Before I get into my topic this evening, I want to thank Bill McKillop, John Helms, Dennis Teeguarden and others who decided to invite Simpson to provide the 1990 S. J. Hall Lecture in Industrial Forestry.
The year 1990 is special to Simpson since we at Simpson are celebrating our centennial. By being here tonight, those of you who wish may, in your own way, join Simpson in its centennial celebration. I doubt that Simpson's centennial was even noted when your committee asked Simpson to provide tonight's lecture, but I've decided to use the occasion as one of my themes for this evening. Two other themes I want to discuss tonight are the impacts the Environmental Movement is having on forest management and the economics of timber production.
I've been actively involved in industrial forest management for over twenty-two years and know personally seventeen of my 21 predecessors who have shared the honor of presenting the annual S. J. Hall Lecture. I never knew the late Mr. Hall, but I share his belief that economic understanding is basic to effective forestry. I hope my comments tonight will contribute to achieving the objective Mr. Hall had in mind when he established the Forest Economics Foundation here in Berkeley twenty-five years ago.
Economics applied to forestry has been one of my central interests since I was an undergraduate forestry student. I have devoted much of my career, with mixed success, to trying to further the understanding and application of economics to forestry. As I will discuss later, forestry in the United States and around the world has been severely handicapped by a professional mind-set that almost universally rejects conventional economic principles for determining how forests should be used and managed. Many of the problems we are dealing with today are caused by this professional mind-set, and our responses to these problems are conditioned by this mindset.
I never fully appreciated this as a graduate student in forest economics. My graduate advisor refused to teach forest economics to his graduate students. Instead, he insisted that his graduate students learn economics from the economics department, starting at the sophomore level. My graduate advisor maintained the forest economics literature was too garbled and too full of errors to be useful. I responded that a graduate student in forest economics ought to be conversant with the literature, errors and all, and requested he have a reading course to review and critique the literature. He still refused, saying it would take me and my fellow students two to three years to really master price theory. Then, he said, we could skim through the forest economics literature some weekend and would realize how bad it was. He was wrong on one point. It took me two years, rather than two days, after I had left graduate school to read most of the forest economics literature and reach the same conclusion.
Today, timber management and private property rights are under assault, not just here in California, but throughout the United States and many other countries. Cattle ranchers, farmers, real estate developers, the chemical industry, mining and the oil industry, among others, are also under assault, but the anti-economics forestry mind-set has made the forestry profession more vulnerable to this assault. Too few forestry leaders are prepared or willing to explain and defend what they are doing from a free market property rights perspective. Our country seems willing to go to war over oil supply, while far bigger declines in timber supply are frequently proposed by the press, the politicians, and public timber managers.
The Environmental Movement has developed a momentum that, like it or not, is profoundly affecting the way Simpson and other forest management organizations can continue to do business. It is ironic that this movement seems to have reached its peak as a threat to private property rights and free market capitalism here in the United States at the same time that many countries in Eastern Europe and throughout the developing world have decided that socialism and other forms of statism don't work and are attempting to develop their own free market economies.
It's no accident, I believe, that socialism and forestry started in Germany. Since before Roman times, Germanic culture has embraced collective institutions such as tribal, or collective, ownership of property, subordinating individual rights to those of the tribe or some larger entity, and concentrating planning and economic controls in a centralized authority. Only since World War II has West Germany embraced capitalism in a manner that has lead to its preeminent economic position in Europe. Prior to World War II, Germanic law with its collective tribal origins contrasted sharply with Roman law and its focus on private property. The private property basis of Roman law, incidentally, took root in England during the Roman occupation, and was a major factor contributing to England's leading position during the Industrial Revolution. Since World War II, England and Germany went in different directions until Margaret Thatcher took some strong steps to privatize a lot of state industries to try to cure the "English Disease" caused by the stifling disincentives of a socialistic welfare state.
I hope you don't think I've already strayed too far from forestry and forestry economics. I've been trying to set the stage for asserting that the forestry profession begun in Germany and later adopted in the United States and around the world was founded on a rejection of private property rights and free markets for the perpetuation of timber supplies. The widespread, erroneous belief that government ownership or regulation of forests was necessary for long-term timber production lead directly to the forestry institutions we have today that make timber management so vulnerable to the Environmental Movement. Let's return to this later.
First, a little history about Simpson and how it has survived, grown and prospered for a whole century. Simpson was founded by Sol Simpson as S. G. Simpson and Company at Shelton, Washington, in 1890, only one year after Washington had become a state. Sol Simpson started his business as a contractor building grades for logging railroads to tap the immense virgin forests West of Shelton. Simpson soon became a logger, introducing horses as well as railroading to an industry that had depended primarily on oxen for its locomotive power. The Simpson Logging Company, including a subsidiary railway company, was incorporated in 1895. Land with timber read to harvest was acquired and logged with the logs sold to sawmills around Puget Sound.
Simpson is one of the few survivors in the industry from those days. Simpson stayed in the industry by deciding to retain its timberlands after they were logged. In fact, much of Simpson's current forest ownership was acquired from others after it was logged.
Some of Simpson's early competitors didn't disappear, but chose to reinvest in other industries. The Boeing Company and the Vance Company, for example, both began their corporate lives in the timber industry, before using their accumulated capital to invest in airplanes and hotels. More trees were one of the last things needed in Washington State a century ago to develop its economy. The departure of other companies made room for Simpson to grow. Simpson's decision to stay in timber has lead to the fourth generation of family ownership. Simpson currently owns more than 765,000 acres of timberland in California, Oregon and Washington, and employs about 8,000 people.
Simpson has grown from a small, regional company into a large, globally oriented enterprise through a long series of acquisitions. Simpson began lumber manufacture in Shelton, Washington, in 1925 and remained focused around Shelton until 1945. It entered the door and plywood businesses in 1941 and 1943, respectively, through acquisitions in the Shelton area. In 1946, Simpson and the U. S. Forest Service entered into a unique 100-year Agreement which formed the Shelton Cooperative Sustained Yield Unit. Simpson pooled 159,000 acres of its land with 111,000 acres of Forest Service land to be managed cooperatively. Over the years Simpson has increased its land in the Unit to 250,000 acres since land acquired within the original Unit boundary automatically becomes part of the Unit. The Forest Service has held its acreage within the Unit constant, but has made some very significant reductions in its commitment to timber management. Less than 65,000 acres, or 58%, are designated for primary timber management under the new Olympic National Forest plan released in August of this year. Harvesting has shifted from mostly Forest Service lands in the early decade of the Agreement to mostly Simpson lands during the past decade. Simpson currently operates three sawmills, one door plant, a plywood plant and a pulp and paper mill in Washington as part of its forest products businesses.
In 1945, Simpson made its first acquisition in the Redwood Region of California with the purchase of Requa Timber Company. This was followed by numerous other acquisitions. The major acquisitions were the Coast Redwood Company, in 1948, Northern Redwood Company, M & M Wood Working Company, Sage Land and Lumber Company in 1956, and Arcata Redwood Company in 1988. Our California ownership is about 380,000 acres of primarily redwood timberlands, but includes a significant amount of Douglas-fir type as well. Simpson operates both container and bareroot tree nurseries in California, plus two sawmills, one remanufacturing plant, one market pulp mill, one integrated pulp and paper mill and two paper mills as part of its forest products businesses.
In 1988, Simpson returned to timberland ownership in Oregon with the purchase of 117,000 acres of timberland with immature timber stands from Times-Mirror. Simpson also has an Oregon Overlays Division located in Portland, Oregon, which impregnates kraft paper with phenolic resin for use in Simpson's specialty overlaid plywood plant in Shelton, Washington and for outside sales.
I've mentioned both the solid wood and pulp and paper mills together, since they are all part of Simpson's forest products businesses. Simpson entered the pulp and paper business in 1951 when Simpson Logging Company purchased the Everett Pulp and Paper Company in Everett, Washington, which was renamed Simpson Paper Company.
In 1959, Simpson Logging Company was renamed Simpson Timber Company. Simpson Timber Company remained the parent company until 1985 with first a paper company subsidiary and later an extruded plastic pipe subsidiary (1967). The growth of Simpson through acquisition for the past thirty years has been concentrated in pulp and paper and plastic pipe. Reinvestment in mills and timberlands by the timber company has also been significant. By 1985, the paper company subsidiary had become much larger than its parent, the timber company, so a new holding company called Simpson Investment Company was formed. This completed a five-year program of decentralizing Simpson's operations. Three separate operating companies were formed, each with their own operating president and corporate staff. Simpson Timber Company with the timberlands and building products manufacturing, Simpson Paper Company with pulp and paper manufacturing, and Pacific Western Extruded Plastics Company are now all wholly owned by Simpson Investment Company which is located in Seattle, Washington. Simpson Paper Company is headquartered in San Francisco, Simpson Timber Company in Shelton, Washington, and the pipe company in Eugene, Oregon.
I mentioned earlier that most of Simpson's growth, at least in terms of new or acquired facilities in the last thirty years, has been in the paper and plastic pipe companies. Simpson Paper Company currently operates two pulp mills in California at Fairhaven and Anderson, one in Washington at Tacoma, and one in Pasadena, Texas. It also operates ten integrated or stand alone paper mills in California, Washington, Michigan, Texas, Pennsylvania, Vermont and Iowa. The acquisition of another paper mill in Oregon has been announced subject to reaching a final agreement with the seller. The main focus of the paper company is specialty papers such as Xerox paper, label paper and text and cover papers. The pulp mill at Fairhaven produces market pulp and the mill in Tacoma, Washington, manufactures bleached and unbleached pulp, kraft paper and linerboard.
The paper company is currently constructing a market pulp mill in Chile and establishing a 40,000 acre eucalyptus plantation with a Chilean partner. This pulp mill is scheduled to start up in late 1991. It will operate primarily on radiata pine supplied by our Chilean partner, Compania Manufacturera de Papeles y Cartones, S.A. (CMPC). The Chilean joint venture is called Celulosa del Pacifico (Pacifico).
Simpson Paper Company is among the leaders in using hardwood fiber blended with softwood fiber to achieve high quality printing surfaces. The timber and paper companies are working together to establish a 10,000 acre drip-irrigated eucalyptus plantation near Corning, California, and a 17,000 acre gmelina plantation in Guatemala. The eucalyptus will be trucked a short distance to our pulpmill at Anderson. The gmelina will be barged almost 1200 nautical miles to our pulpmill in Texas. We are actively exploring another tropical hardwood plantation project in Mexico in the center of the Isthmus of Tehuantepec from which pulpwood could go to ports on the Gulf of Mexico and the Pacific Ocean. Incidentally, when I'm asked about the risks Simpson is taking investing in places like Mexico, Chile and Guatemala, I'm not joking when I say these risks are not as great as having investments in California. I won't say much more about the pipe company except that through acquisition it has become the largest PVC pipe manufacturer in the West with five plants in California, two in Washington and one in Oregon. Our irrigated eucalyptus plantation near Coming is one of its best customers. An acquisition earlier this year vertically integrated the pipe company into it, raw material manufacture at resin plants in Kentucky and Florida.
I've probably told you more than you ever wanted to know about Simpson. It is a very closely-held private company, so financial information is not made public. If Simpson were publicly held, however, it would rank somewhere very close to the middle of the top Fortune 500.
Simpson survived and prospered during its first century by innovating and adopting to change. We believe we are positioned to continue growing absolutely and relative to the rest of the industry well into our second century. The issues we've faced in the past and those facing us today have, at times, seemed insurmountable. The perspective of a century helps sustain a conviction that we can deal with today's problems and opportunities as well as we have those of the past.
Simpson's stockholders have given Simpson's management one very clear goal; stay in the top quartile of the industry in terms of financial performance. Each quarter when the financial reports come out, Simpson's businesses are compared to our public competitors. We'd like to be number one and stay number one, but that would be most difficult. We've been there fleetingly and learned once you're on top, the only way you can go is down. Staying in the top quartile is no mean accomplishment.
The list Simpson is compared to has kept changing as the industry changes. Some prominent names are no longer with us like St. Regis, Crown Zellerbach, Diamond International, American Forest Products, Continental Can, Hammermill Paper Company and Great Northern Nekoosa. Most of these companies were in the bottom quartile of industry performance before they were acquired and/or dismantled.
Our country and the world will continue to demand wood and paper products. No matter how tough the operating environment becomes, one key to survival is relative performance. Those who can stay in the top quartile can survive. Those near the bottom are likely to disappear.
The industry today is facing some very tough times. Companies dependent on public timber are experiencing devastating declines in their timber supplies. The spotted owl and various forest practice initiatives in California have created much uncertainty. Public opinion does not favor our industry. The large, public ownerships here in the West create public expectations about how private land should be managed. For the past three decades, the courts have allowed major takings of private property without compensation. The U. S. Supreme Court has slowly begun to reverse this. Much of the media attention about the recent appointment of Justice Souter seemed focused on abortion which is an important social issue. The position of the court on property rights and compensatory takings, however, are of much greater importance to American business. Even if we have a new majority of strict constructionist judges on the bench ready to enforce the just compensation clause of the fifth amendment, they still have to wait for the cases to come to them. This takes time, patience and money.
My own reaction to the Big Green and EPIC or Forests Forever Initiatives here in California was to fight them with a "no" campaign and save our money for a legal battle if we lost. We would have to be prepared to shut our operations down if we lost and a court stay on enforcement could not be obtained. Then we would have to be prepared to battle it out in court all the way to the U. S. Supreme Court.
The industry consensus in California was otherwise. Pollsters advised us that the only way to beat Forests Forever was with a counter initiative, not a "no" campaign. We'll know in less than three weeks if they were right. In any event, the industry's counter initiative is also bad, cynically pandering to public sentiment about clearcutting and global warming. The industry initiative is good only in comparison to Big Green and Forests Forever. All three initiatives are bad.
Simpson probably has more of its future tied to clearcutting than any other timber company in California. In our coastal redwood forest, it is the only way to get another crop started promptly. And it's the only way to incorporate tree selection and the results of tissue culture and seed orchards into future crops of trees. Legally mandated selective cutting will set Simpson's forestry program back by more than three decades.
The northern spotted owl, as you know, is causing havoc with timber management plans. Our second growth forests are so thick with spotted owls that we will find it very difficult to log under the emergency rules adopted by the California Board of Forestry. Simpson will pursue a mixed strategy of using the courts to exempt California from the listing of the spotted owl while negotiating an experimental taking permit with the U. S. Fish and Wildlife Service that, hopefully, will enable us to demonstrate that our logging doesn't adversely affect the bird. The spotted owl is most plentiful in the second growth block Simpson has logged in most heavily during the past decade. The birds obviously move around in response to our activity, but they are thriving. Our "experiment" using independent scientists will be to capture birds, attach radio collars and then monitor what the birds do and where they do it.
Earlier I mentioned Simpson's unique Shelton Cooperative Sustained Yield Agreement with the U. S. Forest Service. This Agreement, signed in 1946, has 56 years left to go unless terminated early. This Agreement is clearly in trouble. Simpson has not made a new green timber purchase from the Forest Service from the Unit for more than eight years. In 1985, we permanently shut down our two logging camps that harvested the Forest Service timber and permanently closed our old-growth sawmill in Shelton. We were losing serious money operating this part of our business. All of the Forest Service timber was purchased by Simpson at its appraised price, but for years Simpson had protested the Forest Service appraisals on the Unit. Regional average costs were used rather than empirical cost data from the Unit, and the Unit had by far the highest cost logging on any National Forest.
Our previous decadal timber management plans for the Unit were always worked out jointly with the Forest Service. Since 1984, however, as the Olympic Forest Plan was moving from draft to final, the Forest Service planners went to great lengths to keep Simpson at arm's length in the planning process. We had no more opportunity for input or access to the planning process than any other entity. This has really strained our belief that Simpson and the Forest Service are still partners on the Unit. On July 17, 1990, the Regional Forester approved a final plan for the Olympic National Forest which includes a new plan for the Unit. Simpson has appealed this plan on a number of grounds. Our main objection is the application of all the National Forest Management Act (NFMA) regulations and policies to the Forest Service portion of the Unit which has significantly de-emphasized timber production in favor of
commodity production. The Agreement specifically made timber the dominant use for Forest Service land in the Unit. When NFMA was passed by Congress in 1976, it was made subject to existing rights. The legislative history contains a specific colloquy between Senators Jackson and Humphrey that makes clear that wherever NFMA and the Agreement are in conflict, the Agreement will prevail. The Forest Service is not likely to back down on this and neither is Simpson. After the appeals process has run its course, we are likely to end up in court.
The recent tightening of log export restrictions and spotted owl decision have probably made the Unit inoperable. Simpson is not going to purchase federal timber if this eliminates or severely restricts our ability to export private timber. The Forest Service harvest level on the Unit under the new plan is simply not worth bothering with in any case. The new plan for the rest of the Olympic National Forest calls for very large harvest reductions that could drop even further if the Jack Ward Thomas Report recommendations for the northern spotted owl are implemented. About forty percent of the old growth on the Olympic National Forest that could still be harvested after implementation of the Thomas Report is in the Unit. If Simpson won't buy this timber, it can't be purchased by other processors who will be really scrapping over the much reduced cut available to them, and it will just sit there. Simpson has proposed a number of modifications to the Agreement, including one that would permit the Forest Service to sell timber to third parties after Simpson exercised the right of first refusal. The Forest Service response to our Agreement modification proposals has been discouraging. The Agreement is very much in limbo.
During the 1980's, Simpson Timber Company, like all the other surviving solid wood manufacturing companies, underwent major restructuring. We permanently shut down several sawmills and plywood plants. Today, however, we are producing more lumber and plywood in fewer plants with about one-third fewer people. The whole western industry went through this same process. The cost reductions we and others made have all been bid away in the market. Real prices today are less than half the average price levels of the 1970's on most grades and species of lumber. Competitive markets are supposed to act this way and benefit the consumer. This is pretty clear evidence for those who need it that our markets are competitive. Throughout Simpson's restructuring, whenever a decision had to be made that involved federal timber, that mill was closed or remodeled to operate on private second growth. There was no master plan to do so. On a case by case basis, it was always the prudent thing to do. Today, Simpson can operate all its solid wood manufacturing facilities without any federal timber, we have no federal timber sales under contract, and no plans to buy any in the future for our existing manufacturing facilities. Ten years ago we were about 50 percent dependent on federal timber. The tough decisions that led to these changed circumstances will help keep Simpson in the top quartile I referred to earlier.
California may be leading the nation in environmental regulations, but Washington is not far behind. There are two related but separate negotiation processes going on among various interests, including the industry, the State Department of Natural Resources, environmental groups, Fish and Wildlife and native Americans. Two years ago we reached what have become known as TFW agreements. TFW stands for timber, fish and wildlife. After negotiating some ground rules which are different east and west of the Cascades, the various interests agreed to voluntarily review logging plans and discuss ways to achieve each others objectives. TFW was supposed to provide a five to ten year peace between the environmental groups and timber industry in Washington. For the past year, we've been at the table negotiating new rules. The peace lasted less than one year. The new negotiations are called the Sustainable Forestry Roundtable. In these negotiations, using the threat of legislation and/or a timber initiative like California's, the environmentalists have a whole new set of demands. These include controls on the rate of harvest, clearcut size limitations, clearcut adjacency constraints, and dedicating ten to twenty percent of each owner's timberlands to developing and maintaining "advanced successional stage timber" for predominantly wildlife management.
There are a number of other environmental issues that affect timber management. These include the use of chemicals, wetlands, cumulative effects, biodiversity, and various air and water quality issues. Our manufacturing plants have another complete spectrum of environmental issues. Rather than try to cover any more of them individually, I'd like to make some general observations about the Environmental Movement.
In spite of what I'm about to say, I want you to know that Simpson has a policy, clearly understood by all levels of management, to comply with all laws and regulations. Because of this, we have one of the better compliance records in the industry. We still try, however, to head off or change the laws and regulations we don't like if there appears to be a reasonable opportunity to do so,
California, as most of you know, has been on the cutting-edge of the Environmental Movement. In response, some Californians have been on the cutting-edge of revealing the Movement for what it is. Virginia Postrel, for example, editor of Reason magazine from Santa Monica, had an excellent article in the April 1990 issue entitled "The Green Road to Serfdom." She points out that "beneath the rhetoric of survival, beyond the movie-star appeals, lies a full-fledged ideology - an ideology every bit as powerful as Marxism and every bit as dangerous to individual freedom and human happiness. Like Marxism, it appeals to seemingly noble interests - the longing for beauty, for harmony, for peace ..." "Just as socialism seduced many people by masquerading as an elaborate
form of charity, so this greenideology-without-a-name disguises itself as a simple concern for a cleaner world. But there is a difference between the ordinary desire for clean air or pretty places to hike and the extraordinary passion to remake the world." It is, according to Ms. Postrel, "the green road to serfdom." She buttresses her case by quoting numerous statements of environmental leaders like Gaylord Nelson, David Brower, Jeramy Rifkin, Paul Ehrlich, Lester Brown, Stephanie Mills and E. F. Schumacher.
There are Marxist and non-Marxist Greens. The non-Marxist, earthgoddess-worshipping variety are uncomfortable with confrontation. They like consensus and preach nonviolence. Ms. Postrel points out that "Most greens can still consider themselves nonviolent for one reason: Their victims don't fight back. So far no one has taken up arms to defend his logging equipment against Earth First! sabotage or his factory against EPA closure."
Some serious scientists are part of the Environmental Movement, but many of the serious concerns about global warming, ozone depletion, unsustainable industrialization, and resource depletion or devastation are based on pseudoscience or no science at all - just wildly exaggerated claims. The real green ideologists would be very unhappy if science found a way to make industrial civilization sustainable or the greenhouse effect were proved to be insignificant. A couple of years ago when excitement over cold fusion suggested the discovery of cheap, safe clean energy, Jeramy Rifkin said to the Los Angeles Times "It's the worst thing that could happen to our planet." Paul Ehrlich said it would be "like giving a machine gun to an idiot child."
Some greens are comfortable with scientific inquiry and prefer facts to mystical insight, but all oppose the technological optimism that drives science and the economy that sustains it. They focus on ecology and point out that the natural world is made up of complicated interconnections we can only begin to understand. At the same time, they deplore the complicated human connections that create markets, cities, and communication networks.
In 1959, C. P. Snow, an avowed socialist, made an impassioned defense of industrialism which the Greens would do well to heed. Snow argued that: "Industrialization is the only hope of the poor. It is all very well for one, as a personal choice, to reject industrialization - do a modern Walden, if you like, and if you go without much food, see most of your children die in infancy, despise the comforts of literacy, accept twenty years off your own life, then I respect you for the strength of your aesthetic revulsion. But I don't respect you in the slightest if, even passively, you try to impose the same choice on others who are not free to choose. In fact, we know what their choice would be. For, with singular unanimity, in any country where they have had the chance, the poor have walked off the land into the factories as fast as the factories could take them." (C. P. Snow, The Two Cultures: And a Second Look, New York: New American Library, 1963, p. 30)
While the Environmental Movement has made people focus on the quality of life and on some health, safety and aesthetic issues that are important, we are very much in danger of being swept away by a modern witch hunt as misdirected and uncontrollable as the one that took almost three centuries to run its course in Europe. Reason eventually prevailed as people gradually learned that the plague and other calamitous events were not caused by witches, but could be explained by scientific inquiry. Today, scientific inquiry rather than witch hunting needs to guide our response to environmental concerns. Likewise, the role of property rights and their voluntary exchange in markets should be much preferred to government ownership or regulation.
With great effort and ingenuity, and the systematic denial of personal liberty, governments can supplant self-interest and competition, and replace the invisible hand of market forces with collective endeavor, input-output tables and centralized plans. The results can be five year waiting lists for Trabants, the fume-belching East German excuse for an automobile, or national forests.
Despite the collapse of communism and the triumph of market economics, a big role for the state is still uncritically accepted in many spheres of economic life. This is not because theories of market failure have won any arguments. They have not. It is because people have become so accustomed to pervasive government that they seldom notice or question it. Let's return to forestry as an example.
Why do we have national forests? Why do we have forest practice regulations? Why do we have three terribly bad forestry initiatives on the ballot here in California? Why should a forest landowner practice sustained yield? I really don't have time to try to fully answer all these questions, but there is a common theme to all the answers. It is, I believe, very closely related to what is still being taught at the forestry schools here at Berkeley and elsewhere.
Sustained yield has been a tenet of faith among foresters since forestry emerged as a profession. In some circles it has been elevated to the level of other unassailable institutions such as motherhood, democracy and religious freedom. There are, however, some serious problems with the concept. It is the root cause of the professional forestry mind-set I referred to in my introduction.
In the United States, forestry emerged as a profession and national forests were created based on the belief that unregulated markets would result in forest devastation. We read and hear the same nonsense today about tropical forests. It was and is believed that governments must own or regulate forests to perpetuate timber resources and insure sustained yield. This belief is widely held and is the basis for extensive public forest ownerships and private forest practice regulation in the United States and elsewhere.
The profession of forestry began somewhere in medieval Germany several centuries ago. Prior to the industrial revolution, forest management practiced by professional foresters had spread from Germany to most other parts of Europe. The origin and spread of forestry in the past are veiled by time, language barriers and innumerable wars and other major societal changes. A common forest management philosophy emerged in a feudal environment, however, that continues to have a major and most unfortunate impact on forestry today. This philosophy is capsulized by the concept of sustained yield and the many associated ideas about how forests should be managed. Sustained yield is a biological model and a philosophy of forest management that is based on few, if any, economic concepts. It is incompatible with the generally accepted role of prices in modem market economies to best allocate society's scarce resources.
Sustained yield can be given different definitions to suit the objectives of various users. It is usually more expedient for a user to define the concept to fit a particular circumstance or objective than to challenge it. Consequently, most public and private forest management organizations are quick to volunteer that they are practicing sustained yield. The term is sometimes used more as a slogan, and not given any precise operational definition. At Simpson, for example, one of my earliest contributions was to change the definition of sustained yield used in the company's public affairs booklet entitled "This Is Simpson", from a more traditional definition that implied even flow to one that was more in keeping with actual practices and policies. The revised definition reads as follows:
"In managing our lands, Simpson operates on a sustained yield basis. The exact forest planning systems involved are complex, but the concept itself is quite simple.
Sustained yield means maintaining continuous production on all our lands that are economically and environmentally suited for timber production. Mature timber is harvested at rates consistent with both available supplies and market demands."
Those of you who are more in tune with a traditional definition of sustained yield may be quick to point out the Simpson definition provides quite a bit of wiggle room by leaving some key elements unspecified. This was done intentionally to help wean the company, its employees, customers, etc., away from the traditional definition.
Traditionally, the concept of sustained yield evolved into a very well defined model that is central to the formal education of every professional forester. This concept, simply stated, is that the objective of forest management is to achieve and maintain a uniform distribution of age classes over a given forest area such that every year the oldest age class can be harvested and that the volume of this harvest will be equal to the annual growth of the entire forest. With the same number of acres in each age class and the oldest age class harvested each year, the forest will produce an even flow of harvested timber from year to year in perpetuity. This is the simplest model of sustained yield that can be visualized best where each age class is grown separately in what is called even-aged management. The model can be easily extended to more complex situations such as uneven-aged management where each acre contains intermingled age classes, but only the largest or oldest trees are removed. Another extension of the model is to include the thinning or partial removals of intermediate age classes in both even and uneven aged forests.
The age of final harvest must be precisely specified for such a forest, since there are various levels of sustained yield depending upon the age selected for final harvest. This leads to the concept of maximum sustained yield, where the selected age of the trees at final harvest maximizes the output of the forest. Isn't this what Forests Forever, or Initiative 130, is trying to achieve with uneven aged management? It may be naive and misdirected, but it's found in most forest management textbooks.
In the real world, each forested ownership usually has a variety of soil conditions and other factors that make the trees grow differently. There is considerable variation in how individual trees grow within species and between species. Trees also grow differently depending on where they grow and how they are managed. They can be grown in densely stocked stands or in widely spaced stands with lots of "elbow room" to grow. They can be fertilized, irrigated or subjected to various other types of cultural practices that affect their rates of growth.
Until Forests Forever came along, regardless of the complexity of the forest you want to manage, or model, the computer made today's forester equal to the task. Many computer models exist that precisely define the maximum sustained yield level and numerous other sustained yield levels for any given forest area and the range of cultural practices and harvest ages the user wants to consider.
Actually, very few forests, if any, meet or even come close to the precise arrangement of acres or numbers of trees by age class, soil productivity, level of cultural treatments, etc., that are defined by the sustained yield model. Foresters have developed, however, a number of formulae that take a forest as it exists and move it over time toward the idealized sustained yield forest. These formulae can be very simple or very complex. The simplest formula selects the age of the trees at final harvest, such as age 50 or 100, and then harvests 1/50th or 1/100th of the acres each year. This leads to a perfectly uniform distribution of age classes in 50 or 100 years, respectively, Some of the more complex formulae never achieve the idealized uniform age class distribution but move towards it asymptotically.
In any event, the outcome of all of these formulae is generally known as an allowable cut, which can be expressed annually or for some other time period. The essence of allowable cut calculations is that the allowable cut is a function of the forest area, the initial volume of standing timber and the growth of the forest over some specified period or until the uniform distribution of age classes has been achieved.
The U.S. Forest Service has, since 1973, more rigidly defined sustained yield by restricting its planned harvest to no more than the long run sustained yield of each forest. In fact, its new plans are based on something called non-declining yield, where there is no planned decrease in the projected harvests.
The allowable cut is like a "bag limit" on trees. The coincidence is not accidental, since the forestry profession began on feudal estates where the hunting of deer and boar were far more important than the harvest of timber. For centuries, peasants could help themselves to timber, but lost their heads if caught poaching the master's deer. As far as timber harvesting was concerned, the woods were treated as a commons. As timber became sufficiently scarce that it needed to be allocated to different users, the game managers became foresters by extending their "bag limits" to the trees.
Economic Analysis and Sustained Yield
Economic analyses began to be applied to forestry in the 1800's to value forests for taxation purposes. In 1849, Martin Faustmann, a young German forester, published a critique of the forest valuation procedures of the day, and suggested a major change. This change was to calculate the optimal age of timber harvest using prices and interest rates. Faustmann's Formula is the first known correct application of compound interest rates in discounted cash flow analyses. Bankers and economists did not show the same level of analytical sophistication until more than 50 years later. Unfortunately, all Faustmann did was start a raging debate within the forestry profession about "soil rent" vs. "forest rent" which continues to this day. Public forest management agencies have almost universally rejected Faustmann's optimal harvest age calculation. So too have a few private timber companies. The disciple of the market, however, and the fact that finance managers as well as foresters get involved in private forest management decisions, has led to widespread use of Faustmann's Formula, or close approximations thereof, in the private forest sector.
A major problem still remains. All the Faustmann Formula does is define a long-run equilibrium harvest age that would produce an economic sustained yield as opposed to maximum sustained yield. In fact, maximum sustained yield harvest ages become the special case where a zero rate of interest is used in the Faustmann Formula. Positive interest rates always lead to lower harvest ages and lower levels of inventory being carried in the long-run equilibrium forest.
Foresters and forestry organizations who adopt economic harvest ages are still strongly inclined to just plug these into their traditional allowable cut models. When the even-flow policies of most public forest management agencies are followed, the allowable cut using economic harvest ages is always lower, sometimes substantially lower, than if maximum sustained yield harvest ages are used. It's no wonder public forest management agencies have rejected Faustmann's harvest age calculation.
Partial or improper use of economics often can and does lead to more perverse results than not using economics at all. As my graduate advisor tried to tell me, the forest economics literature is full of examples.
Many public forests are managed so that existing timber inventories greatly exceed the long-run sustained yield inventory levels under either the economic or maximum yield definitions. Allowable cut calculations have resulted in the planned rationing of overmature old-growth timber inventories over more than a century to meet the even-flow constraint of not cutting more today than can be cut from the sustained yield forest of the future when the idealized uniform distribution of age classes has been achieved.
Some schools of thought even view this level of timber harvesting as "overcutting," since old-growth forests have little or no net growth. Harvesting any timber at all means that harvest exceeds the growth. The forestry profession has simply provided a more complex, but equally absurd, criteria for determining current rates of timber harvest. The naive notion that today's harvest cannot exceed today's growth is replaced with the constraint that today's harvest cannot exceed the sustained yield level of a hypothetical forest that won't exist for at least a century, if ever. Forests Forever would carry the absurdity of this kind of thinking to new heights.
Because of the inappropriate importance to current harvest calculations attributed to hypothetical forests, much research effort has been directed (misdirected) into getting more insight into how much wood these hypothetical forests will grow. With the large inventories of overmature timber and even-flow policies typical of public agencies, growth determinations for the hypothetical sustained yield forests become more important than growth in the existing forest or the transition forests, since several cycles or harvest rotations will occur before the hypothetical sustained yield forest can be created. Again, Forests Forever would carry this mensurational madness to new heights on private timberlands.
With all this as background, let's consider what can happen when a veneer of economic analysis is combined with sustained yield using the allowable cut effect. The allowable cut effect is simply the change in allowable cut when the inventory or growth of a forest is changed. Adding acres, or increasing the intensity of cultural practices increases the allowable cut. The results are similar to what I would expect if we put the Flat Earth Society in charge of geological surveys or the space program.
A few examples of allowable cut effect economics follow:
- Assume a 500,000 acre predominately old-growth forest that currently has 6 billion board feet of timber inventory. Under current management practices, its maximum sustained yield level is 100 million board feet per year. (With Faustmann's economic harvest ages, it would only be 80 million board feet per year so this has not been seriously considered.) The annual allowable cut under even-flow sustained yield is 100 million board feet per year. Wood on the stump, or stumpage, is worth $200/MBF. Gross annual receipts are therefore $20 million. All management costs are $2 million, so the net revenue is $18 million. The present value of this net revenue stream in perpetuity when discounted with a 10% interest rate is $180 million.
Now let's look at a more intensive forest management program that can increase the sustained yield level to 150 million board feet per year by prompt planting of cutover acres with improved trees, controlling competitive vegetation and spacing the young stands by precommercial thinning. The cost of this new program is $1.5 million per year. Does this program make economical sense?
Annual receipts go up $10 million for a $1.5 million increase in annual costs. Net revenue increases from $18 million to $26.5 million. Net present value increases proportionately. The apparent rate of return on investment is infinite if the cash flow from increased harvests proceeds or starts at the same time as the increased cost stream. Even if the increased cost stream starts one year earlier than the revenue stream, the apparent annual rate of return is an astounding 500%. Waiting a full decade before taking a harvest credit for the increased level of investment reduces the apparent rate of return to a more believable 32.9%. Waiting two decades to take a harvest credit reduces the apparent rate of return to 18.6%. The rate of return can be made whatever the user wants by specifying when to take the harvest credit. None of these rates of return mean anything. They only obfuscate the fact that economics was ignored in making the underlying forest management plans.
- Now let's look at the same forest and a proposed land withdrawal for a wilderness, a park or some other purpose. Let's assume this withdrawal would take 100,000 out of the 500,000 acres and one billion out of the six billion board feet inventory. The acreage to be withdrawn is proportionately larger than the timber inventory to indicate lower than average productivity on the withdrawn lands. Let's further assume that the sustained yield level is reduced proportionately with the inventory from 100 million to 83.3 million board feet per year. The net annual income (assuming no change in costs) is reduced to $14.7 million per year and the 10% net present value becomes $147 million. The apparent cost of the wilderness is $33 million.
- In the interest of placating the loggers and the hikers (and not incidentally also increasing the agency budget), the forest manager might propose a "preferred alternative" that offsets the proposed withdrawal with more intensive management. The allowable cut could stay at 100 million board feet per year, the hikers would get their wilderness, the agency would increase its budget by $1 million per year and the net revenue from the forest would drop from $18 million to $17 million. Net present value would drop from $180 million to $170 million indicating the wilderness costs only $10 million instead of $33 million.
In somewhat oversimplified form, this example illustrates what is going on today all over the United States on 197 national forests that are in the process of producing new forest plans under the National Forest Management Act passed by Congress in 1976. The allowable cut is no longer identified as such but has been replaced with terms like potential yield and programmed yield which explicitly tie harvest levels to the forest's budget.
A sharp analyst might point out that this forest is so overstocked in terms of current inventory that a forest fire could consume 1 billion board feet without reducing the allowable cut or the ability to harvest 100 million board feet per year in perpetuity. This analyst might also show that the intensified management program really wouldn't have to be implemented for two or three more decades for the forest to still produce 150 million board feet per year, again in perpetuity. And the most telling point this analyst might make is that the market value of this forest if it were privately owned would be close to $1 billion dollars, rather than the $150 million of the current management plan. A private owner, however, would have to adopt a totally different management plan in order to justify and generate this market value.
Incompatibility of Sustained Yield and Economic Theory
As I mentioned earlier, the sustained yield model of forest management and its trappings are incompatible with economic theory and the functioning of prices to allocate resources in competitive markets. Gross anomalies are created when anyone attempts to merge sustained yield forestry and economics and perform analyses in the spirit of compromise. Public forest management leads to resource allocations that are far inside the production possibilities frontier defined by economists as the combination of resource inputs and product outputs that are efficient for all possible sets of relative prices.
The real economic benefits of intensive management practices are totally obscured by the allowable cut effect. Many forest management practices are economically good investments if confined to particular situations, including harvest ages based on financial rather than biologic maturity and maximum physical production. The longer biologic harvest ages render most forestry practices uneconomic.
Uneconomic traditional forest management concepts have resulted in the widespread belief by the forestry profession that forestry must be left to the state. As I mentioned earlier, this belief and the rejection of market mechanisms directly led to the establishment of the forestry profession in the United States and the creation of the National Forest System. Until the magic of the allowable cut effect was used to justify forestry investments, foresters generally believed that compound interest was so inimical to tree growing that private timberland owners would never practice good forestry. Socialism and other forms of statism, rather than capitalism, are still the much preferred alternatives among the profession for producing timber. In the western United States, including Alaska, public agencies own and manage over 68% of the total commercial forest area. This excludes parks and wilderness areas where timber production is not allowed. There are very few voices raised against forest practice regulations for private land in the three West Coast states.
The idea that competitive markets will establish prices, including interest rates and rent gradients, that will optimize the spatial and temporal production of timber has simply not penetrated the profession very far. How can we be very critical of the general public's perception and attitudes when we as a profession have done so much to reinforce them. Initiative 138 is a good example.
The migratory nature of the timber industry during the 1800's was and still is mistakenly viewed as evidence of market failure. The fact that the industry was making a rational and socially desirable inventory adjustment because timber was so plentiful its price was close to zero, was and still is poorly understood. The so-called "wasteful" logging practices were also a function of the near zero price. "New Forestry" I might point out is a lot like returning to these "wasteful" practices. The widespread abandonment of cutover timberland until the 1940's reinforced the idea that industry would always cut and run. Land abandonment was actually caused primarily by confiscatory property tax systems.
Once the timber inventory adjustment proceeded to the point that timber prices became positive, and could be expected to rise at market rates of interest, private enterprise began to invest in successive crops of timber without benefit of allowable cut effect calculations. The fact that private owners harvest trees at much younger ages and carry much lower levels of timber inventories is still a major source of concern to public timber agencies and much of the forestry profession that measure results against the sustained yield model rather than the economic efficiency model.
The thinking behind the Forests Forever initiative is a clear case of mingling the green ideology I discussed earlier with a traditional sustained yield model based on uneven-aged management. If this initiative passes and gets the most votes next month, the future prospects of Simpson and other forestland owners, not just in California, but in all three West Coast states, will be considerably dimmer. We'll need a lot more lawyers and lot fewer foresters.
I try to stay optimistic and tell myself that the radical emotion-charged response to environmental issues will, like the earlier witch hunts, run its course. I only hope it also doesn't take another three hundred years. I'd like to still be around when this storm has past.
Introducing: John L. Walker
John L. Walker was born in upstate New York and received his Bachelor's degree in forestry for the State University of New York, College of Forestry at Syracuse University (1962). He has had field forestry experience on the Mendocino National Forest in California, the Snoqualmie National Forest in Washington and Forstamt Garmish in Bavaria, West Germany. From 1962-1963, he was a Fulbright Grantee at the Forest Research Institute and Colleges at Debra Dun, India, studying tropical silviculture and forest management.
From 1965 until 1968, John Walker was a forest economist for the U.S. Forest Service at the Forest Products Marketing Laboratory in Princeton, West Virginia. In 1968, he received a M.A. degree in economics from the University of Washington and became manager of forest economics for the Timberlands Division of Weyerhaeuser Company. He held this position for five years, earning his Ph.D. in forest economics in 1971 at the University of Washington. His doctoral dissertation was on "An Economic Model for Optimizing the Rate of Timber Harvesting."
In 1973, Dr. Walker became Director of Resource Services for Simpson Timber Company in Seattle, Washington. He also became an affiliate faculty member of the University of Washington College of Forest Resources where he has taught courses in forest economics. From 1978-1980, he was a member of Class I Foundation's Leadership Program. He is currently on the Board of Trustees of this foundation.
In 1981, John was transferred to the Redwood Region where he was Simpson's California Resources Manager and a member of the California Forest Protective Association Board of Directors and Board of Managers. In 1983 John returned to Seattle to become Simpson's Vice President - Land and Timber, which is his current position. During his career, John has been involved in forestry projects throughout the United States, Canada, Europe, Asia and Latin America. He is active on a number of National Forest Products Association committees dealing with both public and private forestry issues. He is also a member of the American Economics Association, Western Economics Association, the Society of American Foresters, and Rotary International.