occur two to

three years after the timber is bought. An increase in sales, however,

leads to an increase in harvests from past sales, all other things being

equal.

b/ These CBO projections were developed as inputs for the DRI FORSIM

model so that it could compute prices, total production, and investment

rates.

45
TABLE 9. TOTAL NATIONAL FOREST PRODUCTION OF SOFTWOOD

SAWTIMBER FOR FOUR CASES, 1980-1990 (In billions of board

feet per year) a/

Case H

Case I Expansion Case HI

Calendar Base General Emphasizing Intensive

Year Case Expansion Pacific NW Expansion

1980 10.1 10.1 10.1 10.1

1981 10.2 10.3 10.3 11.0

1982 10.3 10.7 10.9 12.2

1983 10.5 11.3 11.3 12.8

1984 10.6 11.7 11.7 13.3

1985-1990 10.7 12.2 12.2 13.7

(annual average)

a/ These estimates are for harvests that would result from sales of

softwood sawtimber. Total sales of all material increase at rates

similar to those of harvests. In actual practice, the industry removes

timber in response to market conditions, and so harvests would not

accelerate as smoothly as this table indicates.

Case IE—Expansion with Emphasis on the Pacific Northwest

This case would not only expand sales and production by the same

amount as Case I (1.5 billion board feet per year) but also would respond to

some of the market problems existing in Case L Case n would not rely as

heavily as Case I on Rocky Mountain production. Rather, it would expand

sales in the Pacific Northwest through departures to the non-declining evenflow constraint. The purpose of this case is to provide sales in the area

where sufficient processing capacity and markets exist, and where recent

price increases have been greatest.

Under this alternative, production from National Forests in that region

would increase by 33 percent from 1980 to 1985. This case represents a 10-

year departure of about 25 to 30 percent beyond sustainable yield levels.

Litigation might result because of the balanced development constraints of

the Multiple Use Act, however, this study assumes that such litigation does

not retard the acceleration in sales.

46
Case in—Intensive Expansion

By 1985, this case would expand total National Forest timber sales by

3.0 billion board feet per year over the Base Case. The increase from 1979

levels would be 36 percent. This case has the single purpose of producing

the maximum harvest from all regions that is technically feasible within the

time frame. It would require substantial departures in most regions and

would probably be challenged in court with respect to balanced development

and environmental impact.

EVALUATION OF THE ALTERNATIVES

In this section, the policy alternatives are evaluated in terms of the

three criteria proposed in the previous chapter—price effects, sustainability, and regional effects—as well as several other factors,, such as the

effects on the federal budget, environment, employment, and international

markets. The effects of each alternative are compared to those expected in

the Base Case.

Effects of the Base Case

Price Effects. Under the Base Case assumptions that current policies

and economic conditions will continue, the Producer Price Index for

softwood lumber would increase at an average annual rate of 13.34 percent

for the next 10 years. Prices of plywood and other wood products would

escalate about as fast as lumber. Since 1970, lumber price increases

averaged 14.1 percent annually until late 1979.

The post-1970 trend of increasing demand and constrained supply will

continue to put strong upward pressure on prices. Although housing

construction was declining through 1979, wood product prices remained

roughly constant until the beginning of 1980. Since that time, product

prices have declined rapidly, but stumpage prices have stayed relatively

high. 2/ When the housing market increases its demand for lumber again,

prices are estimated to surge by up to 35 percent per year. 3/

Sustainability. The Base Case is designed so that as little pressure as

possible is put on NDEF or multiple-use constraints. This analysis concludes

that the projected rate of harvest could be sustained without departures.

2/ Random Lengths (March 1980).

3/ Data Resources, Inc. (DRI), unpublished study prepared for CBO

(March 1979).

47
Regional Effects, Under the Base Case, capital investment would

decline in the western regions and increase in the South. In the Pacific

Northwest, direct employment in wood product industries is estimated to

drop from its 1979 level of 162,000 to about 131,000 in 1990. 4/ The annual

decline in asset value of industrial facilities in the Pacific Northwest and

Rocky Mountains will exceed new investment in virtually every year.

Other Considerations. Opposition to continued increased timber sales

from the National Forests has grown in recent years as new sales of old

growth gradually intrude into environmentally sensitive areas, in the Rocky

and Cascade Mountains. Because the Base Case would expand production in

those regions, the potentially adverse effect on the environment might

generate even more intense opposition. Public opposition leads to litigation

which, in turn, delays sales and restricts production. In areas that are

experiencing a decline in private harvests, public support of new sales might

exceed the opposition because of the perceived employment benefits of

increased sales.

Incremental receipts from increases in sales assumed for the Base

Case (600 million board feet per year) are estimated to be less than the

Forest Service's incremental costs because stumpage prices in that region

are relatively low. In 1985, the incremental costs (which are chargeable to

sales in that year) for administration, road construction, and reforestation

would be between $50 and $200 million. Receipts from additional sales

would be about $50 to $100 million. To attain the Base Case production

level in 1985 would require 600 to 700 additional, permanent, full-time

employees of the Forest Service. 5/ Sales under the Base Case would

slightly stimulate employment and increase receipts to county governments

in the Rocky Mountains. In addition, the Base Case could have a small but

stimulative effect on exports and a slight dampening effect on imports from

Canada.

Effects of Alternative Cases

Price Effects. Generally, the greater the increase in sales and

production, the greater the retardation of price escalation. The Producer

4/ DRI, unpublished study.

5/ USD A, Forest Service, Options for Dampening Softwood Timber Products Price Increases, 1978-1990 (draft, May 28, 1978); Enoch Bell,

Expanding Softwood Production, p. 61.

48
Price Index for softwood lumber is projected to increase at an average rate

of 13.34 percent per year from 1979 to 1990 in the Base Case. In the

alternatives, the annual average rates would be 12.64 and 12.83 for Cases I

and n, respectively, and about 12.47 percent for Case m. 6/

It is possible that actual price increases will exceed these estimates

due to a stronger than foreseen reduction in private timber supply. Some

new evidence supports a more pessimistic view of future supply. 7/ In that

case, price increases could rise faster than these estimates, but it is

expected that the differences among the alternative cases would remain

almost the same.

Most of the price effects of accelerated production would not take

effect until the second half of the decade. For example, under Case n a

new house would cost about $85 less in 1982 than it would under the Base

Case. By 1985, however, the difference would be about $650 and by 1990,

the difference would be about $1,400. 8/

The effect on the overall annual increase in the Consumer Price Index

(CPI) would be approximately 0.004 to 0.005 percent per year. If the

average increase in the CPI through 1990 is 7 percent per year voider current

policies, it would be lowered to 6.996 percent per year under Cases I and n,

and to about 6.995 percent per year under Case EL

Sustainability. Because of land withdrawals and restrictions under the

new Land and Resource Management plans, it is doubtful whether the

National Forests could sustain the increases in sales of any of the alternatives. Case I was designed to increase production in those regions that now

have some surplus allowable sale quantity. But it appears that the surplus is

too small to support increased sales unless the departure provisions are used.

Case n is designed to exceed sustainable levels in the Pacific Northwest

6/ DRI, unpublished study.

7/ Forest Industry Council, Forest Productivity Project, Forest Productivity Reports (1979).

8/ The comparisons are based on a new house that costs $65,000 in 1979,

assuming that $9,100 (14 percent) of the cost is wood products, and

that the amount of wood products in future new construction is the

same as it is today. By 1985, the cost of wood products in that house

would be $22,825 under the Base Case, and $22,175 under Case IL The

cost of the house, however, would be about $124,365 assuming that

1970-1978 inflation rates continue. The savings from changes in

timber policy would be approximately 0.5 to 1.0 percent of the

purchase price of the house.

49
region by over 1 billion board feet per year. This would require very large

departures on virtually all Pacific Northwest forests. Case n might require

new legislation because of the extent of sale increase. Case IE would

exceed sustainable levels in most regions.

It is not clear whether departures would be "one-time occurrences"

and would thereby lead to sale increases for only 10 years, or whether

departures could be successive. It is likely that the National Forest total

sale levels will decline after the first decade of departures.

Regional Employment. Three regional trends are expected to reoccur

in the wood products industry as soon as the housing market recovers:

o Production of wood products in the South will increase, while

remaining constant or decreasing in other regions.

o Capital investment will increase in the South, but decrease in the

Pacific Northwest.

o As productivity increases, total employment is projected to

decrease, particularly in the Pacific Northwest.

None of the alternatives would reverse any of these trends, but they

could affect them to a limited degree. In the short run, employment in the

wood products industry in the Rocky Mountains is expected to remain either

stable or decline slightly under the Base Case. Employment in the Pacific

Northwest is not expected to recover to 1979 levels. Implementation of

Case I would stimulate the economy of the Rocky Mountain region, and Case

n would support employment in the Pacific Northwest for a short period. By

about 1989, however, the decline in private sector production in the Pacific

Northwest and moderate increases in productivity would cause employment

to fall below 1979 levels in all cases.

By 1990, under the Base Case, employment in the Pacific Northwest is

expected to be between 19 and 28 percent below 1979 levels. Cases n or HI

would increase production from the National Forests in the Pacific Northwest, but because the industry is expected to shift some production from its

own land toward National Forest land, the increase in National Forest sales

will be eroded by almost 50 percent. As a result, total 1990 production in

that region will probably be less than that in 1979. 9/

In the longer term, a great deal depends on whether private harvests

decline moderately or severely. If the decline is moderate, by 1990, total

97 CBO estimates based on data from DRI, unpublished study.

50
Pacific Northwest employment in the wood products industry under Cases n

and HI is estimated to be 13 percent lower than its 1979 level of 162,000. If

the decline of private harvests is severe, and particularly if the departures

are not sustained through 1990, Pacific Northwest employment could be 27

percent lower than 1979 levels (see Table 10). 10/

This analysis estimates effects only as far as 1990. Since most

departures would probably last for 10 years and many might be one-time

occurrences, production from National Forests could decline as the departures terminate soon after 1990. Under alternative scenarios, an increase in

sales from departure could be apportioned over six to eight years instead of

the full decade in order to respond with more flexibility to national demands

for wood products in the short term. Those scenarios are exhibited in

Table 10 under the heading of "Cases n or HI: Temporary Increase in

National Forest Production."

Any decision to expand National Forest sales in the Pacific Northwest

should consider two uncertainties: whether private production will decline

rapidly or slowly, and whether the expanded sales planned under departure

will lead to proportionate increases in harvests. No data exist to resolve the

first uncertainty, and only some evidence is applicable to the second. For a

number of practical reasons the Forest Service often falls short of its sale

target, and the backlog of timber that has been sold but remains uncut

increased by about 40 percent between 1974 and 1979. ll/ Also, the Service

seems consistently more optimistic about goals than subsequent performance warrants. 12/ Accordingly, one should not assume that the goals of

Cases n or HI can necessarily be attained or, more importantly, maintained.

A major concern for the Pacific Northwest is that production from

private forests will decline substantially during the next 15 years. To add to

the uncertainty, some feel that employment per thousand board feet may

decline faster than that assumed in Table 10 because of increases in

productivity. On the other hand, as timber harvesters shift to the smaller

Ibid.

ll/ Written testimony prepared in response to questions from the Committee on Agriculture, Nutrition and Forestry, U.S. Senate (February 21,

1980).

12/ Roger Fight and Enoch Bell, Coping with Uncertainty, A Conceptual

Approach for Timber Management Planning, USD A, Forest Service

Technical Report PNW-59 (1977).

51
TABLE 10. PRODUCTION AND EMPLOYMENT IN THE PACIFIC NORTHWEST IN 1990

UNDER DIFFERENT SCENARIOS a/

National Forest Private

Production Production Decline

(billions of (billions of Total from

board feet board feet Employment 1979 Levels

Harvest Level per year) per year)b/ (thousands) (thousands)

Base Case National Forest

Production (with Moderate

Decline in Private Harvests) 4.4 8.9 131 31

Base Case National Forest

Production (with Severe

Decline in Private Harvests) 4.4 7.5 117 45

Cases n or HI: Sustained Increase

in National Forest Production

(with Moderate Decline in

Private Harvests) 6.1 8.2 141 21

Cases n or HI: Sustained Increase

in National Forest Production

(with Severe Decline in

Private Harvests) 6.1 6.8 127 35

Cases n or El: Temporary Increase

in National Forest Production

(with Moderate Decline in

Private Harvests) 4.7 8.7 130 32

Cases n or IQ: Temporary Increase

in National Forest Production

(with Severe Decline in

Private Harvests) 4.7 7.3 118 44

a/ CBO estimates, based on data from DRI, unpublished study.

b/ Private production in 1979 in the Pacific Northwest was about 10.4 billion board feet. A

moderate decline is assumed to be about 14 percent by 1990. A severe decline is assumed

to be a decline of 28 percent by 1990.

52
logs of second-growth forests, employment in the woods and in processing

might increase. If the decline in private production is substantial, then the

short-term increases of Case n or Case in could be risky because they would

consume whatever incremental buffer or margin the Forest Service could

provide to compensate for the private decline. Under Cases n or HI,

employment would increase to about 170,000 for two to four years and then

decline rapidly to between 115,000 and 145,000. The decline per year under

Cases n or IE could be about twice that of the Base Case. The rate of

change of employment is in some economic and social respects more

important than the level.

This study cannot determine which of the scenarios in Table 10 is the

most probable. It is plausible that the Pacific Northwest economy could be

healthy in 1990 even if the worst alternative in Table 10 happens, because

other factors could compensate for the effects evaluated in this study. On

the other hand, there is a substantial risk that employment might decline

severely. If one believes that this risk should be minimized and that

departures provide one method to stimulate employment, then departures

might be more useful in the future when the need might be greater.

Other Considerations. Expanded timber sales adversely affect the

environment to some degree. By this standard, any of the alternatives

would be inferior to the Base Case. The Forest Service has concluded that

environmental effects could be controlled by specifying the type of harvest

technique or investment level. 13/ If investment levels could be increased

substantially, adverse effects could be minimized. Otherwise, the major

effects associated with any of the alternatives would be degraded water

quality, additional stress on threatened or endangered species, and scenic

attractiveness. Case I, which encourages production in the Rocky Mountains, would, according to Forest Service studies, adversely affect soil

productivity and big game habitat as well. Case n would degrade air quality

and fish habitats in the Pacific Northwest. And Case HI would produce

problems in both regions. 14/

All the alternatives would require budget and manpower increases in

comparison to the Base Case. Generally, costs per incremental board foot

to prepare and manage sale programs are high in the Rocky Mountains,

Alaska, and the Sierras. They are relatively lower in the Pacific Northwest

13/ USD A, Forest Service, Timber Harvest Scheduling Issues Study

(October 1976).

14/ Enoch Bell, Expanding Softwood Production, USD A, Forest Service,

p. 34.

53
(on the western side of the Cascades), and the South. Receipts for sales are

highest in California and the Pacific Northwest and low in sections of the

Rockies, Alaska, and the South. It follows, therefore, that Case I, which

depends on increased Rocky Mountain production, would have a poor

receipt-to-cost ratio. Case It would have a relatively good ratio because it

focuses on production from the Pacific Northwest. The ratio for Case HI

would be relatively poor because of the large increase and high marginal

costs. It should be noted that if sale procedures and accounting systems are

altered, these effects would change substantially.

Projections of budgetary costs are controversial because of the budget

accounting system used. Small production increases in the Pacific Northwest would be inexpensive and very cost-effective, but further increases

would involve higher costs as more timber was sold in areas in which new

road construction was necessary. In Case I, costs above the Base Case

would probably be between $120 and $415 million per year, with incremental

receipts of about $150 to $225 million. 15/ Costs of Case II would be

somewhat lower than those of Case I, but incremental receipts would

probably be greater. Case HI would probably not be cost-effective overall

because the increased costs in the Rocky Mountains would be larger than the

incremental receipts in the Pacific Northwest.

The Forest Service has not made projections of costs and receipts for

increases in sales of the scale used in this study, and extrapolations from

their data for small increases is hazardous. Neither budgetary costs nor sale

receipts tend to increase proportionately to sale increases. Budget costs

escalate faster than sales, and sale receipts increase more slowly. A linear

extrapolation, however, would indicate that the annual cost/benefit ratio for

Case I would be about 0.4 to 0.6; for Case n, about 1.3 to 1.6; and for Case

HI, about 0.7 to 1.0. 16/ Generally, as sales increase, and stumpage prices

decrease, receipts per unit will fall even as costs are increasing.

The additional Forest Service manpower needed to support the expansions would be roughly 1,400 to 3,000 for Cases I and H and 2,500 to 6,000

for Case m. 17/

15/ USDA,, Forest Service, Options for Dampening Softwood Timber Products Price Increases, p. 28.

16/ Correspondence from Donald Funking, Assistant Director, Timber

Management, Forest Service, January 11, 1980.

17/ USDA, Forest Service, Options for Dampening Softwood Timber Products Price Increases, p. 28.

54
Any increase in timber sales would slightly affect imports and exports.

The net effect on the balance of payments would be positive. Imports from

Canada would decline under Cases I and n by about 200 million board feet

per year by 1990. Under Case m, imports would decline by almost 600

million board feet per year. 18/ Exports could be indirectly stimulated to a

very slight degree.

SUMMARY

The analysis of the options leads to the conclusion that even large

increases in sales by the Forest Service would have relatively modest

effects on price escalation. The small effect on prices would be caused in

large part by the substitution by private owners of public timber for their

own stocks. The projected increases would exceed sustainable levels and

would require a departure from non-declining even-flow guidelines. Case n,

which relies upon an accelerated production in the Pacific Northwest, might

be superior to the other alternatives. It does, however, carry the risk that

near-term increases could preclude longer-term action to compensate for a

decline in private harvests. A general expansion (Case I) would be costly in

an economic sense and would be likely to cause environmental problems in

the Rocky Mountain regions. Those who feel that the retardation of price

escalation is not worth the risks to the resources and to the economy of the

Pacific Northwest might prefer a continuation of current policies to the

alternatives.

18/ DRI, unpublished study.

55

APPENDIX

APPENDIX. PRICE PROJECTIONS

This Appendix provides technical information on the price projections

made in this paper. The Congressional Budget Office contracted with Data

Resources, Inc., (DRI) to use its FORSIM model of the wood products

industry so that the projections for the different cases would be internally

consistent and would be linked with current macroeconomic conditions.

The FORSIM model is generally considered to be the most a reputable

and reliable predictor of market conditions that is available. It is widely

used by the industry. It was judged by the Congressional Budget Office to

be more than adequate and valid for the purposes of this analysis. The

Council on Wage and Price Stability used the FORSIM model for its study of

lumber prices. I/

The Congressional Budget Office requested that DRI supplement

FORSIM with a model of stumpage prices called the Timber Assessment

Market Model that was developed for the Forest Service. 2/ This Appendix

describes the FORSIM model, explains how CBO and DRI used it and the

Haynes/Adams model to project prices and investment, and summarizes the

results.

THE FORSIM MODEL

The model is designed primarily to estimate future prices of lumber

and plywood, as a result of projected market demand for wood products and

timber availability. Generally, the model manipulates the demand and

supply inputs in order to compute prices and regional effects. Secondarily,

the model projects shipments of products and new mill capacity. The model

assumes that most demand for products is derived from other demands, such

as housing and industrial products. As a result, short-run demand is not

greatly affected by changes in prices. In the longer run, demand responds to

prices with an elasticity of about -0.2.

I/ Council on Wage and Price Stability, Lumber Prices and the Lumber

Products Industry (October 1977).

2J Darius Adams and Richard Haynes, 1980 The Timber Assessment

Market Model, Forest Science Monograph (in press).

59
DRI establishes a future estimate for demand for lumber and plywood

through its macroeconomic model. That model generates housing starts by

type and region, expenditures on repairs, nonresidential building, industrial

production, index of furniture and fixtures, and the AAA corporate bond

rate. These data become inputs for the FOR SIM model. The aggregated

inputs used in this study for 1979, 1985, and 1990 are shown in Table A-l.

The other major input to the FOR SIM model is regional timber

availability and log supply. In typical studies for industrial clients, DRI

assumes a level of supply and runs the model until supply and demand

balance. But in this study, CBO asked DRI to adjust this procedure by

assuming three alternative sale schedules for National Forest timber. A

summary of the alternative sale schedules and the resultant production from

National Forests appears in Tables 7, 8, and 9 of this paper. Because the

National Forests provide only 22 to 25 percent of total domestic supply,

CBO wanted DRI to estimate the level of production from private land and

stumpage prices as a result of the alternative National Forest production

levels. DRI used the Timber Assessment Market Model to compute some of

the effects on timber production from private land, on lumber imports, and

on prices as a result of the alternative National Forest sales.

The FORSIM model includes various "use factors" to translate end-use

demand for various goods into projected consumption of wood products.

Similarly, it forecasts industry production of wood products through its data

on regional mill capacity and production costs. It then merges supply and

demand and computes dealer inventories, mill inventories, imports, exports,

and the backlog of unfilled orders. Through these factors, the model

computes prices of end products, regional production levels, and employment, and then reiterates in order to adjust timber supply and

imports/exports. Through the reiterative process, it frees mill capacity

constraints and thereby develops estimates of new investment in mill

capacity.

IMPLEMENTATION OF THE MODELS

The analysis first determined how stumpage prices and private supply

in each of the three major timber regions would be affected by increases in

the harvest of timber from the National Forests. DRI used the data on

public harvests provided by CBO and the equations and elasticities from the

Haynes-Adams model to calculate these effects. Four simulations were run,

corresponding to the Base Case and three alternatives considered in this

paper. These simulations established stumpage prices and production levels

by region.

60
TABLE A-l. U.S. INDICATORS OF DEMAND FOR LUMBER AND PLYWOOD, 1979, 1985, AND 1990

Total Housing Starts

(in millions of units)

Single-Family Housing Starts

(in millions of units)

Repairs and Alterations

(in millions of current dollars)

Nonresidential Building Contracts

(in millions of current dollars)

Industrial Production Index

(1967=100)

Furniture and Fixtures Index

(1967=100)

Yield, AAA Corporate Bond

1979

1.95

1.15

36.55

41.65

149.60

1.62

9.40

1985

2.44

1.37

65.02

79.04

202.30

2.20

9.50

1990

1.85

1.05

105.32

122.00

231.30

2.52

8.80

(percent)

SOURCE: DRI Macroeconomic Model, March 1979.

These data on supply were then inserted into the quarterly and annual

Lumber Product Models of FORSIM in order to assess the effects on prices

of wood products by region and for the nation as a whole. The next step in

the analysis was to estimate the regional microeconomic effects on the

lumber industry resulting from increased timber harvests from the National

Forests. The different regions would experience varying market conditions

as a result of the scenarios, and the model translated these into capacity

ratios and profitability. These in turn were used to project new investment

in mill capacity and employment by year for each region.

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SUMMARY OF RESULTS

Through the beginning of 1990, the demand for softwood lumber would

be relatively inelastic with respect to prices. Although in Case I lumber

prices were 5 percent lower than in the Base Case, demand increased by

only 1 percent. Because regional demand also would be inelastic, an

expanded supply of stumpage in one region could lead to increased mill

capacity only if the share of that region's national market could expand. If

that share could not expand, industry would have little incentive to expand

mill capacity, and constraints on mill capacity would affect the level of

timber harvested from private land.

For example, lumber from the Pacific Northwest provides a share of

the lumber consumed in the Midwest. If public timber sales in the Pacific

Northwest provided increased supply but if the products from that increment did not penetrate the midwestern market, then industry in the Pacific

Northwest would have little incentive to increase processing capacity. It

would instead use more public timber and less private timber. Stumpage

prices in that region would fall, but product prices would not fall proportionally.

This study found that increased sales of public timber in both the

Rocky Mountains and the Pacific Northwest would reduce stumpage prices.

Harvests of public timber would increase, but harvesting of private stock

would decline in all cases. The lower timber costs in certain regions could

affect product prices on a proportional basis if regional market shares could

be increased. This study, however, found that lower product prices from

mills in one region would be matched by changes in prices of imports and of

products from the South. The South is able to reduce product costs (as it did

in 1974-1975, and might be doing at this time) because its open market

stumpage prices are very sensitive to small changes in demand and to

pressures by mill owners to reduce costs. Because the South has demonstrated ability to match price reductions in other regions, the study

concluded that rather large changes in stumpage prices in the Pacific

Northwest or Rocky Mountains as a result of National Forest timber sales

would have less than proportional effects on product prices, and market

shares, and therefore would lead to rather small effects on regional mill

capacity, production, and employment.

For example, the study estimates that in the Pacific Northwest mill

closures would outweigh new investment in capacity by an aggregate value

of $1.24 billion through 1990 under the Base Case, and by $0.93 billion under

Case I. If National Forest sales of timber in the Pacific Northwest were

increased by 1.7 billion board feet as in Case n, aggregate new investment

62
in capacity would outweigh closures by $120 million through 1990. These

projections strongly indicate that the trend of new investment capacity

toward the South and away from other regions is not likely to be reversed by

the level of changes in National Forest timber sales that are evaluated.in

this study, and that the ability of the South to maintain regional shares

would constrain the price effects of these policies.

If regional timber sales in Case H were 1.7 billion board feet over sales

under the Base Case, FORSIM projects that the difference in sawmill

capacity in 1990 in the Pacific Northwest would be 0.8 billion board feet.

Production under Case n would exceed that of 1979 by 0.5 billion board feet,

however employment in lumber mills would decline from their present level

of 23,600. Employment in lumber mills in the Pacific Northwest would be

20,900 workers in Case n and 19,400 workers in the Base Case. It is clear

that much of the increase in public timber sales would be absorbed by

decreases in private harvests. As a result, the price effect is estimated to

be smaller than it would be if private harvests were maintained.

A summary of selected results appears in Table A-2.

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TABLE A-2. COMPARISON OF 1979 AND 1990

1990

Base Case Case Case

1979 Case I H IE

Sawmill Capacity and

Production (in billions

of board feet)

Northwest

Capacity 9.4 8.7 8.8 9-5 9-3

Production 8.5 8.3 8.4 9.0 9.0

Rocky Mountains

Capacity 10.6 11.2 11.4 11.1 11.3

Production 9.6 10.7 10.8 10.5 10.9

South

Capacity 9.0 9.8 10.0 9.7 9.9

Production 8.2 9.4 9.5 9.3 9.5

Canada

Capacity 18.5 22.3 22.4 22.0 21.6

Production 16.8 22.0 22.0 21.8 21.5

Producer Price Index for

Lumber 3.528 13.988 13.066 13.311 12.851

Average annual rate of

increase (percent) — 13.34 12.64 12.83 12.47

Stumpage Costs (dollars per

thousand board feet)

Northwest

Rocky Mountains

South

252

95

113

573

223

387

530

192

373

450

208

382

424

176

373

SOURCE: DRI FORSIM Model, March 1979. The FORSIM results for

1989 were extrapolated by CBO for 1990.

o

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