EconSouth (First Quarter 2009)

Forest Products Industry Has Deep Southern Roots

The Southeast's generous canopy of trees not only contributes to the region's beauty but has given rise to an industry that generates billions of dollars and employs thousands of people. Behind all that bark is a lot of economic bite.

Photo of a lumber truck
From the sky, much of the Southeast looks like one vast forest.

Even in an age of sprawling metropolitan areas, timberland covers half or more of every Southeastern state except Florida. Alabama, Georgia, and Mississippi are nearly two-thirds blanketed in trees. Those forests are more huge pine tree farms than untamed wilderness, though, as the timber is raw material for an array of products from the obvious—plywood, boards, and cardboard—to the not-so-obvious—diapers, LCD screens, and sausage casings.

The forest products industry is one of the region's oldest (see the sidebar). Northeastern lumbermen first turned their attention south in the late 1800s after the "cut out and get out" logging practices of the day first depleted the forests of the Northeast and then those of the upper Midwest. More than a century later, advanced forest management strategies, technology, consolidation, and globalization have transformed the industry. And today, the global recession is testing it as nothing has since the Great Depression.

A Southern stalwart
Despite the current challenges, the industry remains a significant part of the Southeast's economy and landscape. About 197,000 people in the six Southeastern states earned a combined $8.7 billion working in forestry and logging, wood products, and pulp and paper in 2007, according to the most recent figures available from the U.S. Bureau of Labor Statistics (BLS). That employment figure has shrunk almost 14 percent since 2001 and almost 8 percent between 2005 and 2007.

Related Links
On the Web:
Timber Mart-South
American Forest & Paper Association
Southeastern Lumber Manufacturers Association
Rayonier Inc.

Forest products are especially significant in Georgia and Alabama. In Alabama, where timber covers 71 percent of the state, the industry employed about 40,000 people in 2007, and shipments from there in 2004 were valued at $10.4 billion, according to the American Forest and Paper Association (AFPA). The industry is even bigger in Georgia, the largest state east of the Mississippi River. The state is nearly two-thirds forested, and the related industries employed more than 50,000 Georgians in 2007; industry shipments in 2004 totaled $14.4 billion, according to the AFPA.

Paper mills, veneer plants, sawmills, lumberyards, and, of course, pine plantations are commonplace across the Southeast. In 2007, just under 1,000 paper and wood products manufacturing plants operated in the region, according to the AFPA. And five major ports—Miami, New Orleans, Mobile, Savannah, and Tampa—shipped $3.3 billion worth of wood and paper products overseas in the first 11 months of 2008, according to the U.S. Department of Commerce.

Fewer felled trees mean falling revenue
But economic cycles have profound effects on the wood products industry. While the industry has evolved in the past 15 or so years, its fortunes are still tied to the larger economy. On the lumber side, that means construction. The recession that began in December 2007 has been punishing, as nationwide housing starts in 2008 dipped below one million, the lowest number since at least 1958, according to the U.S. Census Bureau. The 904,300 housing units begun last year were 33 percent fewer than in 2007 and less than half the number started in the recent peak year of 2005.

Along with demand, lumber prices have plummeted. Nationwide in January 2009, average prices for lumber used to frame houses were down 21 percent from a year earlier and 58 percent lower than the August 2004 high, according to Random Lengths, an industry newsletter. This development has left the South's lumber producers in a bind. Regional production was down by about a third late in 2008 from the year before, and the coming months offer little hope of improvement, said Debbie Brady, president of the Southeastern Lumber Manufacturers Association. The Southern Forest Products Association estimates that 2008 lumber production in the South was the lowest since the 1991–92 recession.

Many mills have furloughed employees and reduced operating hours. While those cutbacks lower costs, they also limit the effect of efficiencies that are critical in producing a commodity that is sold on price. The less produced, the higher the average cost.

"So the challenge is twofold," Brady said. "How do you find a spot where you can [operate] and still have enough efficiencies? It's going to take a really sharp operator to get through this." So far, the tonic that lumber producers typically turn to when new construction slows—home remodeling and renovation—has not materialized, said Tom Harris, professor at the University of Georgia's Warnell School of Forestry and Natural Resources and publisher of a nonprofit industry newsletter, Timber Mart-South.

Photo of Rayonier employees
Courtesy of Rayonier Inc.
At Rayonier's mill in Jesup, Ga., employees use computerized processes to make highly refined chemical cellulose.

"The manufacturers are just limping along," Harris said. "And what production they're doing is right at break even."

Technology's benefits branch out
But not all of the employment declines in wood products manufacturing throughout the decade are the result of lower demand and production. Because of many technological advances, the industry is able to produce the same amount of output with fewer workers.

Indeed, you're more likely to see an old-fashioned, giant circular-saw blade on the wall of a theme restaurant than in a modern sawmill. Today's advanced mills employ machines that X-ray logs to find knots, measure the space between rings, and generally determine the quality of the wood. Lasers and cameras scan almost 600 feet of logs per minute. Those cameras produce images on computer monitors, including diagrams suggesting how to cut a log—for example, a log might yield a two-foot-by-10-foot plank from the middle and pieces of different dimensions farther out. An extra two-by-four might come out of the edge of an odd-shaped log. Each approach has the same objective: to waste nothing.

"It's an intensely technical industry now," Brady said.

As the housing slowdown takes its toll on lumber producers, the broad-based recession is also hurting paper and packaging makers. Many of the South's pine trees become cardboard packaging or containerboard because the wood's long, tough fibers are well suited for that type of material.

As economic activity has slowed, however, businesses and consumers need fewer boxes. In December 2008, containerboard production in the United States was down 26 percent from December 2007 while production for all of 2008 was down 3.7 percent from the year before, according to the AFPA. Amid the difficult conditions, in January this year, Chicago-based Smurfit-Stone Container Corp., the second-largest maker of corrugated packaging in North America, filed for bankruptcy protection.

Although the present and immediate future look bleak, the long-term outlook for Southern paper and lumber production is reasonably bright, experts contend. The key for paper and paperboard makers is efficient manufacturing, which comes from using larger, more sophisticated machines that produce more than older, smaller ones, Harris said. Such advancements help to explain why some mills dating from the 1920s and '30s in St. Mary's, Ga., St. Joseph, Fla., and Mobile, Ala., have closed in recent years.

As long as Southeastern mills keep their machinery up to date, they should benefit from being near both plentiful supplies of wood and huge markets in Europe and the northeastern United States. And they are just as close to Japan as their South American competitors, Harris said.

"There's a competitive advantage, to some extent, if you have big, efficient plants in the southern United States," said Lee Thomas, chairman and chief executive officer of Rayonier Inc., a Jacksonville, Fla.–based forest products company and a member of the Federal Reserve Bank of Atlanta board of directors. He noted that the same advantages of location that paper makers enjoy apply to another Southern pine product—so-called fluff pulp, which Rayonier produces for use in diapers, feminine hygiene products, and other absorbent products.

Photo of machine moving lumber

Winds of change blow through the industry
As forest products companies struggle through the worst economy in decades, some forces that have reshaped the industry figure to become even more important in the longer term.

For one, companies have for some years been focusing more sharply on niche markets, and that focus is expected to intensify, Thomas said. The age of the integrated behemoths that own millions of acres of trees and make everything from lumber to cardboard boxes to copier paper and labels has largely passed. Giants like Georgia-Pacific, Mead Westvaco, and International Paper began selling vast land holdings in the 1980s and '90s. Georgia-Pacific owned six million acres of timberland when Thomas went to work there in 1993 and owned virtually none when he retired as president of the company in 2005.

International Paper once owned millions of acres of Southern timberland and manufactured a full range of forest products—but no more. The company began a transformation in 2005, selling 3.8 million acres of Southern timberland in 2006 and 13 lumber mills, including seven in the Southeast, in 2007. Now, International focuses on uncoated paper and packaging.

Experts such as Ian Munn, professor of forest economics and management at Mississippi State University, and Thomas say large-scale sales of timberland, globalization, and consolidation represent fundamental shifts in the forest products industry. After selling timberland, the paper and wood producers no longer own their raw material. Instead, they buy it on the open market, sometimes under agreements with the investor groups that bought their lands.

That model is still new enough that industry watchers have not yet concluded how difficult it will be for major producers of paper to wring efficiency from a complex supply chain—made up of links such as harvesting timber, buying it, trucking it, and converting it to paper—that they no longer completely control. "The market works, and it will happen," Harris said. "It's just different than, say, our South American competitors, who still control that whole process."

The few forest companies that have chosen to maintain major land holdings have made changes of their own. Rayonier is one of three major forest products firms that have become real estate investment trusts, mainly because of favorable tax implications. Rayonier owns, leases, or manages nearly 2.6 million acres of timber and land in nine U.S. states and New Zealand and sells timber for use in markets including pulp, paper, lumber, and other wood products.

In partnership with real estate developers, the company also develops property that it deems more valuable than for growing timber. In particular, Rayonier's real estate development subsidiary, TerraPointe LLC, is working to secure development permits for 200,000 acres it owns along the Interstate 95 corridor between Savannah, Ga., and Daytona Beach, Fla.

This sort of change is nothing new. The forest products industry, especially the paper and packaging components, has been consolidating for some time, propelled by gains in cost and efficiency, much like other industries. Mead Westvaco resulted from a union of Mead and the West Virginia Pulp & Paper Co. And International Paper acquired Champion, Union Camp, and Federal Paper Board. Georgia-Pacific, which in 2005 was acquired by privately held Koch Industries, bought Fort James, itself the result of an earlier merger.

From Southern forests to the world
Paper and wood companies have adopted global strategies. "I think you've seen companies focus more and begun to see them diversify geographically," Thomas said.

For instance, his company, Rayonier, generates 40 percent of its revenues outside the United States. Industrywide, exports of U.S. paper products have climbed considerably, fueled in part by a relatively weak dollar and strong demand from emerging markets. Through November 2008, exports of pulp wood and wood pulp, paper and paper base stocks, newsprint, and other paper products totaled $38.22 billion, more than the total for all of 2007: $37.31 billion. The 2007 total was up 51 percent from 2001 and was more than double the industry's exports in 1991, according to the U.S. Bureau of Economic Analysis.

Going global has been good for paper makers as much of the growth in demand for their products has come from developing economies. As living standards improve, demand generally surges for products such as bathroom tissue, Harris said. In addition, China has been a major consumer of "recovered paper," or waste paper that is recycled into newsprint and other products. Yet in the global economic slowdown, Chinese demand has also slackened, Harris said.

While exports have grown, so have imports, Thomas pointed out, forcing domestic producers to sharpen their operations. The worst economy in perhaps 70 years is also putting the forest products industry to the test. Coming out of the current recession, Thomas predicted the industry will be "more consolidated, more focused, and more global."

This article was written by Charles Davidson, a staff writer for EconSouth.

Once a Sapling, Now a Mature Industry

No one recruited the lumber and paper business south. Rather, the industry took root here mainly because of favorable growing conditions. In particular, longleaf pines have a long taproot that grows well in the sandy soil that covers much of the Southeast. And once these pines are cut, they can be regrown relatively quickly: Pine trees in the Southeast reach maturity in about 30 years, compared to 80 years in the Northeast and 40 to 50 years in the Pacific Northwest, said Ian Munn, professor of forest economics and management at Mississippi State University.

Important though it remains, the forest products industry today is not the force it once was. In the early 1900s, forest products employed twice as many Alabama workers as any other industry, according to Auburn University historian Wayne Flynt's book, Alabama in the Twentieth Century. In the early 1960s, textiles and wood-related industries employed more than 75 percent of the workforce in 76 of Georgia's 159 counties, writes James Cobb of the University of Georgia in The Selling of the South: The Southern Crusade for Industrial Development, 1936–90.

Such was the timber industry's prominence that it holds a significant place in the Southeast's culture and history. One of the first places country music pioneer Hank Williams heard live music was at Saturday night lumber camp dances in the mid-1930s. Williams lived at the time with relatives in a converted railroad boxcar in the Pool lumber camp in south Alabama's Monroe County, according to Paul Hemphill's Williams biography, Lovesick Blues. Pool and other lumber companies set up mobile camps so that when crews cut all the trees in one place, they could simply move on rails to the next stand.

More grimly, lumber and turpentine camps, along with mines and other businesses throughout the Southeast, participated in the notorious convict leasing schemes of the early 20th century. States leased prison inmates—most of them African-American men and many held on trumped-up charges, according to historians—to companies hungry for cheap labor. Alabama was the last state to outlaw the practice, in the late 1920s.

Then came the Great Depression, a major blow to the region's timber industry. But the industry rebounded, thanks in no small part to laws restricting burning and free range livestock grazing. Before World War II and into the 1950s, roaming farm animals, especially hogs, dug up seedling pine trees to eat the roots in areas throughout the South. At the same time, owners of cattle, sheep, and pigs burned forests to promote grass growth. In the mid-20th century, states in the region passed better fire suppression laws, and nationally the Smokey Bear fire prevention campaign greatly helped curb forest fires, Munn said.

Photo of lumber