Good evening. It’s a pleasure to be back in Portland once again.
It was exactly a year ago today that Weyerhaeuser Company reached an agreement in principle with Willamette’s board to acquire Willamette.
What does this have to do with the subject at hand? Plenty. The 1.7 million acres of timberland we acquired from Willamette were a critical strategic ingredient in the combination of our two companies. And, as we’ve said many times, timberland is one of our core businesses.
But, getting back to our purchase of Willamette … even though the combination involved two integrated, industrial timber owners, it was not without change. In fact, we wound up with more timberland than fit our strategic direction.
This led to the sale of some legacy timberland in Washington and a tree farm in Oregon that we acquired from Willamette.
We also had to meld two systems with different forest-management strategies and organizations. While these changes can and do impact jobs and communities, I believe we’ve minimized negative impacts through an outreach effort that has been sensitive to the affected people and communities.
Why make such an effort? Because forestry, even on private lands, is a uniquely public venture and the public ultimately holds our franchise to operate. And I don’t think they distinguish between the various types of private ownership.
We’re all familiar with the concept of the “triple bottom line”—financial, environmental, and social—that is more and more the measurement of our performance by our stakeholders. This includes our commitment to the communities where we operate.
The responsibility of forest ownership will provide a major theme for my remarks.
With that in mind, I plan to discuss:
- the promise and role of managed forests
- actions to dispel or alleviate public concerns and misperceptions
- the roles of various private forest owners, and
- finally, my thoughts about how America’s forest owners can effectively and profitably conduct business while maintaining the public’s trust.
While there may be some radicals who would advocate the elimination of managed forests, most citizens understand and accept the role of privately owned, managed forests. And, indeed, such forests offer the world the ability to provide needed products to a growing world population in a sustainable and environmentally friendly way.
Depending on the region, well-managed forests can grow from three to ten times the volume of wood per acre over a rotation as an unmanaged forest. This provides society the opportunity to enjoy wood and paper products on a sustainable basis without placing demands on the world’s most ecologically significant natural forests—or those that people wish to preserve for scenic, recreational or other purposes.
Some experts have estimated that less than 5 percent of the world’s forests would be required to meet present wood demand if all the timber came from high-yield, managed forests.
On the other hand, 20-40 percent would be required via unmanaged, naturally regenerating forests.
A similar point could be made regarding the location of managed forests. The more productive the forests we manage, the smaller the total “footprint.”
Meanwhile, global demand for wood and paper products continues to rise with population growth. In the United States, the U.S. Forest service— according to the Oregonian—predicts consumption of wood will rise by almost 40 percent over the next 50 years.
Conclusion: Both the world and the United States need managed forests—and it makes sense to locate a good share of them where tree-growing is best to reduce the overall footprint.
Nonetheless, as timber owners in this day and age, we need to continuously make our case to the public that we’re responsible stewards of our forest lands—and that wood products are a wise choice from an environmental standpoint.
We’ve been making real progress in doing so here in the Pacific Northwest. The Oregon Forest Resources Institute is a model for effective communications about responsible forest management. In Washington state, a decade of hard work has produced steady gains in the public’s opinion of our industry.
Helping make our case more broadly is another industry effort called the Wood Promotion Network. For three years, it has been promoting managed forests and wood products through public information, advertising and coalition-building.
Finally, there’s an even bigger effort I’m familiar with as immediate past Chair of the American Forest and Paper Association—and that’s the Sustainable Forestry Initiative, or SFI.
SFI was originally developed by AF&PA members as a “code of conduct” they committed to operate by. Last year, an independent board representing a balance of interests, including environmentalists, was given oversight of the SFI standards. Furthermore, Weyerhaeuser and many other companies are using independent auditors to certify that our practices are consistent with these standards.
Why is this important? Because wood products’ retailers and consumers increasingly want to know that the wood and paper products they buy come from responsibly managed forests.
As of the end of 2002, 107 million acres of forestland in North America were enrolled in the SFI program and 77 million of them have been third-party certified. I’m pleased to say that all of Weyerhaeuser’s forestlands in the United States have been independently audited against the SFI standards—and found to meet them.
The AF&PA board approved use of an SFI label earlier this year and some member companies already are beginning to apply the label to their products. Weyerhaeuser expects to begin doing so later this year.
I mention our industry programs to build public confidence in our forestry practices because the incentives to own forests and care for them depend on our ability to sell the products they produce. That’s why it is incumbent on all forest owners to support—monetarily and otherwise—such efforts.
Now to change gears. Let’s focus on who should own the forest? Isn’t that the question we’re here to address?
There are various governmental owners, of course. For the federal government, the goals now imposed by various laws, agreements, and pressure groups, appear to be recreation, conservation and even abandonment from any management.
What about timber production on federal land? Not hardly. Taking Oregon as an example, we see that timber sales from federal forests have dropped from just under 3 billion board feet in 1990 to about 50 million a year for the past four years—a decline of more than 99 percent.
The Forest Service’s take on the consequences of this logging collapse in public forests, again as reported in the Oregonian: “Public forests will increasingly be transformed into untended reserves of aging trees, while private plantations of young, fast-growing trees in the South and other nations feed an ever-increasing U.S. appetite for wood.”
Although timber production is mostly shut down on federal forests in the United States, other governmental jurisdictions are growing trees to provide timber income.
In many states, including Washington and Oregon, a significant proportion of school funding comes from timber from state land. These public lands also are used for conservation and recreation. Local governments also own forestland, some managed for timber production, but most used for parks. The non-federal jurisdictions also are under public pressure and have seen declines in their timber- harvest levels.
Taken altogether, federal, state and local governments own approximately 27 percent of the United States’ timberlands. Now let’s look at the major owners of non-governmental forests.
First, there are the “family forests” or small woodlots, owned by ten million individuals, families and small businesses. Although none of these owners hold a great extent of forest, altogether they own some 58 percent of all the nation’s commercially valuable timberland.
They value their trees for their beauty, as wildlife habitat, as a source of income and as an inheritance for their children. A study in Washington state found that more than half of its small-woodlot owners maintain a residence on their forest land.
Then there are the large, industrial forestland owners—mostly, integrated forest products companies like Weyerhaeuser—who own trees as a business. Although their trees can provide a source of income in their own right, a critical strategy is to provide a raw-material source for their mills. Most of these large owners manage their forests as a portfolio of assets, with targeted rates of return.
At Weyerhaeuser, we believe total value through the system is maximized when timberland returns are enhanced by “linked” manufacturing and marketing strategies. A good example of this is our partnership with Home Depot here in the West to provide its home centers with Douglas fir lumber.
Large forest products companies own just 12 percent of America’s timberlands.
Finally, there is a group of owners I’ll call “focused timber owners.” It includes timber-management organizations—TIMOs—and pension funds, mutual funds and real-estate investment trusts, or REITs. These owners hold trees as an alternative investment to stocks and bonds for their investors. Altogether, they possess 3 percent of America’s timber-producing forests. While this is a small percentage, it is the ownership category that has grown the most over the past few years.
Which of these parties should own America’s forests? My view: all of them.
Small-woodlot owners own forest land that is often geographically scattered in ways that make no sense for an industrial owner to invest in. They usually provide that timber to a nearby mill, whether locally owned or belonging to an integrated forest products company. In any case, their timber can—and does—provide jobs and products that society needs.
Integrated forest products companies like Weyerhaeuser view forest ownership as a way to control their raw-material costs as well as an investment. We desire the “value-added” benefits of integrating from the customer back to the forest. Many of us don’t want to rely on other growers for 100 percent of our timber supply. Even so, few of our mills are self-sufficient, and we buy additional timber from other sources.
Focused timber owners want to make money for their investors. They value the unique risk-and-return equation of timber ownership for a portion of their investment portfolios. These investors are willing to buy timberlands from any forest owner and they’re willing to sell land and timber to the highest bidder.
How can these different categories of forest owners relate in a way that produces harmony? Governmental owners for the most part satisfy the public’s need for forests devoted to conservation and recreation.
Small-woodlot owners satisfy the timber needs of local mills. Large, integrated forest products companies obtain the timber they need partly from their own forests and partly from purchase of timber from other owners.
And those who hold timber as an investment not only provide timber to all wood processors, but they provide a valuable market—i.e., liquidity—for timberlands that other owners no longer find strategic.
Does this system work to perfection? No, of course not—or we wouldn’t have the oversupply of forest products we have today. But that’s not so much the fault of the forest owners as the timber processors—and, to some degree, the softwood lumber dispute between the United States and Canada.
One change I’d like to see is a more level playing field when it comes to the taxes forest owners pay on their timber income. REITs and partnerships don’t pay tax on the timber income they return to their investors, and their investors get capital-gains treatment on their dividends. So the maximum combined tax rate on timber gain from REITs and partnerships is 20 percent.
However, as it stands now, the timber earnings of integrated forest products companies are taxed as ordinary income to the corporation. Our shareholders are, in effect, double-taxed when they have to cough up the money to pay their individual income tax on the dividends we pay them.
The resulting maximum combined tax rate for the timber income from integrated C-corporations can be as high as 58 percent. That’s why we continue to lobby for all taxpayers to receive capital-gains treatment on their timber income. We’re most happy that the Bush Administration has proposed eliminating the tax on dividends for individuals.
So what’s the future of forest ownership in the United States? Will current ownership patterns stay the same? Will timber as an investment look better or worse in the future?
For the most part, I think I’ll leave the answers to those questions to the excellent speakers you’ll be hearing over the next two days. However, you can pretty well guess Weyerhaeuser’s perspective if you’ve watched our wallets for the last few years. We’ve increased our forest ownership.
Today, Weyerhaeuser owns or holds harvest rights on nearly 42 million acres of forests worldwide—or an area roughly two-thirds the size of Oregon. We continue to grow this business and we like the return fundamentals.
In closing, let me amplify my earlier remarks about the responsibility of forest ownership from the perspective of my role as CEO of Weyerhaeuser Company. We believe our stewardship of our land is of positive benefit both to nearby communities and to society as a whole.
Weyerhaeuser has worked hard to maintain a reputation for excellence in silvicultural research and innovation—as well as forestry practices—and we’re proud of it. We’ve also worked hard to be a good corporate citizen in those communities where we do business.
To maintain the public’s confidence in our practices, we believe it’s vital to meet these public expectations. Since I believe all forest owners are subject to the same public scrutiny, it behooves us all to do the same.
We’re all under the microscope and both the future of our forests—and the value of our investments in them—demand that we perform to the public’s satisfaction.
