How Wall Street is destroying the timber way of life
The pressure for real estate and the short-term perspective of fancy Wall Street financial instruments have changed the old line companies utterly.
Montana’s forest products industry is staring extinction in the face, Kirk Johnson reports in Tuesday’s New York Times. Johnson describes a scramble "to save the historically important, culturally resonant timber industry — once a pillar of the state’s identity, now under siege as demand for housing and wood products has plummeted in the national economic downturn.”
Welcome to the modern economy, where there’s no chance that in Montana, or any place else, the forest products industry of the future will look anything like the forest products industry of the past. Even before the U.S. economy tanked, traditional forest products companies operating under their traditional names and corporate structures had become as rare in the Northwest woods as the northern spotted owl.
The old forests on which those traditional companies once grew fat are, by now, mostly gone. By the early 1990s, when battles over the northern spotted owl and other old-growth-dependent wildlife shut down logging in the national forests, an estimated 85 percent of the Northwest’s original old growth had already disappeared. Just about all the remaining old growth was already protected in national parks and wilderness areas. The environmental battle focused on the last bit of unprotected old growth that still grew on federal land.
The Northwest Forest Plan, created by the Clinton administration to settle the owl wars, placed almost all of those trees off limits. The Forest Plan was supposed to protect habitat for the owl and a host of other species, including wild salmon, and still permit loggers to cut a billion board feet of timber each year in the national forests. A billion board feet was never realistic, but the Bush Administration has portrayed it as a solemn commitment and has been trying to loosen logging restrictions for the past eight years. So the battles continue. Fourteen years after the Forest Plan went into effect, environmentalists still fight federal agencies over the fate of the owl and its habitat. The upshot has been very little logging in the national forests. The mills built to process old growth logs have shut down. The curtain was coming down on the legendary business of the old Northwest.
But not on the forests themselves, ironically. Once upon a time, environmentalists — and some timber workers — worried that we were logging the forests at an unsustainable rate. At least in the national forests, we were. Now, the trees are growing a lot faster than they’re being cut.
To be sure, on the urban fringe a lot of the old forests keep disappearing, not because of logging but because growing houses is a lot more profitable than growing trees. "A continuation of the converstion of this land to non-forest uses seems inevitable, particularly in the Puget Sound region," states a 2007 report by the UW’s College of Forest Resources on The Future of Washington’s Forests and Forest Industries. “Forestlands are declining by more than 30,000 acres per year. . . . Higher and better uses attract values that are many times larger than forestry use values.”
So the fight over our forests has shifted to a new front: real estate development in the exurbs and in the resort-rich Mountain West. “Objectives of protecting endangered species habitat and fish-bearing streams lack incentives and lead to unintended consequences,” says the report. “Many ecosystem services are being provided by landowners at low cost to consumers, but at great cost to landowners.” That's not likely to keep happening. In exchange for giving up potential profit, land owners get increased regulatory hassle. “Non-industrial owners are . . . in the path of growth and extremely frustrated by some of the rules and regulations,” the report warns. “You can’t log trees as close to a stream as you can build a house.”
At the same time, industrial forest-land owners have felt financial pressure to do nothing but grow trees. And here's where the story becomes not one about spotted owls but about the federal tax code and the Wall Street financial engineers. (If the following story has echoes of the mortgage-derivative frenzy in the housing market, you are not far off.)
Let's take the saga of Plum Creek, which led the way toward the current brave new financial world. It followed a long, winding path to get here. In 1864, Congress authorized huge land grants as a reward for anyone who built a railroad from the Great Lakes to Puget Sound. The Northern Pacific laid the rails and got the land. Eventually, after a big merger in 1970, the remaining land wound up in the corporate hands of the Burlington Northern Railroad. BN spun its land holdings off to Burlington Resources. Next, the timberlands went to a master limited partnership called Plum Creek. In 1999, Plum Creek reconstituted itself as a real estate investment trust (REIT).
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Comments:
Posted Fri, Dec 12, 8:10 a.m. inappropriate
Nice work Daniel! This is the kind of journalism we don't see enough of. And I'm feelnig better about the decline of newspapers given the rise of webnews like Crosscut.
Posted Fri, Dec 12, 8:22 a.m. inappropriate
An excellent piece. Some 30 years ago, I took a sabbatical from Washington, DC and did a three-year stint as a Weyerhaueser executive (it was during the period in which Jack Creighton ran "the country's largest REIT" as he puts it). The company then was completely different from the company now.
There are many other companies, including The Boeing Co., which have changed dramatically over the same period. Some have changed because of
board decisions to expand or pare back their businesses. Many, as Chasan points out, changed to take advantage of tax-code provisions---provisions already existing or, in some cases, which they promoted in order to
exploit them. He also is correct in pointing out the parallels to
troubles in the housing sector, leading to the current financial crisis,
in which groundrules were changed to encourage unhealthy speculation and
risk-taking.
Some of the people and institutions who most exalt "the free market"
have in fact used and distorted the tax code and other public law to
gain a competitive edge. Here in Washington state, for instance, loopholes and so-called tax expenditures in state and local tax codes--extended to favored sectors and companies, such as Boeing---amount to three times the size of the state's biennial budget. Successive governors keep promising to cut them back but each, including Gov. Greogire, expands them. We would be facing no budget crisis now if even some of these
special-interest gifts had been reviewed and removed.
Posted Fri, Dec 12, 12:02 p.m. inappropriate
Ditto the sentiments.
More than most, my interest in this, as evidenced by my Crosscut article cited by Daniel(greatly appreciated BTW), is personal, and so is Jack Creighton's.
He's old Weyerhaeuser, while Steve Rogel is barely Weyerhaeuser - he came with WeyCo's purchase of Willamette Industries, a deal that wags and insiders refered to as Willamette's purchase of Weyerhaeuser with Weyerhaeuser's money.
In a nutshell, what we see here is what happens when the tax code gets used for purposes other than the generation of revenue. So-called "incentives" and myriad other tax-tweaks in it drive those interested in short-term profits to leverage the law to make a buck, not invest because of the inherent value of an asset or a business.
The Internal Revenue Code shouldn't be anyone's get rich quick scheme.
Call it the Ted Stevens or Warren Magnuson school of investing, but it's a serious downside to having legislators write laws that make Adam Smith roll over in his grave or Karl Marx and John Maynard Keynes smile in theirs.
Whether in the forest products industry or wherever, exactly what's described in this article will continue until its stopped everywhere. The much ballyhood Big Three bailout is but a current example. Kill it before it multiplies.
In the meantime, old Bull Bucks, Whistle Punks, Sawyers, Machine Tenders, Digester Cooks, and their mates shake their heads in sorrow over the death of what gave the PNW its start.
The Piper
Posted Fri, Dec 12, 2:47 p.m. inappropriate
These are all very good comments and observations, but I have some skepticism of the conclusion that tax law or some of these other "tools" are ruining the old timber business. Perhaps I'm being too "guns don't kill people...", but it seems to me that principles are needed through our society to use the tools afforded businesses wisely. In that vein, short term profiteering at the peril of longer term viability is a real problem.
I should mention that my timber background comes from working with Alaska Pulp for 7 years and my real estate experience amounts to 19 years in the business having completed many large transactions with REITs. REITs real problem to me is that they don't re-invest in their properties since they have to pay their profits out and since they are judged on "funds flow." This will be revealed in this recession when REITs struggle. General Growth is the first to be hit because of grossly overlevereging, but the story remains. They are Q to Q earnings driven because they feel forced by Wall Street. I disagree. They chose to go along with Wall Street rather than lead Wall Street (ala Buffet, Gates, Dimond, Welch or others). These REIT execs have decided to bow to Wall Street rather than differentiate themselves as long term operators. This differentiation and leadership of Wall Street can be done, but it takes conviction.
But to use the tax code to avoid corporate double taxation like any S corporation or LLC is able to do is a perfectly reasonable business strategy. Just because it wasn't envisioned at first to include timber doesn't make it wrong. Afterall, Section 401(k) was a single line giveaway to one company in the early 1980's. It was worded in a manner that a tax accountant was able to justify, and get the interpretation through the IRS and tax court, what we now know as 401(k) plans.
Further, the forest prodeucts industry was forced to change by many forces, including over cutting and environmental issues. This housing led recession will be brutal on the industry, as it has been in all prior recessions (or, back in the day, my grandma called them panics). Making changes to the new reality from what existed before are very hard, to which places like the Olympic Penninsula get really whacked. But they are adapting; something the US auto industry gets the joy of truly engaging in now.
I would suggest that the tools don't necessarily create the problems here. It's the principles pursued to create a long term benefit that takes intestinal fortitude, which I absolutely agree Wall street does not have, or too many other folks these days (see Gov. Blagojevich, Bernie Madoff, AIG, Fannie, et al -- there's not enough room to list them all).
Good points raised, but I would caution where to pinpoint the problem. I think it's principles.
I know I lack eloquence in this comment, but hopefully you'll cut my argument a little slack.
Jim
Posted Fri, Dec 12, 6:16 p.m. inappropriate
This is a terrific article.
Now let's look at how these entities are taking advantage of conservation incentives to funnel money from tax payers to equity investors through these REITs.
A good example is a "tool" being touted around the country called transfer of development rights. This allows a REIT to pay itself to transfer development rights (granted through zoning) to itself for use on another parcel it owns. In some cases, these transfers are subsidized by taxpayers through funds like the national Forest Legacy Program - a cash grant is awarded to "match" or increase the payment for the value of the development rights removed from the first parcel. Then the REIT gets to develop the second parcel at a greater density than the original zoning would allow. In some cases, the taxpayers even pay for the new infrastructure needed for the denser development.
There are some interesting books out there on using equity investing to mine conservation programs for cash and tax incentives while developing "conservation subdivisions," destination resorts, and yes, private resorts like the now bankrupt Yellowstone Club.
I believe that when America moved away from valuing savings, we opened up our system to questionable practices.
Posted Sat, Dec 13, 8:42 a.m. inappropriate
This is great journalism with accurate in depth analysis. really enjoyed reading it. the comments add to it.
As was mentioned early in the article, over-regulation has been a huge factor in the present diminished state of the industry. a search of the Seattle Times website of "forest land conversion" yields over 100 hits with many authors going back to the '80's warning that over-regulation would have harmful unintended consequences. The last major regulation, the 2001 forest and fish law ("can't cut trees closer to streams than you can build a house") has done great harm, especially to small forest landowners. If forestry cannot be practised economically, and there is a conversion alternative, who could blame the landowner for realizing his investment?
Harvest impacts occur only every 40 years or so. The balance of the time the landowner is providing ecosystem services for free. The enviromental community should work with loggers and foresters so that the forestry infrastructure remains intact, so forestry remains a viable alternative to conversion.
Posted Mon, Dec 15, 8:33 p.m. inappropriate
God I hate color ads. Very distracting, and I will never click on them. Ever. Make them be black and white and maybe I would.
Posted Mon, Dec 15, 8:39 p.m. inappropriate
Sorry to be off topic. In reading this article, I was irritated and distracted by all the color ad-chatter all around. For that reason, I do prefer a paper paper.
Made from trees, felled by loggers.
Posted Fri, Jul 31, 4:25 p.m. inappropriate
Jack Chasen wrote a fine article. Now Crosscut should follow up with the 2009 UW report "Retention of Forest Lands at Risk of Conversion" - the second dropping shoe to the Futures report that Chasen read. As the report states, it's time for the Washington Legislature to step up , as Maryland, Minnesota, Virginia, Vermont and Oregon have done, to ensure the viability of timber land owners in the future. If the land owners, including the REITs, don't keep the land in forestry, the spotted owl will need to find its habitat in suburban subdivisions. What looks like a forest in Kitsap county is really some trees in the midst of rural housing.
http://www.nwenvironmentalforum.org/documents/RetentionReport/RetentionReport.pdf
Barnaby Bigelow