OREGON STATE UNIVERSITY

Changing Ownership of Timber Lands Raises Social, Economic Challenges

05/23/2008

CORVALLIS, Ore. – Almost all large, publicly-traded forest product companies have shed their timber lands in the past 20 years, a reflection of global economic pressures, new tax laws and other forces – and this phenomenon has changed the very nature of commercial forestry.

In their place are new real estate investment trusts and timberland investors that are focused on maximizing their profits, mixed in with remaining small and private forest landowners and companies struggling to survive. These wide-ranging changes are poorly understood and may not serve the best long term interests of society, according to recent studies in the College of Forestry at Oregon State University.

This revolution in America’s forest ownership and management has taken place quietly and largely under the radar, but it has huge business, social and environmental implications, said John Bliss, OSU professor and holder of the Starker Chair of Private and Family Forestry.

“In forestry, we grew up with the idea that large, public forest product companies would always own and manage forest lands,” Bliss said. “That was naïve. By and large they have gotten out of that business completely.”

These “vertically integrated” public forest product companies used to own large tracts of their own forest lands as well as the mills to process the timber, Bliss said. At the same time they retained professional land managers, employed huge numbers of forest and mill workers, and had a long-term commitment to forest products as their primary business. They dwarfed small forest landowners in size, and sometimes disparaged them as “less professional” and not using the latest practices or technology, Bliss said.

But in the last couple decades, these companies – International Paper, Georgia Pacific, Boise Cascade, Pope and Talbot – have either sold off their timber lands or gone out of business altogether. What’s left is a grab bag of small forest landowners, new types of large timber land owners, and commercial mills that have to buy timber wherever they can get it. The motivations and goals of these people and entities are quite different from those of the past, experts say.

“A lot of this was driven by very tough global competition and changes in tax laws,” said Erin Kelly, an OSU forestry doctoral student. “The tax laws were created at the federal level for business in general and had little to do with forestry. But the end result was that ownership of timber lands was dragging down the bottom line for the big forest product companies.”

More favorable tax situations were enjoyed by real estate investment trusts (REITs) or timber investment management organizations (TIMOs) which provided mechanisms that helped avoid corporate taxes and long-term capital gains. At the same time, large public companies faced cost-cutting, mergers and acquisitions, a drive for maximum efficiency and improved profits.

“Several CEOs of large public timber companies have said that they simply had no choice,” Bliss said. “It was either recognize the efficiency of new business models or go out of business.”

But those changing ownership structures, researchers say, have had multiple impacts. Real estate investment trusts, for instance, have a mandate to maximize the value of the lands they own. They don’t have a mill they are required to keep busy, and their managers don’t much care whether the land produces timber or gets turned into golf courses, resorts or subdivisions. And who, ultimately, are the new owners? They could be just about anybody, including the ordinary investor – pension funds, mutual funds and insurance companies hold many of these REITs and TIMOs, which can help them diversify their holdings.

“People who used to be in the timber production business are now in the investment business,” Kelly said. “The end result is a lot of pressure to take timber lands out of production for whatever other use makes more money. The largest private landowner in the United States right now is a real estate investment trust in Seattle. But whether this best serves the long-term good of society is a different question.”

At the same time, the remaining small timber land owners or small private companies are trying to produce wood and forest products in competition with large, multinational industries all over the world.

“In today’s global, intensely competitive free market, smallness of enterprise is not generally viewed as an asset,” the scientists wrote in one recent study. “Particularly in commodity markets, economies of scale in ownership, management, production, transportation and marketing all favor bigness.”

The challenge, OSU experts say, is to identify approaches or techniques that can allow economic survival of today’s smaller or more disjointed forest land owners. No easy solutions exist, Bliss said.

“There has been the idea that smaller landowners or companies in the U.S. could turn more to ‘green’ wood products that are produced in environmentally sensitive ways,” Bliss said. “But so far the American consumer has not generally indicated a willingness to pay more for these products.”

There may be some opportunities to grow older, very high quality logs in long rotations that can be used for specialty products and command higher prices, Bliss said. Some forest lands have also been sold to environmental groups for conservation purposes, which can be locally important but offer less of a widespread solution. Hunting leases and other ecotourism options provide some potential for income. And intensively-managed plantations on the best forest lands may help keep them economically viable.

Small forest landowners often provide the commitment to caring for the land, diversity of uses, personal attachment, flexibility and ethical underpinning that are viewed as very positive forces, Bliss said. These people are not always driven by the need to maximize production or convert forest lands for a quick profit – but they must compete in the marketplace in order to survive.

“The squeeze is on, there’s no doubt about it,” Bliss said. “Our challenge is to accept these new realities and find ways for the smaller owners to survive, hopefully even thrive.”