Sunday, February 28, 2016

Eastern Mill Tour – Part 3

9:44 AM Comments 0

October 2015

Northwest Pennsylvania

The Business of Timber and Logging…and Whiskey!

In this entry, we are going to look at some of the behind-the-scenes economics that are quietly whirring away in the background before any tree gets cut down or any log gets sliced up.

The forests in the NW region of Pennsylvania are almost all privately owned. The land owners will put the timber rights up for sale, and brokers, acting as an impartial middle man, will collect bids from various timber companies, such as Northwest Hardwoods. It is up to each timber company to estimate the overall value of the available trees, and decide what they are willing to bid, which is accomplished by sending out a seasoned forester to literally walk through the forest and survey the trees.

It is to impractical for the forester to measure every single tree, so instead, they collect a snapshop of the overall make up of that particular tract of land. They will record the estimated number of trees, the distribution of species throughout, and the estimated volume of each grade of lumber they expect to harvest. They are then able to estimate the overall value of the entire tract of land and submit their bid.

Since the highest bidder ends up with the logging rights in the end, this process is incredibly competitive and cutthroat, and with the timber valuations being based on years of experience and guesstimates, it is as imperfect and subjective process as you can get. If the surveyor estimates the quality and volume of the lumber too high, the timber company just cut into their already tight margins, but if they estimate too low, and missed adding in the value of some high-dollar veneer-grade trees, they may lose out on the contract to another timber company that had a more accurate bid. According to the surveyor that toured the forest with us, the only clear winner in this entire process are the land owners and the timber brokers.

The land that we visited on our trip was actually owned by an investment company, with the value of the timber as part of its overall investment portfolio and it had put up for bid the logging rights to every tree of mature size, no matter the species, on the entire tract of land.

The volume of each tree is calculated by first estimating the number of 16′ lengths of #2 and better grade lumber the tree will yield, then by measuring the diameter of the trunk 4.5′ off the ground. Height is estimated using geometry and old-school tools hanging around the surveyors neck.

This portion of the trip was about 4 hours long, but was by far the most information dense and interesting part of the entire trip. I could have spent days listening to the NW Hardwoods surveyor describe the economics of the timber industry and the science of estimating the grade and board footage yield of each tree. Also, it didn’t hurt that it was a picturesque fall day with the warm morning sun filtering through the softly falling leaves.

BTW, it takes roughly one year from the time the lumber company purchases the timber rights until the boards are ready to sell to hardwood distributors.

I also want to share a few finacial metrics from the sawyers point of view. Their workmans comp rate is a staggering 55%, meaning they have to pay the state of Pennsylvania $0.55 for every $1 they pay themselves in wages! To put this into perspective, the workmans comp rates I pay on my employees is a mere 3.5%.

This means one of three things:

1. Their jobs are incredibly dangerous

2. They are being screwed over by the workmans comp board

3. A bit of both

The sawyers pay rate from the timber companies is around $130 per 1000 board feet harvested, with an average 3-man crew able to log about 12,000 board feet per day. While this seems pretty good, don’t forget that the $130 per 1000 is gross pay. All the expenses, such as the aforementioned workmans comp, machinery costs and maintenance, and employee wages, have to be accounted for, which makes logging a very difficult way to make a living.

Veneer and Whiskey

As I described during my tour of the lumber mills, once the logs get cut up, every single board is graded according to its color and defects. The same goes for each and every log prior to entering the saw mill. The lumber grader is looking for two things. First and foremost is a veneer grade log, the creme-de-la-creme, which is worth 4x what a lumber grade log is worth. The only problem with veneer grade logs are that they have to be as perfect a tree as nature can grow, which makes them quite rare. One of the surveyor’s main goals, while analyzing a tract of forest, is to identify as many of these trees as possible, which will hopefully give them a leg up over the other companies bidding on the same tract of land. The only problem is that the defects that prevent a tree from being a veneer grade log are imperseptible to the untrained eye. We were shown a row of veneer grade cherry logs and I was hard pressed to tell them apart from the standard lumber grade Cherry logs, even when the details separating the two groups were pointed out. Don’t forget, the timber surveyor has to identify all these defining characteristics while hiking uphill and down, battling the weather of the day, and peering skyward at a 60′ tree!

In addition to veneer logs, the graders are keeping an eye out for whiskey barrel white oak logs. White oak is the primary species used for the staves in the building of whiskey barrels, which are currently being manufactured at an almost unsustainable rate, due to our insatiable appetite for whiskey. Whiskey barrel logs are valued just slightly below veneer grade logs, at about 3x the value of normal FAS lumber.

All the veneer and whiskey barrel logs are separated from the rest of the “herd” and get laid out in rows in the log yard, ready for inspection. Buyers will travel from all over the world to meet with the grader, wander the yard, and inspect the logs. When they identify a particular log they would like to purchase, they staple their tag onto the end. This behind-the-scenes look at how much work goes into the sourcing of raw materials, for certain segments of the industry, was simultaneously facinating, confusing, and inspiring. I have never looked at a roll of veneer or a sheet of plywood the same way since!

Matson 3a

This photo shows a yard full of white oak whiskey barrel hopefulls!