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An Analysis of Inflation in Timber Harvesting Costs
| Content Provider | Semantic Scholar |
|---|---|
| Author | Cutshall, Jason B. Grace, Laura A. Munn, Ian A. |
| Copyright Year | 2002 |
| Abstract | A logging cost index developed from production and cost data from 19 logging firms was graphically and statistically compared with related Producer Price Indexes (PPIs) to demonstrate that true logging costs have risen faster than both logging contract rates and logging input prices. Graphical comparisons between the cost index and PPIs indicated that logging costs outpaced logging contract rates and logging input prices for much of the study period (1993-1997). Sign tests indicated that the two types of indexes were not different, but tests were considerably weakened by the small time period used. Results suggested that changes in logging costs were driven by factors in addition to inflation, such as production and the possible compliance with environmental restrictions. 1 Approved for publication as Journal Article No. FO126 of the Forest and Wildlife Research Center, Mississippi State University. 2 Graduate Research Assistant and Associate Professors, Department of Forestry, Mississippi State University, Box 9681, Mississippi State, MS 39762. INTRODUCTION One of the most important challenges for the U.S. forest products industry is to assure that local, regional, and national wood supply systems are maintained at an internationally competitive level of performance (Stuart et al., 1998). Wood supply systems consist of many functions, including those necessary to purchase and convert standing timber into industrial raw materials, to transport the raw materials in an appropriate form and timely manner to manufacturing facilities, and to insure a future supply of wood while attempting to satisfy the broad range of stakeholders in the process. A variety of methods to perform these processes have evolved at local, regional, national, and international levels. Customer groups of the forestry process have a vested interest in understanding the functions and the needed improvements of U.S. wood supply systems. The forest landowner, logging contractor, and wood using industry are the three major components of production forestry and together form the wood supply system. All three components are interdependent, with the health of each member reflecting the condition of the entire system. The landowner component has been healthy in recent years because of steady increases in stumpage prices, but the wood-using industry, and particularly logging contractors, have suffered (Stuart and Grace, 1998). Shannon (1998) reported that efficiency, defined as the tons of wood produced per dollar spent, declined in the southeastern U.S. from 1990 to 1995 for a number of logging contractors. Stuart et al. (1998) maintained that variability is the enemy of efficiency and identified five sources of variability affecting timber harvesting—technical, organizational, natural, administrative, and regulatory. Variation caused by these forces may limit an operation's productive capacity and increase input costs. For example, production quotas impact the contractors' ability to pay for fixed costs of capital. Although it is not listed as a source of variability, Shannon (1998) suggested that inflation also impacts logging efficiency. Inflation is a substantial and continual rise in the general price level resulting from an increase in the volume of money and credit relative to available goods. The impacts of inflation on logging have been largely unexplored. Inflation increases input costs, but is seldom accounted for in harvesting contract rates. Few forest industry firms conduct extensive logging cost analyses to assure that contract rates accurately reflect true logging costs (Shaffer 1986). Understanding inflationary effects on logging costs will provide better insight into the condition of logging businesses. Their survival is critical to wood supply systems and the forest products industry. The Producer Price Index (PPI) published by the Bureau of Labor Statistics (BLS) measures average changes in selling prices received by domestic producers for their output. The PPI contains more than 14,000 price indexes, and some relate to inputs of logging operations such as equipment, fuel, tires, and repair and maintenance. The BLS also publishes an Employment Cost Index (ECI) that includes labor indexes comparable to logging. Costs per unit of production calculated from firm-level logging data can be used to develop cost indexes, providing a measure of cost changes over time. Comparisons of these cost indexes with related producer price indexes may illustrate differences between true harvesting costs and input prices. Nonparametric statistical methods provide useful insight into the relationships between cost indexes and producer price indexes by testing for differences between the two indexes. Many outstanding contractors (those with high business and environmental ethics) are reevaluating logging as a feasible business opportunity because the return is no longer worth the investment. Some of these loggers with large operations are downsizing, and others are leaving the industry to pursue other opportunities (Stuart and Grace, 1998). Wood supply systems will not be maintained at internationally competitive performance levels if they do not include exceptional loggers with sound business and environmental principles. The objective of this study is to determine how logging costs have changed relative to logging contract rates and logging input prices. METHODS The Industrial Forestry Operations Research Cooperative at Virginia Polytechnic Institute and State University initiated a study in 1988 to determine the components of logging costs (Loving, 1991). Logging contractors participating in the study provided production and cost data. Loving's study was continued and expanded by LeBel (1993 and 1996), Walter (1998), and Shannon (1998). The project was expanded in 1995 to include more contractors in the Gulf South as well as the Lake States and Northeastern States. The data set currently includes information from more than 90 logging businesses. This study examines a subset of these businesses. The overall study was designed to monitor the performance of a subset of the logging industry. American Pulpwood Association pulpwood producer surveys conducted by Munn et al. (1998) and Watson et al. (1989) indicated that relatively few contractors produce the majority of wood supplied to wood consuming firms. These logging contractors are key to the success of the U.S. forest products industry. Tankersley (1998) reported that forest products companies are interested in the health of outstanding loggers because these companies must be in compliance with SFI or other environmental criteria to be able to compete in foreign markets. There are several criteria a logging business must meet for inclusion in the study. First the contractor must be a professional, which includes meeting social and regulatory obligations for running a business such as insurance obligations and environmental responsibility. Participating contractors were nominated by peers within the logging industry or by APA member companies. Scientists then met with each contractor to discuss the contractors' willingness and ability to participate in the study. The final determinant of contractor inclusion was their willingness to participate and ability to provide data. Contractors also have the option of leaving the study at any time they wish. Data Collection Production and cost data were collected from nineteen contractors in seven states during personal meetings with each contractor. The meetings were conducted at the contractors' logging job or office, and lasted approximately two to six hours. Several researchers including Cutshall (1999), Miller (1999), Shannon (1998), Walter (1998), Omohundro (1999), Altizer (1999), and LeBel (1996) provided portions of the data for this study. Production and Cost Data Yearly, and in some cases quarterly and weekly, production data were obtained from the participating loggers, representing the green tons of wood delivered to mills. Most of the production data provided were in tons, but some were converted from cords or MBF to tons using local conversion factors. The cost information represents the cost associated with getting wood from the stump to the mill. The goal was to obtain quarterly data, however, only yearly data was available for most contractors. Information was obtained in several forms, including tax returns, professional accounting reports, or directly from the contractor's books. These costs were aggregated into the six categories listed in Table 1. Detailed sub-categorical information was gathered from a subset of four contractors. The size of the subset was determined by the number of contractors who were willing and able to provide this level of cost detail. Major Cost Components The labor component includes all items related to employee compensation, including the owner's salary. Owner's salaries varied arbitrarily between contractors, and some contractors did not provide salary. Therefore, Shannon (1998) used an annual salary of $30,000 instead, arguing that this amount would be needed to hire a supervisor to assume the same responsibilities. An annual salary of $20,000 plus $0.30 per ton was assumed for all owners in this study to account for differences in operation size. Loving (1991) included workers compensation in the insurance component; however, it was included in the labor component for this study because it is a function of the number of workers employed and is required by state law for contractors participating in this study. Equipment costs include depreciation, taxes, licenses, and interest. Depreciation was used instead of note payments because it was more readily available and was easily obtained from tax forms or financial statements. Payment to principal would have been more challenging and time-consuming and was unavailable in some cases. Shannon (1998) recognized that using depreciation strays from the desired cash |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://sofew.cfr.msstate.edu/papers/0148cutshall.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
