ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS
A variety of market conditions in both the U.S. and global economies influenced demand and pricing for our products and affected our operating results in 2007. Those market conditions included the following:

• The U.S. economy grew 2.2 percent in 2007.
• The U.S. Federal Reserve took measures to lower short-term interest rates 0.4 percent over the course of 2007.
• Single-family housing starts fell from 1.47 million units in 2006 to 1.04 million units in 2007.
• The U.S. dollar continued its decline in value against the euro and Canadian dollar.
• The global economy continued to grow at a healthy rate, primarily due to strong growth in Asia.
• Increased containerboard capacity in Asia continued to result in increased exports of old corrugated containers (OCC) from the U.S.

HOW ECONOMIC AND MARKET CONDITIONS AFFECTED OUR OPERATIONS
Major effects that economic and market conditions had on our operations in 2007 included:

• Consumption of softwood market pulp increased by an estimated 1 percent.
• Shipments of packaging fell 1.2 percent despite 1.1 percent growth in nondurable goods production.
• Sales of new and existing homes fell sharply in 2007 leading to further decline in single-family starts.
• Consumption of lumber and structural panels fell due to lower levels of homebuilding and repair and remodeling.
• In turn, lumber and oriented strand board (OSB) prices fell.
• Log prices fell throughout the year, following declines in wood product prices.

Favorable Conditions for U.S. Market Pulp Producers in 2007
Market pulp prices rose 17 percent in 2007 due to:

• Higher fiber costs in Europe and Canada;
• Weaker U.S. dollar versus the euro and Canadian dollar; and
• Strong demand for fluff pulp, especially in Asia.

Industry Box Shipments Decreased in 2007
Industry shipments of boxes fell 1.2 percent in 2007. The containerboard industry’s operating rate was approximately 96 percent in 2007 but decreased slightly from an industry operating rate of 97 percent in 2006. The price of containerboard increased slightly due to the high operating rate and low inventories through the year.

Home Sales and Single-Family Starts Decreased
Tighter lending standards and high inventories of homes available for sale led to a sharp drop in new homes sales and single-family starts.

Lumber, Structural Panel and Engineered Wood Product Consumption Decreased in 2007

• As single-family home starts decreased further from the 2005 peak, demand for lumber, structural panels and engineered wood products decreased in 2007.
• The decrease in demand for wood products has resulted in a decrease in product prices.

Domestic Log Prices Lagged the Decline in Wood Products Prices in 2007

• Log prices typically follow product prices, but with a lag that varies by region. The lag for Southern log prices is longer than in the Western U.S. markets.
• Domestic log prices in the Western U.S. decreased 9 percent in 2007 compared with 2006.
• Demand for export logs and the weaker U.S. dollar contributed to higher prices for export logs compared with domestic sales.