Timber Industry Cautiously Optimistic

Editor’s note: This article appears in the latest magazine edition of Talk Business & Politics, which you can access online here. 

Although it has been nearly seven years since the end of the Great Recession, the state’s once-thriving timber and forestry sector is still mending from the once-in-a-generation downturn that nearly brought every segment of the industry to its knees.

But slowly and surely, there seems to be a quiet confidence that the bellwether industry and top economic engine for South Arkansas has finally turned the corner toward recovery after several false starts following the most severe economic downturn in nearly 80 years.

“If there was a way to describe what people are feeling, I would say we are ‘cautiously optimistic,’” said Max Braswell, executive vice president of the Arkansas Forestry Association (AFA). “We feel like there are basic economic indicators out there that would lead us to believe that 2015 has a generally favorable outlook for the forestry community. But we certainly don’t want to get ahead of ourselves in any shape or form.”

Braswell says that the current cautious attitude will likely remain for a while because of fresh memories of the past several years, when good news on any front was hard to find. The AFA executive, whose association represents the entire spectrum of the broad forestry and timber industries, said Arkansas was especially hard-hit between 2007 and 2012 and will likely never see those pre-recession record levels of employment and robust economic activity again.

He also admits that in 2012 and 2013 – when U.S. housing stocks topped the ideal “1 million housing” level but quickly lost momentum and fell back to nearly 500,000 – the industry may have been overly influenced by rosy forecasts.

“Because of that period when things were as bad as they’ve ever been, we’ve had no direction to go but up,” he said. “Certainly, we have seen improvement because much of our industry is tied to housing, and we have seen some gains there, but they kind of fell flat and lost steam.”

UNPRECEDENTED IMPACT
The major reason for that, according to University of Tennessee economist Donald Hodges, is because no segment of the southern forestry industry was left untouched from the onslaught of the Great Recession, particularly those sectors most closely related to home construction.

According to the U.S. Census Bureau, new home construction as measured by single-family housing starts dropped to just 0.45 million in 2009, 74% below the record 1.72 million starts of 2005. But unlike other sectors of the recovery that were starting to improve, housing starts did not recover after the recession ended, remaining at 0.47 million in 2010, 0.43 million in 2011 and 0.54 million by August 2012, even though real U.S. GDP had fully recovered to pre-recession levels by 2011.

In a study called “Recession Effects on the Forest and Forest Products Industries of the South,” Hodges looked at the effects of the recession on the southern U.S. by reviewing existing data related to economic and resource impacts, including employment, timber product output, production facilities, state economies, exports, and forest area and management activities.

And what he found was astounding. Between 2004 and 2009, the South’s forest sector’s direct contribution to the regional economies decreased by 24% between 2004 and 2009 as a result of the downturn.

Given the importance of the region in providing and processing the raw materials for wood and paper products, Hodges said understanding the effects of the recent recession on the forests and forest-based industries of the southern United States was critical.

RECORD-LOW PAYROLLS
By far, Hodges said, the most influential part of the recession for the forest products sector was the collapse of U.S. housing construction, which fell by more than 75% between 2005 and 2009. “This resulted in significant losses for many sectors of the southern forest products industry, most notably wood manufacturing and housing-dependent industries such as millwork and cabinetry,” he said.

In Arkansas, the economic impact to the state’s forestry and timber industry in South Arkansas was palpable. For instance, the number of construction jobs across Arkansas between 2006 and 2013 declined by 20.2% from 56,960 to 45,477. In the all-important residential building sector, employment levels fell even more dramatically from 4,691 workers in 2006 to 2,761 in 2013, a slide of 41% over seven years.

And with fewer homes being built across the state, Arkansas loggers and sawmills also saw post-recession payrolls fall to record lows. For example, the number of Arkansas workers employed in the forestry and logging sector and supporting activities peaked at 3,843 jobs in 2006, statistics from the Arkansas Department of Workforce Services show. By 2013, that number had dropped 21% to just over 3,000 workers.

EVERY SECTOR AFFECTED
Overall, nearly one-sixth of all blue-collar jobs in Arkansas – just over 43,000 – were tied to forest product harvesting and manufacturing before the recession. There were also 2,500 companies in the forest product business, and they supported $1.2 billion in payroll, the largest of any manufacturing sector, state employment numbers show.

Additionally, of the two and a half million acres of forestland, private landowners owned 58%, timber manufacturing firms owned 25% and the public owned 17%, largely as national forest. But by the time the recession officially ended in June 2009, every sector had encountered ill-effects of the unrelenting downturn.

For example, Georgia-Pacific announced the indefinite suspension of production and the layoff of about 700 workers in its Crossett plants in 2011. Later that year, the Arkansas Forestry Commission furloughed 36 workers due to budget shortfalls tied to declining timber sales.

In another area, family-owned Anthony Forest Products Co. of El Dorado announced in the fall of 2010 that it was closing one of its plants following a fire at the company’s sawmill facility in Atlanta, Texas.

“After extensive due diligence, there were two major problems,” Aubra Anthony Jr. said of the sawmill closing. “First, the exceptional risk of the continuing weak demand for lumber for homebuilding, and second, the daunting financial risk of proposed new Environmental Protection Agency regulations related to industry boilers using wood waste for fuel.”

In a company news release, Anthony expressed how difficult the decision was to cut those 78 jobs from the El Dorado sawmill operator’s payroll for the first time in the company’s storied history – which goes back to 1916.

“This [was] a sad day for us, our family of employees, our business partners and the community of Atlanta, Texas,” said Anthony, who sits on the AFA board.

But Anthony’s story could have been the headline at any local newspaper across South Arkansas between 2007 and 2012, Braswell said. Since 2009, thousands of Arkansans in South Arkansas communities that depend on the industry’s economic vitality have been laid off. Altogether, there are currently nearly 28,000 jobs in the forestry industry with payrolls of $1.36 billion annually, according to the AFA. That represents a total loss of more than 12,000 jobs in the past decade, state employment statistics show.

EXPECTATIONS FOR CONSTRUCTION
Despite those depressing numbers, Braswell’s “cautiously optimistic” assessment is not uncommon today. In late January, University of Arkansas economist Kathy Deck offered some good news and hope for the industry when she gave the state forecast at the 21st annual Business Forecast Luncheon in Rogers.

Deck, director of UA’s Center for Business and Economic Research, told nearly 1,000 business leaders and executives that construction industry employment between November 2013 and the same period of 2014 had outpaced all other sectors with growth of nearly 9%.

And just as surprising was the fact that the mining and logging sector was the second-fasting growing sector with job growth of nearly 4.1% year-over-year.

“Construction continues to be brisk at both the public and private level,” Deck said, adding that the industry was “on fire” compared to the past several years. However, Deck warned that industry leaders should pay close attention to the same overbuilding woes that caused a supply glut in the years ahead of the recession.

Meanwhile, several corporate-owned certified family forest owners that operate in Arkansas have also expressed hope that housing markets are rebounding and key industry sectors are stabilizing.

In a fourth quarter conference call with analysts, Potlatch CEO Michael Covey said the nation’s ninth-largest lumber producer expects housing markets gains from last year to continue well into 2015, thus improving the company’s short-term outlook.

“In 2015, we expect about 1.1 million total housing starts and anticipate that lumber prices and log prices will be modestly higher than 2014 with some bumps along the way due to weather, inventory levels, currency and other factors,” Covey said.

Potlatch is a Real Estate Investment Trust (REIT) with nearly 1.6 million acres of timberland in Alabama, Arkansas, Idaho, Minnesota and Mississippi. Currently, the Spokane, Wash.-based trust owns nearly 410,000 acres of forestland in Arkansas. Timber harvested in Arkansas is sold to the Potlatch mill in Warren, and to other area lumber and paper manufacturers, company officials said.

PRICING EXPECTED TO STRENGTHEN
Plum Creek Timber Co. also offered a similar outlook for 2015. In the company’s fourth-quarter earnings release, the Seattle-based REIT said it expects U.S. residential construction activity to grow at a measured pace during 2015, resulting in approximately 1.1 million to 1.2 million housing starts.

Although Plum Creek’s timber prices improved in each of its operating regions during 2014, the timberland owner believes the improvements in the South represent only the early stages of recovery in the region. Currently, Plum Creek is one of Arkansas’ largest private landowners with 714,000 acres of forestland in 23 counties.

“We believe pricing is expected to strengthen as housing starts move above the 1.2 million starts level,” said Plum Creek CEO Rick Holley, who gave back his $2 million stock bonus in December because he said shareholders did not receive a return on their investments.

Closer to home, El Dorado-based Deltic Timber is also hoping for a turnaround in 2015. In the previous quarter, CEO Ray Dillon offered a nuanced picture of the company’s real estate, a key indicator for the strength of the Central Arkansas housing market.

“Residential lot sales are projected at 15 to 35 and 60 to 80 lots for the fourth quarter and year of 2014, respectively,” Dillon said. “Commercial acreage in Chenal Valley continues to receive interest from potential buyers, but due to the volatile nature of commercial real estate transactions and the significant number of factors related to any sale, it is difficult to anticipate future closings.”

EQUIPMENT EXPENSES
Meanwhile, Larry Boccarossa, executive director of Arkansas Timber Producers Association (ATPA), said he is hopeful that the larger industry players like Deltic Timber, Plum Creek and Georgia Pacific start ramping up capital spending again so independent producers and loggers can get back to work.

“I represent the producers, logging contractors and small independent guys who hung in there after the [recession], and are now looking for long-term work that will help them pay for their equipment investments,” Boccarossa said.

He added that the key issue for the small producers and loggers with crews of five to 10 workers is paying for the expensive equipment used to cut and harvest timber for private landowners. In the previous legislative session, Arkansas lawmakers extended a tax break beyond the first $50,000 of the purchase price of equipment if the business owner’s primary activity is harvesting timber. Now, the exemption eliminates the sales tax in full.

Boccarossa said his organization is preparing for its annual expo in June and that excitement is building about new equipment that John Deere and manufacturers will showcase at the Hot Springs event. His said the expo will also be a chance to get a feel for how the industry is doing across the board and, hopefully, for independent loggers and producers to sign some long-term deals.

“We are optimistic that things are going to get better,” the ATPA executive director said. “I see some signs we are finally starting to come around.”