development

Have rising labor costs doomed wood products in the United States?

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by Brent Sohngen (Sohngen.1@osu.edu)

This article goes into more detail about the economic factors driving outcomes in the forest sector, and in particular, the pulp and paper industry in North America. As with my last post, this piece considers the case of a pulp and paper mill that is soon to shutter in Chillicothe, Ohio. The scenario there, while in many ways unique because of the types of paper the mill produced, also shares many traits with what is happening more broadly in the wood processing sector.

I imagine it is never an easy decision to shut down a factory. Politicians often make it out to be the nefarious work of owners bent on squeezing everything they can out of workers, local communities, and suppliers before escaping in the middle of the night, their pockets lined with millions, or billions, in profits. But it’s never that simple.

When a factory closes, costs decline, but so do revenues. Capital is left behind, along with the good will of a community and well-trained employees. Usually for clear economic reasons, owners conclude that continued investments in the factory will not payoff. In some cases, closing may result from rising input costs, while in other cases it may happen when the products the factory makes are no longer demanded.

Such appears to be the case in Chillicothe, Ohio, where Pixelle Specialty Solution is shutting a large, long-established, pulp and paper mill. This mill produced carbonless paper and other specialty products. The carbonless paper market has been declining as an increasing share of transactions go online. Pixelle moved other product lines from this plant to other plants they own.

Why not repurpose the mill for other products? Ohio has a decent stock of trees, but growth has been slowing as its forests age. Trees are mostly mixed hardwoods, which can be fine for certain types of pulp, but pulpwood is most economically obtained from clear cuts, especially those in wood plantations where uniformity lowers costs. Larger trees make their way into 2x4s while smaller trees and tree parts are shifted to pulp and similar lower value uses. Profits are made on the larger trees.

Clear cuts are not super common in Ohio where owners prefer selection cuts. If they cut anything, just the largest, most valuable trees are taken, with smaller ones, tops, and branches often left behind. Without care, and good forestry, this approach may lead to high grading, which contributes to slower forest growth rates. Ohio does not have a strong timber growing and harvesting base in comparison to other regions in the US and the world, so any new mill would need to import pulp.

Pulp imports could come from other parts of the United States. The US has long had an advantage when it comes to trees. In the second half of the twentieth century, old growth forests in the Pacific Northwest provided a key strategic asset, followed by second, third, and fourth generation pine plantations in the Southern US.

Pine in the US grows plenty fast, but the US growth advantage has eroded over the years as industrious foresters have figured out how to grow eucalyptus and pine plantations faster  in Brazil. Yes, rainforest is falling to make way for cattle and soybeans, but the Brazilian wood products industry has planted over 10 million hectares of fast-growing non-indigenous species on old farmland and savannas to feed its iron (heat from charcoal) and wood product industries.

Because wood pulp is easily transported, it can be made cheaply in Brazil and shipped to the United States or China. Not surprisingly, Brazil is now one of the world’s largest exporters, and their exports are growing (Figure 1).

Figure 1: Pulp exports from the US and Brazil (UN Food and Agricultural Organization, FAOSTAT database).

For US paper companies, it’s a big hurdle to overcome the substantial boost that lower labor and energy costs provide in Brazil, alongside ultra-fast forest growth rates. Even if energy costs can be driven down here, US companies will still have a tough time competing in this global market because of trends in labor costs.

A recent report by BTG-Pactual finds that the key problem holding US paper manufacturers back is the high cost of producing pulp. Their analysis illustrates that pulp costs are roughly 40% higher in the United States than in Latin America.

Figure 2 illustrates US cost trends for five inputs used to produce paper: trees (timber price), manufacturing wages, interest on bonds, electricity, and natural gas. From 2000 to the present, wages and electricity prices increased, while natural gas, interest rates and timber input prices declined.

Although many costs trended downward this century, since 2020, costs of most inputs have risen. This most recent trend weighs heavily on wood product manufacturers in the US.

Figure 2: Input and output price trends. Data sources: Timber prices from Timber-Mart South; Wages, AAA bonds, and pulp, paper and allied product prices from St. Louis Federal Reserve; Electricity and natural gas prices from Energy Information Administration.

 

High costs for labor – a key problem facing paper manufacturing in the United States – is not an unfamiliar story for most industries.  With high labor costs, companies must rely on technological or other advantages to maintain a competitive advantage.

Today, there is talk of using tariffs to compensate for this competitive disadvantage, however, imposing tariffs is a bit like swimming upstream. Even if tariffs help to keep pulp and paper mills afloat for a few years longer, only lower wages (or higher wages in the competing country) or better technology with fewer labor inputs will resolve the competitive disadvantages in the long run. There is a risk with tariffs too. They raise prices and increase the pace of substitution

Big new investments in US pulp and paper, or forest industries more generally, will only be made when longer term prospects turn positive. One of those “positives” is the price of paper material, which has increased in the last couple decades, almost in lock step with wages (Figure 2).

These rising prices reflect declining capacity in the United States and Europe over the last 5 – 10 years combined with growing demand for shipping containers and boxes. This demand increase was global in nature, with rising economic growth and trade across the globe in the twenty-first century. The movement to e-commerce also elevated demand for boxes.

Undoubtedly, these demand factors have kept some factories in the US open longer than otherwise. For the last decade or so, businesses have been able to compensate for higher wages with better prices. Eventually, however, the strong uptick in several costs proved terminal for factories like the one in Chillicothe.

One thing the US has going for it is its land-base, which is capable of producing well over 500 million m3 of timber sustainably each year – a number 40% greater than we currently produce. With rising competition from Brazil and other places with potential for fast-growing forests, moving to this level of wood harvesting in the US will require both new demand and new investments in technology and people. These investments will have to happen both in forests and factories.

Could we see movement to this level of harvesting and investment in the US?   I’ll turn to that question in the next post.

Re-Greening in Action!

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Brent Sohngen, Professor of Environmental and Natural Resource Economics at Ohio State University (sohngen.1@osu.edu).

I was intrigued by a recent story from WRI about forests coming back in Latin America. The authors report on data provided by the University of Maryland which looks at tree losses and gains in the region from 2015 to 2023. Out of 18 countries examined, the authors find that three countries gained tree cover, 10 remained neutral, and five experienced forest losses. The gains occurred in Guatemala, El Salvador, and Uruguay. Losses in Honduras, Belize, Brazil, Bolivia, and Paraguay.

We shouldn’t be surprised anymore to find that deforestation in many places is slowing while reforestation is gaining steam. My colleague Douglas Southgate and I recently wrote a book (Reversing Deforestation) arguing that trends in demography, technology of food and wood production, and local ownership were setting the stage for forest transition across Latin America. When climate policies, efforts to protect habitat, and private carbon markets are added to mix, the signals are strong and forest gains are picking up steam.

I got to see these changes in person in February, when I traveled to northern Guatemala and participated in a series of meetings and field visits hosted by colleagues from The Wildlife Conservation Society (WCS). The main topic of discussion at the meeting was forest restoration and re-greening of grazing lands in key ecosystems of Central America. Because of the location in Flores, Guatemala, much of the conversation centered around activities in the Maya Biosphere Reserve.

For the field trip, we headed up the route to Carmelita (Figure 1), an historic community about 85 km north of Flores in the heart of the Maya Biosphere Reserve (https://maps.app.goo.gl/xCXXNYFWC6iusDNE6). Communities and ranches dot the route. Many people in these communities have been integral to successes and failures of the Reserve since its establishment in the early 2000s. The objectives of the Maya Biosphere Reserve were to protect forests and culture, while at the same time providing for livelihoods. A tall order anywhere in the world.

Figure 1: Google Maps satellite image of the “Route to Carmelita”, seen as the road leading north from San Andres towards Carmelita.

In this part of the Reserve, protection has not always been easy to accomplish. The GIF in Figure 2 illustrates how deforestation has crept up the route to Carmelita since 2000.
There are many explanations for this deforestation. Fortmann et al. (2017) break the concessions in the Reserve into three groups: long-established residential concessions, recently established residential concessions, and non-residential concessions. By far, most deforestation has happened in the recently established residential concessions – the ones along the route to Carmelita.

Figure 2: GIF of deforestation along the Route to Carmelita between 2000 and 2023, obtained from the Global Forest Watch website (https://www.globalforestwatch.org/)


Many of the folks who were recruited to join these recently established concessions were migrants to the region, often with farming backgrounds. The forest concessions along the road to Carmelita had also been harvested for decades prior by industrial timber companies, leaving the areas with comparatively low stocks of valuable timber. As a result, the income generated in this area was lower than elsewhere in the Reserve.

Becoming a concession member provided an opportunity to secure some land. Forestry provided a less certain approach to obtaining the food and income necessary for the survival of their families. And some large ranchers moved in, frequently offering large sums of money to locals, allowing them to take advantage of communities that did not have the resources to fight back.

Yet today, there is hope. Data from the University of Maryland (Figure 3) shows forest cover increasing in many places along this route. Not everywhere, and deforestation still happens, but reforestation is a growing feature of the landscape.

Figure 3: Woody Vegetation Canopy Cover data from Global Land Analysis and Discovery data set (https://zenodo.org/records/14231362). Blue illustrates areas where canopy cover increased from 2015-2023 while red indicates a decrease in canopy cover.

People who know say there are good reasons for this change. Bigger trends in demography and technology help, but the government has also worked to root out the excesses of illegal deforestation and cattle ranching, especially by larger operations. Ownership of forests, current or future, is becoming more secure through the concession model as many have now been renewed for an additional 25 years.

Some land is coming back on its own as cows have been removed and crops eschewed. Some land is being re-greened by human efforts, using funding from international aid agencies (the UK and the EU have been essential as was USAID before it was disbanded), or private donations. This is work WCS, the Association of Forest Communities of Petén (ACOFOP), and their many other local partners are doing.

The problem of regreening, however, is not at all trivial. One option of course is to leave the land alone and see what happens. Trees will come back if the land is left alone and fire abated. But under what conditions will the land be left alone and not converted back to grazing or cropland?

WCS reckons one way to make regreening durable is to address food production and forest productivity. Some land that could be reforested will instead be devoted to food production for some time. Even if 25% of a concessions landscape remains cropped for local subsistence, while the rest returns to forests, estimates suggest that benefits could be large enough to compete with local ranching wages.

On our excursion to the area, we picked up a local fellow who had been working in his field and transported him home. It was his birthday — he said his 100th — but rather than celebrating, he was tending to his crop of maize. It’s humbling to see someone who should be retired and playing with his grandkids working like that. It’s problematic to think that regreening could worsen outcomes for him and his extended family if some land is not available for food production.

For the long term, WCS is trying to elevate two goals. First, their emerging model of re-greening ensures land is available to local inhabitants to generate income and food, improving livelihoods, and competing with wages on nearby ranches. Second, their model attempts to increase forest productivity by speeding the time to mature forests with nursery operations and replanting focused on valuable species like Mahogany and Spanish Cedar. Standing forests in the area have already been high-graded, so it’s going to be a while until mature, high-value forests return, but WCS is doing everything it can to make this happen as quickly as possible over as much landscape as it can.

Already, one can see signs of success. In areas formerly infested with exotic and highly invasive pasture grasses, Mahogany trees 10-15 feet high planted several years ago are emerging at the top of the canopy. Data from bird studies suggest that reforesting areas now attract forest dependent species that have avoided the area for years. Wildlife cameras are capturing animals more comfortable in forests than grazed and cropped lands.

As it has been for the last 25-30 years, the people living and working in the Maya Biosphere Reserve continue to lead by example. Regreening efforts along the “Route to Carmelita” respond to both “failures” from the past and opportunities for the future. Efforts by WCS and its partners to promote livelihoods by supporting some crop production while trying to bring back a productive forest for the future represents a model that can be used in many places.

** Many thanks to Roan McNab for commenting on an earlier version of this document, as well as inviting me to the meeting and excursion in Guatemala, and Gabriela Ponce along with the incredible WCS team in Guatemala for their hospitality and clear explanations of how they are going about their work!

Reversing Deforestation in Latin America: How USAID has helped.

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By Brent Sohngen (sohngen.1@osu.edu)

Watching the current turmoil at USAID is more than sad. Not only is it devastating to hard working people and their families in all corners of the earth, but it will also have long-term implications for the welfare of people in other countries where economic development sorely lags. Yes, we can ignore the plight of others and focus only on ourselves. But the America I know has never been like that. I hope it doesn’t change. I fear it has.

Let me give one example of the type of work of USAID does. You can read more about it and other examples in the book I co-authored with Douglas Southgate Reversing Deforestation: How Market Forces and Local Ownership are Saving Forests in Latin America (Stanford University Press, 2024).

For years, USAID has supported community forestry in the Maya Biosphere Reserve of northern Guatemala. I wrote a bit about this project in an earlier blog post: Is timber harvesting in the tropics sustainable?

Back in the 1990s as Guatemala’s long-running civil war came to a close, there was discussion about what to do with land in the north of the country. The area contained an enormous wealth of Maya history locked up in buildings covered by half a millennium or more of rainforest growth. Lots of people had moved to the area to escape violence and more people were coming in search of a better life. An agricultural frontier was moving north towards the region along the recently paved road, shifting forests to farmland with significant losses of cultural Maya relics to the private black market.

Some people argued the entire northern part of the country should be turned into a giant set-aside, or national park. Fortunately, their arguments didn’t prevail and a more pragmatic approach emerged. This approach included setting some parks aside, while at the same time creating community forestry operations – where forests would be managed for timber and non-timber forest products by local groups.

USAID supported this institutional approach of providing limited ownership of forestland for forest management. The limited ownership occurred in the form of 20-year contracts with local groups. USAID supported efforts to manage these forests scientifically, using forms of selective harvesting in 30- to 40- year rotations which would help maximize value and regeneration of the most important species, Mahogany.

USAID supported entrepreneurship at timber mills that would receive the logs and turn them into boards, sometimes drying them before shipping them to other parts of Guatemala or the world. Famous rock bands have used the wood for their guitars because it’s sustainable. With support from USAID, local business groups would meet periodically to develop marketing strategies.

I haven’t spent an enormous amount of time in northern Guatemala. But the time I have spent has taught me that entrepreneurial spirit is alive and well there. With limited ownership of the land and forest resources through community forestry, full ownership of timber mill capital, and an eager willingness to work, members of the community forestry operations were well off.

As part of my research, we have shown that these efforts slowed deforestation (Fortmann et al., 2017) and increased incomes (Bocci et al., 2018).

Maybe it would have happened without USAID. I don’t know? What I do know is that USAID helped it happen by adapting the time-honored U.S. model of fee simple ownership and encouraging local community ownership because they are philosophically consistent. Back in the 1990s, people in that organization sensed an opportunity to encourage local ownership and help local organizations become better business people.

Who knows what the “new philosophy” at USAID, or whatever some new agency like it is called, will bring? It’s got a tall bar to get over to beat what USAID accomplished in the past.