Regional Cost Analysis and Indices for Conventional Timber Harvesting Operations

Transcription

1 Regional Cost Analysis and Indices for Conventional Timber Harvesting Operations Final Report to the Wood Supply Research Institute Shawn Baker, Dale Greene, Tom Harris, and Richard Mei May 5, 2013

2 Table of Contents Executive Summary... 2 Acknowledgments... 4 Introduction... 5 Regional Summaries... 5 Southern Region... 9 Western Region Lake States Region Northeast Region The Logging Cost Index for the U.S. South Cost Indicators Calculation of Logging Cost Index Logging Costs and Logging Rates Additional Needs Going Forward Periodic Confirmation of Cost Drivers Expansion to Other Regions Hauling Cost Index References

3 Executive Summary We developed a logging cost index for southern mechanized roundwood operations which should replace the labor- and time-intensive index provided to the Wood Supply Research Institute for many years by Bill Stuart and Laura Grace. Our goal was to base the initial value of the index on accounting records of a select group of logging contractors, but to track the changes in logging costs using data publicly available much more readily than annual cost data from loggers. The initial intent of the project was to develop such an index for each of the four major timber-producing regions of the country the South, Northeast, Lake States, and West. However, participation was only adequate in the Southern region to develop a cut and load index at this time. Logger interviews in each region were comprised of a comprehensive review of the logging business and a detailed breakdown of the major costs incurred by contractors over the calendar year We sought above-average contractors who were likely to maintain accurate cost records and provide a reliable benchmark for per ton logging costs. We contacted 95 logging contractors across the United States to request their participation. Forty-seven contractors agreed to be interviewed, and of these, 28 eventually shared detailed cost data. The greatest number of participants in the survey was in the South (23) with 19 total contractors sharing cost data. While many participants elected not to share cost data, we were able to gather interesting data on the condition of the business in each region. In the Southern region, the average cut and haul cost in 2011 ranged from $13.70 to $23.00 per ton, with a weighted average of $17.01 per ton. The cut and load portion of costs represented $12.34 per ton. Haul costs (27%) were the greatest component of the total cost, followed by labor (25%), fuel (16%), depreciation (14%), and repair and maintenance (10%). Harvest systems represented in this cost were almost entirely feller-buncher/grapple-skidder/knuckleboom loader systems working in predominantly pine stands. In the Western region, cost data were shared by only five contractors, which limits the confidence we have in the representativeness of the data for the entire region. The average cut and haul cost ranged from $23.50 to $52.50 per ton, with a weighted average of $37.08 per ton. The cut and load portion represented $31.22 per ton. The cost distribution in the Western region was substantially different, with labor (36%) representing the largest proportion, followed by hauling (16%), fuel (14%), depreciation (10%), and repair and maintenance (10%). Contract labor (often for hand felling) represented an additional 6% of the total. Three harvesting systems, cable logging, shovel logging, and cut-to-length, were commonly used by respondents, and are all represented in differing percentages in the data. Many of the contractors in the study were unable to separate the cost of each individual crew type in the data they reported. We were only able to collect detailed cost data from two contractors in each of the Northeast and Lake States regions. As a result, we weren t able to share cost breakdowns for those regions (in order to protect confidentiality of the data provided). The systems utilized in the two areas differed greatly, as we spoke with cut-to-length contractors exclusively in the Lake States and primarily whole-tree operations using feller-bunchers, skidders, and stroke delimbers in the Northeast (though cut-to-length crews were also in the sample). 2

4 The Southern region was the only region in which we gathered sufficient data to feel confident in generating a logging cost index. Taking the major cost categories reported by respondents, we sought publicly available data sources which would indicate changes in those costs over time. Gathering data on heavy equipment costs, costs of heavy equipment repairs and logging wages paid from the Bureau of Labor Statistics in addition to diesel prices from the Energy Information Administration and interest rates from the Federal Reserve, we had specific indicators of changes for over 90% of the cut and load cost. We calculated the University of Georgia Logging Cost Index by splitting a $12.50 per ton cut and load cost in the fourth quarter of 2011 into the major cost components. The data sources mentioned above were then used to alter those costs on a quarterly basis as the prices for each input changed. Using this methodology, we projected the UGA Logging Cost Index backwards to 1995 in order to compare the rate of change against the logging cost index generated by Stuart and Grace for WSRI. The two largely agreed over the eleven year period of the previous WSRI logging cost index, suggesting that the methodology was sound. The UGA Logging Cost Index will now be published quarterly in Timber Mart-South. While we have developed an indicator of changes in logging costs over time for one region of the country, additional effort will be required to both expand this approach to the remainder of the country and to ensure that the UGA Logging Cost Index remains accurate as the logging industry continues to change over time. The index methodology we developed can easily be employed in the other regions of the country if additional detail on the breakdown of logging costs can be collected. In order to instill confidence in the UGA Logging Cost Index validation of the index with cost records of contractors periodically in the future will be necessary. This will verify that the trends projected by the index are valid and will capture changes in productivity of contractors resulting from improved machinery and/or operating practices. 3

5 Acknowledgments We received a tremendous amount of assistance in performing this research. While we are unable to share the names of the many loggers with whom we communicated during this project, we would like to thank each of them for their contributions and consideration. Those who chose to participate in the study were gracious with their time and very generous in helping us understand the current status of the logging industry. In addition, Henry Schienebeck with the Great Lakes Timber Professionals Association, Doug Duncan with the North Carolina Association of Professional Loggers, Mike Beardsley with the Professional Logging Contractors of Maine and Jim Geisinger with the Associated Oregon Loggers were extremely helpful in suggesting possible participants in the project. Vickie Hoffart and Joel Swanton with the Forest Resources Association also provided assistance in identifying logging contractors in their regions. Jeff Benjamin at the University of Maine graciously helped us both identify and interview a number of contractors. Many of the representatives of WSRI member companies were also extremely helpful in recommending potential contractors from their areas. Without the assistance of each of these people, our efforts would have been much more difficult. Finally, we deeply thank the Wood Supply Research Institute and each of its contributing member companies, logger associations, and other parties for funding this project with our research group. 4

6 Introduction The Bureau of Labor Statistics listed 8,300 logging businesses employing 46,300 people across the U.S. as of the 2 nd quarter of In employee wages alone, the logging industry generates $430 million. It is also a vital component of the U.S. forest products supply chain. Despite the importance of the logging industry, information on the condition of the logging workforce has historically been limited. The business is dominated by small independent contractors, and substantial effort is required to gather sufficient information to make generalizations about the industry as a whole. Many approaches have been designed to estimate the cost of logging operations. Some of these were based on specific detailed historic cost records, while others used simplifying assumptions and reasonable estimates of cost components. All cost estimates need to be based on real data as much as possible to improve their validity. While sources of data on cost components were reported with some frequency through the mid-1980 s, the expansion of contract logging reduced the ease with which large datasets on logging costs could be readily collected. The Wood Supply Research Institute (WSRI) has funded a project with Dr. Bill Stuart to track logging costs for a number of years. The information in reports generated by Stuart has been one of the most widely available indicators of logging cost changes over the past 20 years. One disadvantage of Stuart s reporting was the 1-2 year delay between the recording of the cost information by a contractor and the availability of reports to potential users. Generating a timely, accurate indicator of changes in logging costs would provide value to everyone in the industry. It would establish a baseline against which logging contractors could compare their own costs and would offer buyers and sellers of timber a reference for shifts in cut and haul rates. Regional Summaries We contacted logging contractors in four major timber-producing regions of the country, the South (from Virginia to Arkansas), the Northeast (Maine to New York), the Lake States (Michigan, Wisconsin, and Minnesota), and the West (Oregon and Washington). Contractors were given a description of the goals of the study and asked to participate. Roughly half agreed to participate in each region (Table 1). All participants were visited and a face-to-face interview was conducted during which detailed data on the characteristics of their business was collected. Whenever possible, detailed cost data from the previous calendar year (2011) were collected at the same time. Frequently, contractors needed additional time to find and compile all of the requested data. In many cases, though, gathering cost data after the initial interview was unsuccessful. Only in the South and West regions was sufficient cost data collected to show any regional averages. It is hoped that improved visibility of the project and great assurance that data will not be used to the detriment of collaborators might encourage greater participation in the future. 5

7 Table 1. Summary data on the logging cost interview participants by region. South West Lake States Northeast Contractors Contacted Participants No. Providing Cost Data Total Logging Crews Avg. Contractor Weekly Production (Tons) Production per Woodsworker per Hr (Tons) Weeks Worked per Year Off-Road Fuel Consumption (Gal. per Ton) Avg. Haul Distance (Mi.) Percent Contract Trucking The participating companies varied widely in size from single logging crews up to ten logging crews. Variation between regions was apparent. Average weekly production for logging companies in the Lake States was lower than other regions, despite the fact that the average production of woodsworkers in the region was higher than in either the West or the Northeast. The prevalence of cut-to-length machinery in the Lake States also allowed them to work essentially year round, as only Northeast contractors reported consistent downtime resulting from a mud season. Average haul distances in the South and West were shorter than in either the Lake States or Northeast, and responding contractors mentioned a lesser reliance on contract trucking in the Lake States than other regions. Questions regarding labor were asked of all participants. In the West, respondents were evenly divided regarding whether logging workers were in short supply. In the Lake States, all respondents said labor was limited and in both the Northeast and South, 80% of respondents claimed labor was not a limiting factor. Across all regions, approximately half of contractors offer some sort of bonus system, typically related to production, but safety bonuses were mentioned by contractors in many regions as well. Regarding repair of machines, 63% of contractors rely on their own mechanics for major repair work, 13% on the dealer, and 16% on a subcontract mechanic. Roughly half of contractors assigned repair and maintenance costs separately to each machine as they occurred. Many of these contractors reported, however, that they no longer had sufficient office personnel to enter these records into a database, and often the information was neither available nor used for equipment replacement decisions. When asked about machine replacement strategies, most contractors admitted to examining some factors when making the decision to purchase a new machine (Figure 1). By far the most common measure used was the age of 6

8 the machine. Many had a specific number of clock hours or years they used as a rule of thumb to make decisions; however, these rules had been extended or put on hold for a majority of the respondents. Repair Costs 18% Machine Failure 9% Machine Age/Hours 50% Downtime 23% Figure 1. Primary factors contributing to the decision to replace machinery. In all regions except the West, off-road diesel was most frequently purchased in bulk and kept in bulk tanks. Fuel keycard systems at retail fuel stations out West were used most frequently for both on- and off-road purchases. On-road diesel bulk tanks were less common amongst participating contractors (39% of respondents), as purchases were primarily made at retail stations for 61% of participants. The source of timber harvested by contractors also varied by region (Figure 2). Contractors purchased most of the wood they harvested in the Lake States, while the majority of timber harvested by participants in the Northeast and West regions was cut on a contract basis for larger companies who either bought the stumpage or owned the land (includes forest industry, TIMO and REIT). Dealers were a small percentage of the wood source, though the size of some of the responding contractors allowed them to act as a dealer, with logging crews working for them on a contract basis. 7

9 100% 80% 60% 40% 20% Dealer Owned Contractor Purchased Company Owned 0% South North Lake States West Figure 2. Sources of timber harvested by participating contractors in The average respondent contractor had 25 total employees, owned seven log trucks, but had only one administrative or office staffperson. Often family members either earned a partial salary for assisting with some of the office duties (bookkeeping or payroll, primarily) or provided the service without a salary. 8

10 Southern Region In the southern region, we contacted 40 contractors in eight states (VA, NC, SC, GA, FL, AL, LA, AR), and 23 agreed to participate in the project. Of those 23, 19 actually shared cost data for The goal was not to calculate an average cut and haul cost for the US South, but to determine an accurate percentage breakdown of the main cost drivers for efficient logging companies. As such, the values reported here are not intended to represent an average cost for contractors, but to provide an accurate base cost from which we can predict future movement in the cost over time. We suspect that the costs we report here are lower than the average for all contractors. Participants had higher weekly production than the average contractor, and were selected based on their reputations for quality and consistent performance. Table 2. Components of logging costs in the Southern US, Reported as per ton costs and percent of the total cut and haul cost. Percent Per Ton Labor 25% $ 4.25 Depreciation 14% $ 2.31 Interest Expense 1% $ 0.18 Repair and Maintenance 10% $ 1.70 Fuel and Consumables 16% $ 2.64 Administrative 3% $ 0.57 Insurance 4% $ 0.67 Hauling 27% $ 4.67 Total Cut and Load Cost $ Total Cut and Haul Cost $ Range of Cut and Haul Cost $13.70 $23.00 The percent breakdown of costs has changed considerably over time as prices for inputs have shifted. In 1994, labor represented 35% of logging costs, equipment 19%, fuel and repairs 21%, and hauling 20% (Stuart and Grace 1999). Improved labor productivity and increased costs for fuel are probably the primary drivers changing this distribution. The average cut and haul cost in 1994 was roughly $12.00 per ton (Altizer, Grace and Stuart 2004). Adjusting for inflation, this corresponds to $18.20 per ton in Accurate haul cost records were difficult to obtain in most instances. Companies typically included costs for their own trucks mixed in with costs for their harvesting businesses. Unless trucking was maintained as a separate business, only the rates paid to contract haulers were separated as a cost category in their records. Every effort was made to separate labor, depreciation, fuel and repair costs associated with operating trucks from those associated with cut and load operations. We report a combined cut and haul that includes all costs. From the detailed records of a few of the businesses, it was possible to 9

11 Repair and Maintenance Costs separate the haul costs for owned trucks from those of and contracted trucks. The distribution of cut and load costs for these businesses did not differ substantially from the cut and load costs for businesses for which we could not ensure that all costs were accurately allocated. The lack of accurate trucking costs represents a challenge to the industry that should be addressed. We expected to observe increased repair costs with decreasing depreciation expenses (increasing machine age). This might also signify a willingness to invest more in repairs on older machinery rather than incurring higher fixed monthly payments. That pattern was not apparent (Figure 3). Nor was a clear pattern apparent when comparing repair costs across machine ages (Figure 4). Repair costs vary widely year-to-year and are very difficult to predict for an individual contractor, but for a large group it appears, that they range between 5 and 15% of total cut and haul cost. 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% 25% 30% Depreciation Costs Figure 3. The percent repair and maintenance cost compared against the depreciation cost for all contractors. 10

12 Repair and Maintenance Costs 25% 20% 15% 10% 5% 0% Average Machine Model Year Figure 4. The percent repair and maintenance cost compared against the average age of machinery used by contractors. Table 3 presents summary information from the companies who agreed to participate. They reported an average production of 4,200 tons per week with slightly less than three logging crews per company. Compared against the average Georgia or South Carolina logging contractor, participants had 2.5 times greater weekly production. Roughly half of the timber harvested was purchased or owned by a company with whom the respondent contracted, 35% was purchased by the respondents, and 16% was harvested under a wood dealer. Many of the participants were of suitable size that they served as dealers themselves, so this distribution is likely somewhat skewed when compared against averages for all contractors in the South. Respondents contracted for 45% of their hauling, and owned eight haul trucks. Trucks averaged 5 miles per gallon of diesel. Contractors reported using in-woods or on-board scales on 43% of their loads. Businesses had 25 employees on average with roughly half of those employees working in the woods. The majority of respondents offered some benefits to employees as well, with paid vacation and transportation to the job the most common benefit types (Table 4). Over 80% of Southern respondents indicated that available labor was not a limitation, though most cited a lack of trained labor. 11

13 Table 3. Summary characteristics of participating contractors Count Mean Median Years in business Avg. weekly production (tons) Breakeven weekly production (tons) Weekly hours worked Number of logging crews Total employees in business Employees in woods Number of markets Avg. haul distance (mi) Weeks of quota limitation Timber source - % Company Timber source - % Purchased Timber source - % Dealer Woods tires purchased Avg. Tire cost 18 $4031 $4000 Monthly consumable costs 7 $4350 $4900 Number of pickup trucks Administrative staff Workers comp rate per ton 14 $0.36 $0.33 Mechanized workers comp rate 7 $13.76 $15.00 per $100 Experience mod Employee turnover, 24 mos Percent contract trucking Contract trucking rate ($/ton-mi) 11 $0.11 $0.12 Over-the-road trucks Over-the-road trailers Avg. truck fuel mileage (mi/gal) Avg. weekly on-road fuel consumption Overweight fines (annual total) 13 $5890 $2133 Trucks with scales (% of total)

14 Table 4. Percent of participant companies providing benefits. Benefit Type Percent Retirement Plan 30% Health Insurance 30% Vacation 57% Sick Leave 17% Transportation to Job 61% Holiday Bonus 45% Feller-buncher/grapple skidder/knuckleboom loader operations predominate across the Southern US, and respondents used this grouping of equipment almost exclusively (Figure 5). Some contractors also incorporated a cut-to-length processor at the landing to handle delimbing and bucking. The ages of equipment in the woods do not show a noticeable pattern of reduced equipment investment since the recession started impacting the industry in 2008 (Figure 6). The large number of machines greater than nine years of age is indicative of a group of contractors who prefer to maintain an older equipment fleet and avoid purchasing new equipment. The overall continued investment despite weak market conditions is an indication of the relative strength of the contractors who participated in the project. Many contractors indicated, however, that their equipment replacement strategies had been put on hold during the recession, with purchases occurring only when necessary. In some instances, the payments on new equipment were too great to be covered by their monthly cash flow. Many also noted that extending machine usage beyond the typical replacement age lowered the value of the machines when placed on the used market, thus requiring a higher level of financing when replacement did occur. Those contractors who had strong financial standing were able to take advantage of very low financing offers due to the reduced interest rates. 13

15 Number of Machines Figure 5. Types of equipment used by Southern logging contractors or older Figure 6. Ages of machines operated by contractors in the Southern region. 14

16 Western Region Out of 19 contractors contacted, eight agreed to participate. Of those, five ultimately shared financial data. The Western region had three common operating systems cable logging, cut-to-length, and shovel logging. Almost all of the companies contacted operated more than one of these crew types. Unfortunately, few of the companies maintained separate cost records based on crew. Those that did share separate cost information highlighted the extreme variability between the costs of each of the three operation types. The preponderance of cable logging still involves relatively labor intensive operations, and contracted felling for cable operations was common. In general, Western contractors had relatively large operations. This is reflected in much higher cost per ton. The cost reported here is an average of costs for all three operation types. It was not possible to separate them due to small sample sizes. Table 5. Components of logging costs in the Western US, Reported as per ton costs and percent of the total cut and haul cost. Percent Per Ton Labor 36% $ Depreciation 10% $ 3.80 Repair and Maintenance 10% $ 3.61 Fuel and Consumables 14% $ 5.01 Interest Expense 2% $ 0.62 Administrative 4% $ 1.58 Insurance 2% $ 0.83 Hauling 16% $ 5.86 Contract Labor 6% $ 2.29 Total Cut and Load Cost $ Total Cut and Haul Cost $ Range of Cut and Haul Cost $23.50 $52.50 The small number of respondents limits meaningful detailed analysis of the data. Examining just the cut and load portion of cost, though, it is clear that labor is a substantially higher component of costs (Figure 7). If contracted labor is added to the direct labor cost, half of the cut and load costs are represented by labor rates. As a result, fuel costs are a lower percentage of costs than in the Southern region. Also, haul costs are slightly higher than those reported in the Southern region, but due to substantially higher cut and load costs, haul costs are a smaller percentage of the cut and haul cost. Haul distance is similar between the two regions (Table 6). Longer off-road hauls and challenging terrain were mentioned as additional impediments to trucking in the region. 15

17 16% 7% 2% 5% 3% Labor Depreciation 43% Repair and Maintenance Fuel Contract Labor Interest Expense 12% Administrative 12% Insurance Figure 7. Components of cut and load costs for Western region respondents. Average weekly production of Western contractors was very similar to that of the Southern participants. Median production was 4,000 tons per week. Western contractors achieved this production with a relatively large workforce, though. Companies averaged 3.5 logging crews and close to 40 employees. Western region respondents reported by far the highest labor turnover of any region. Respondents were evenly split in their opinions on available labor in the region, with some reporting little difficulty finding workers and others reporting greater challenges. Skilled workers were in short supply even when available labor was not mentioned as a limitation. Where contractors were not concerned with the availability of labor, increasing percentages of Hispanic workers were frequently referenced. The vast majority of the wood was harvested on a contract basis, with loggers only procuring 5% of their own wood. The average mechanized worker s comp rate was only $8 per $100 payroll. The comp rate for cable logging employees was much higher, often 2 to 4 times greater. Contract trucking was prevalent amongst respondents, with slightly more than half of loads hauled on a contract basis. The average respondent owned 5.5 trucks, and reported an average haul distance of 52 miles. The average fuel mileage of trucks was reported as 5 miles per gallon. Respondents reported that they all used in-woods or onboard scales in their operations. 16

18 Table 6. Summary characteristics of participating Western contractors. Count Mean Median Years in business Avg. weekly production (tons) Breakeven weekly production (tons) Weekly hours worked Number of logging crews Total employees in business Employees in woods Number of markets Avg. haul distance (Mi.) Weeks of quota limitation Timber source - % Company Timber source - % Purchased Timber source - % Dealer Woods tires purchased Monthly consumable costs Number of passenger trucks Administrative staff Mechanized workers comp rate per $100 Experience mod Employee turnover, 24 mos Percent contract trucking Over-the-road trucks Avg. truck fuel mileage (Mi/gal) On-board/platform scales Weeks per year All respondents contributed at least some portion towards employee health insurance and offered transportation for employees to the job sites (Table 7). Some form of retirement plan was also a common benefit, with company 401K and IRA plans both mentioned. Some employers also offered a cash match. 17

19 Table 7. Percent of Western region respondents offering employee benefits. Benefit Type Percent Retirement Plan 63% Health Insurance 100% Vacation 50% Sick Leave 0% Transportation to Job 100% Holiday Bonus 38% The types of equipment used in the region shows how variable operations are (Figure 8). Loaders and shovels were by far the most common equipment types, followed by cable yarders and carriages. The machine age profile in the Western region is similar to other regions with a noteworthy exception. While investment in machinery clearly lagged in 2009 and 2010, the strength of export markets was a sufficient reason to increase capital investments, and the pace of machinery purchases in 2011 and 2012 was higher (Figure 9). Aside from a stockpile of older machinery (new cable yarders were not being manufactured anywhere at the time of the study), the most recent two model years represented the most common ages of machinery. The Western region is the only region where this is the case. All of the contractors interviewed who operated a cable yarder spoke of the desperate need for new yarders. Most of the larger yarders in operation are well over 10 years old Figure 8. Types of equipment used by Western logging contractors. 18

20 or older Figure 9. Ages of logging equipment in use in the Western region. Contractors in the Western region were the last group we interviewed for this project, with all interviews occurring in the fourth quarter of At that time many of the contractors were commenting on the rebounding economy and a seeming increase in the calls received looking for logging services. The strength of export markets had provided areas of the extreme West some protection against the worst of the recession, but logging capacity still suffered as domestic markets reduced their demand. At the time of the interviews, Western contractors were the only respondents mentioning improving market conditions and suggesting that demand for logging was beginning to equal supply. 19

21 Lake States Region In the Lake States, we contacted 20 logging contractors about participation in the study. Of those 20, nine agreed to participate. Of the nine participating contractors, we only obtained reliable cost data from two. As a result, we are unable to report any cost data for the region. Participating contractors were lower production, on average, in the Lake States than in other regions (Table 8). While the average respondent still had three logging crews, each crew was typically only two people. Thus the average weekly production for each company (1800 tons per week) was considerably lower than in the West, for example, where an average crew had close to six employees in the woods. Production per woods-working employee was second only to the Southern region (Table 1). The average production of respondents, was still close to four times greater than the average cut-to-length logging contractor in the region, as reported by Traver, et al. (2012). A large proportion of wood harvested was purchased by contractors, as private and government timber sales (county, state and federal) were a major source of wood in many areas. The Worker s Compensation rates for mechanized logging in the region were relatively high compared to other regions, though state regulations and the incident history of respondents certainly affect this greatly. Most contractors handled the majority of timber hauling with their own trucks. Contract trucking represented only one-quarter of the hauling in the region. Haul distances were relatively long compared to either the Southern or Western region, but legal Gross Vehicle Weights (GVW) were much higher, helping offset the added cost of longer hauls. As a result of heavier GVW, though, fuel mileage of trucks was lower, averaging only 4 miles per gallon. Self-loading trucks were also more common in the area, which aided with decoupling of the harvesting and hauling operations, but reduced the payload of timber which could be hauled (contractors reported average payloads ranging from as little as 28 to as much as 55 tons). While in-woods scales were not common, most trucks were equipped with air suspension trailers, and the payload could be estimated based on the reading of the air gauges. The Lake States was the only region in which all respondents stated that there was not sufficient available logging labor in the area. Skilled labor was particularly necessary in the region due to the prevalence of cut-to-length machinery and the technical skill needed to operate this machinery effectively. Employee benefits were common amongst most of the respondents, with paid vacation and transportation to the job the most frequently mentioned benefits (Table 9). 20

22 Table 8. Summary characteristics of participating Lake States contractors Count Mean Median Years in business Avg. weekly production (Tons) Breakeven weekly production (Tons) Weekly hours worked Number of logging crews Total employees in business Employees in woods Number of markets Avg. haul distance (Mi.) Weeks of quota limitation Timber source - % Company Timber source - % Purchased Timber source - % Dealer Woods tires purchased Avg. tire cost Monthly consumable costs Number of passenger trucks Administrative staff Mechanized workers comp rate per $100 Experience mod Employee turnover, 24 mos Percent contract trucking Over-the-road trucks Over-the-road trailers Avg. truck fuel mileage (Mi/gal) On-board/platform scales Weeks per year

23 Table 9. Percent of Lake States region respondents offering employee benefits. Benefit Type Percent Retirement Plan 44% Health Insurance 56% Vacation 89% Sick Leave 22% Transportation to Job 78% Holiday Bonus 67% Cut-to-length operations were, by far, the most prevalent amongst the contractors interviewed in the Lake States (Figure 10). While we interviewed some contractors who also operated feller-bunchers, all contractors operated harvesters and forwarders. This differs from recent studies of the entire logging force in Wisconsin, which have shown only 50% of contractors running cut-to-length systems (Traver et al. 2012). The age distribution of equipment was particularly uneven in the Lake States. New CTL equipment can cost $500,000 or more, making the impacts of reduced cash flow burdensome. Payments on new machinery were a burden many contractors stated would be too great to undertake at the present time, and a number commented that they intended to focus on the used equipment market until logging revenues were suitable to cover the costs of new equipment. As a result, the majority of equipment in operation was at least six years old Figure 10. Types of equipment used by Lake States logging contractors. 22

24 or older Figure 11. Ages of logging equipment in use in the Lake States region. 23

25 Northeast Region We contacted 16 contractors in the Northeast about participation in the study. Of those 16, seven agreed to participate, but reliable cost data were only gathered from two of those seven. As a result, we are unable to report cost data for the region. The average production of contractors in the Northeast is slightly lower than that seen in the West and South (Table 10). Company sizes are still large, though, averaging three crews and 13 employees in the woods. The primary source of wood harvested by participants came from company ownerships (70%), though contractors purchased 30% of their wood supply. Haul distances averaged 75 miles, with slightly less than half of the hauling contracted. Very few trucks utilized in-woods scales, though most of the respondents used air suspension trailers and could estimate the load based on the air pressure reading. The Northeast region had the greatest number of weeks lost to weather impacts, reporting an average of only 40 weeks of operation per year. The prevalence of whole-tree harvesting systems amongst the participating contractors likely added to the impact of break-up periods. In the Lake States, where a break-up period is also a challenge, contractors reported far less seasonal impact, in part because of the cut-to-length equipment used by most of the contractors. A reasonably high percentage of respondents offered benefits to employees with health insurance and paid vacations offered by all respondents (Table 11). This corresponded to reasonably few concerns regarding the availability of labor, with only 20% of respondents claiming labor shortages were a concern. 24

26 Table 10. Summary characteristics of participating Northeast contractors Count Mean Median Years in business Avg. weekly production (Tons) Breakeven weekly production (Tons) Weekly hours worked Number of logging crews Total employees in business Employees in woods Number of markets Avg. haul distance (Mi.) Timber source - % Company Timber source - % Purchased Timber source - % Dealer Woods tires purchased Avg. tire cost Number of passenger trucks Administrative staff Mechanized workers comp rate per $100 Experience mod Employee turnover, 24 mos Percent contract trucking Over-the-road trucks Avg. truck fuel mileage (Mi/gal) On-board/platform scales Weeks per year Table 11. Percent of Northeast region respondents offering employee benefits. Benefit Type 25 Percent Retirement Plan 71% Health Insurance 100% Vacation 100% Sick Leave 0% Transportation to Job 86% Holiday Bonus 29%

27 The majority of Northeast logging contractors who participated operated feller-buncher and skidder crews. Stroke delimbers were very common, and a fairly large number of roadside processors were also noted. Only one contractor reported operating a cut-to-length crew. Most of the timber cut in the region is harvested by whole-tree systems, though cut-to-length is used by 10-30% of Northeast contractors as well (Leon and Benjamin 2013). Equipment investment in the past two years (2011 and 2012) was relatively low, though there were a number of machines in operation purchased in 2009 and Figure 12. Types of equipment used by Northeast logging contractors or older Figure 13. Ages of machines operated by contractors in the Northeast region. 26

28 The Logging Cost Index for the U.S. South The logging cost index reported for many years by Bill Stuart was last published in 2008 with a preliminary per ton logging cost reported for 2006 (Stuart et al. 2008). This was a valuable source of information on the cost pressures faced by the industry, but suffered from an extended lag time in the reporting of costs due to reliance on collecting year-end costs before summarizing and reporting them. As with this report, the delay between the cost being experienced and it being reported was typically greater than a year. Our goal in this project was to incorporate the detail of actual contractor cost records with the speed of widely available cost indices to develop a logging cost index that could be reported on a timely basis and be useful operationally. The breakdown of costs reported here agree closely with the breakdown last reported by Stuart et al. (Figure 14). While fuel costs have increased substantially, fuel and repair costs (reported as consumables by Stuart) were 26% of cut and haul cost in 2011 compared to 25% in Thus, despite the price fluctuations of individual cost components, the distribution of costs has changed relatively little. Using this rationale, we sought publicly available data that tracks the movement of the major logging cost components. We separated cut and load costs from haul costs to develop specific indices of costs. We report here the development of a logging cost index using cut and load cost data from Southern logging contractors, as the data from that region was the most robust. 100% 80% 60% 40% 20% 0% 25% 27% 3% 4% 25% 15% 3% 3% 26% 15% 29% 25% Stuart 2006 UGA 2011 Contract Services Insurance Administrative Consumables Equipment Labor Figure 14. Percent breakdown of major cut and haul cost categories reported by Stuart, et al. in 2006 and for Southern contractors from this study. Cost Indicators Labor represented 35% of cut and load costs in 2011 for Southern logging contractors. Average weekly wage of logging employees is reported quarterly by the Bureau of Labor Statistics through their Quarterly Census of Employment and Wages data (Figure 15). We averaged the weekly logging 27

29 Average Weekly Logger Wage employee wage for the eleven southern states to determine a reasonable indicator of changes in wage rates 1. There is a roughly six-month lag on reporting of data (e.g., fourth quarter 2012 values will be reported in June 2013). Both employment levels and wage rates have a seasonal cycle. A 4-quarter moving average can be used to smooth the trend if desired. A preliminary value based on the changes in the Employment Cost Index for Construction, farming, fishing, and forestry occupations can be used to estimate the data from the last two quarters of the Quarterly Census of Employment and Wages until they are released if a more timely measure is needed. $750 $700 $650 $600 $550 $500 $450 Quarterly Logging Cost 4-Quarter Moving Avg $400 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Figure 15.Weighted average weekly wage for logging employees, weighted by total logging employment, for eleven Southern States, Source, Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cew/ Fuel and oil costs represented 21% of total cut and load costs in Weekly average retail diesel price, reported by the Energy Information Administration, is available on a roughly one-week lag (Figure 16). These data can be averaged over a quarter to track the diesel price. In 2011, diesel price increased rapidly in the first two months of the year and has remained near $4.00 since. 1 The wage rate used in calculating the logging cost index is a weighted average wage from the eleven states, based on the total number of logging employees in a state 28

30 PPI Construction Equip Weekly Retail Diesel Price $5.00 $4.00 $3.00 $2.00 $1.00 $- Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Figure 16. Average retail on-highway diesel price, Source, Energy Information Administration, Equipment costs represented 18% of the cut and load cost in Our method of reporting logging costs uses depreciation as a cost for equipment, which is subject to changing tax laws, represents a more consistent measure for data collection purposes than machine payments which may vary widely based on payment method, financing, etc. There are detailed data on the cost of equipment over time available for sale (e.g., The Green Guide from Equipment Watch), but a Producer Price Index (PPI) series on construction equipment is available, which tracks the trend of costs for heavy equipment in general over time (Figure 17). The PPI series for construction machinery manufacturing (NAICS ) also includes logging equipment. Both PPI and the consumer price index (CPI) are stated as monthly values and are reported on a time lag of roughly one month for preliminary values (with final values typically lagging roughly 6 months) Q2000 1Q2002 1Q2004 1Q2006 1Q2008 1Q2010 1Q2012 Fiugre 17. Producer Price Index series for construction machinery manufacturing (NAICS ), Source, Bureau of Labor Statistics, 29

31 Producer Price Index Exact costs of repair and maintenance for a given logging crew are among the most variable and least predictable over time. Repair costs for our group of participants represented 14%. For those contractors who reported multiple years of data, though, repair costs frequently varied by 100% or more from year to year. The average cost to perform repairs on heavy machines can be estimated based on a PPI series tracking the rates charged by heavy equipment repair mechanics (NAICS 8113). This series includes forestry machinery repair and maintenance services. Data are only available since 2006 (Figure 18). Estimates of the logging cost index prior to 2006 must inflate/deflate repair and maintenance costs using either the PPI of spare parts for construction machinery or the CPI Q2006 2Q2007 2Q2008 2Q2009 2Q2010 2Q2011 2Q2012 Figure 18. Producer Price Index for commercial machinery repair and maintenance (NAICS ), Source, Bureau of Labor Statistics, At present we do not have a specific index for either insurance or administrative costs. Combined, these two components represent 10% of cut and load costs. The CPI excluding fuel and food is used to adjust these costs over time. With regards to Worker s Compensation Insurance, it seems unlikely that increasing costs represent a reasonable assumption too far back through time. Improved safety has consistently reduced costs for mechanized logging Worker s Compensation rates (Altizer et al. 2004). The final cost component we report is interest expense, which represents only 1% of cut and load costs. Interest expenses are primarily associated with financing on logging equipment. We adjust the interest expense based on changes in the prime rate. In order to accommodate the length of financing agreements, however, we use a moving three-year average of prime rate as a measure of adjustment. 30

32 Prime Rate (%) Figure 19. Majority prime rate charged by banks on short-term loans to businesses, Source, Board of Governors of the Federal Reserve System, This survey involved an examination of a group of contractors at a single point in time. To accurately predict harvesting cost inflationary factors, a comparison to cost trends over time is necessary. While the data presented above do not allow a direct analysis over time, we compared them against other indicators and existing datasets to provide insight on likely inflationary factors. Calculation of Logging Cost Index Our data on the breakdown of cut and load costs for logging contractors covers 2011, so the initial date of the index is set to the fourth quarter of The weighted average cut and load cost for our respondents in 2011 was $12.34 per ton, but varied by contractor from $10 to $16. For ease of reporting, an initial value of the index was selected as $ An average production rate of 2500 tons per week was set, and the cost of each component was calculated based on the percentage each component contributed to the total cut and load cost (Figure 20). The production level is constant over time, only the costs are changed based on the data reported above. For example, in the third quarter of 2011, the cost of labor was $4.33 per ton, and the average weekly wage reported by BLS for logging employees was $ In the fourth quarter of 2011, the reported average weekly wage had increased to $ This increase of 0.4% causes the cost of labor in the logging cost index to increase to $4.35. This method is used to alter each component of the cost index, individually, and all are summed each quarter to generate a quarterly cut and load index. 31

33 21% 1% 5% 5% Labor 35% Depreciation Repair and Maintenance Fuel Interest Expense 14% 19% Administrative Insurance Figure 20. Percent breakdown of cut and load costs for Southern contractors by major cost category, This method allows the relative distribution of costs between categories to increase or decrease based on cost changes. While the approach seems reasonable, it is imperative to ensure on occasion that the publicly available data are representative of actual cost changes and that the formulation of the cost index accurately accounts for shifts over time. The index must be validated against contractor costs periodically to ensure external forces haven t caused shifts in the distribution. However, this method will not be able to recognize changes in technology that alter the productivity of crews. The surveys of logging contractors conducted every five years by UGA would be a source to monitor productivity changes. Projecting the logging cost index backwards to 1995, starting with the fourth quarter 2011 value, allows for a comparison of the index s ability to track changes in costs accurately (Figure 21). Stuart s cost index was reported from 1995 through Figure 21 shows that the two indices track fairly closely. In cases where they diverge, they typically come back together in the next period. Given the completely different approach used to estimate these two indices, the similarities are encouraging. The key advantage of the UGA Logging Cost Index is the speed with which it can be calculated and widely reported via Timber Mart-South. As noted above, however, periodic comparisons with actual cost data are vital to ensure that changes not captured by the publicly available data do not skew the index away from actual changes in logging costs. 32