Why Are Lumber Mills Really Shutting Down?

By Thomas Michael Power (January 27, 2003)

It seems that with each passing week another of our small lumber mills shuts down, putting rural folks out of work. The timber industry and their political allies often are quick to blame National Forest policies and environmentalists for these mill shutdowns. But that is political hyperbole that is far off the economic mark. The shutdowns are not tied to an inadequate log supply, but rather to an excess supply of lumber products on the market. Those are almost opposite problems.

The nation is awash in lumber products. That surplus supply has driven lumber values down to ten-year lows. Those low product prices are putting older, smaller, high-cost mills out of business. Those record low lumber prices are partly a result of American lumber mill capacity actually increasing significantly over the last five years as large, modernizing mills have expanded and new mills have been built. Those low prices are also tied to Canadian, European and Latin American wood product imports successfully competing with American mills.

Blaming local environmental policies for changes that are driven by national and international competitive markets demonstrates either basic economic ignorance or self-interested scapegoating. We should demand better of both our political and business leaders.

Lumber mills are shutting down across the nation and a given mill’s dependence on National Forest timber appears to have little to do with it. In Maine, where there is almost no dependence on National Forest timber, mills are closing and timber-dependent counties are losing population. In California, Sierra Pacific – the largest private timberland owner in the state – announced last January the shutdown of three of its mills. Sierra Pacific pointed to plummeting lumber prices and honestly explained "It just didn’t make sense to be cutting up high-value logs and then selling the lumber at low prices."

We in the West should be used to industrial firms responding to over-supply and low prices by temporarily cutting back or shutting down. Aluminum plants, paper mills, mine and smelter operations, manufacturing plants, farmers and cattle producers all do that. Lumber mills have always done it too. In the face of excess supply and low prices, the logical strategy is not to continue producing, but to cut back. The reduction in supply brings demand and supply back into balance and prices ultimately recover and at least some mills can return to full production. Our forest products industry and mill towns have been through these market-driven closures for as long as we have sold our lumber products onto national and international markets.

Riding the roller coaster of international commodity prices is an unavoidable feature of a natural resource economy. The consequences are not pleasant for any of us, least of all for those working in the mills. The economic insecurity that these commodity price cycles bring to our communities ultimately makes them and their residents poorer. That is why most of those over-specialized communities are working to diversify their economies.

Increasing commercial timber harvests on our National Forests will not solve these problems; it will only make them worse. First, since the costs associated with most National Forest timber harvest programs exceed the commercial value of the timber harvested, such an expansion can proceed only with subsidies from the American taxpayer. To the extent that expanded public harvests come from current roadless areas, the subsidy will have to be even higher because these are the highest cost areas to enter.

But subsidized expansion of National Forest timber harvest at the very time that markets are flooded with lumber products will only drive lumber prices further downward. This will drive still more small mills – especially mills without access to subsidized supply – out of business. Those mill towns that benefit from the irrational subsidized expansion in federal supply, will find themselves still more dependent on a politically propped up and unstable industry. To the extent that the expanded National Forest harvests come at the expense of clean water, fisheries, wildlife, recreation opportunities, and scenic beauty, one of the primary assets rural communities have working for them – quality of life – will have been undermined.

Subsidized increases in National Forest harvests in a desperate attempt to keep mills operating even when market conditions indicate that reduced production is appropriate undermines economic diversification efforts by making the community less attractive to new businesses and residents. It is part of a death-spiral strategy rather than a path to revitalizing our communities. Yet that is the direction in which the current hysterical political response is committed to carrying us.

Thomas Michael Power is Professor of Economics and Chairman of the Economics Department at the University of Montana. He is the author of Lost Landscapes and Failed Economies: The Search for a Value of Place. He may be contacted at (406) 243-4586 or tom.power@mso.umt.edu.