Costs and Benefits of Forest Certification

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1 and Benefits of Forest Certification Family forest owners around the U.S. are wondering, What s driving the growth of forest certification and what s in it for me? Can I expect higher timber prices if my forest management practices are certified? Are there other benefits, and will the benefits outweigh the costs? The concept of certification gained a foothold in 1993 and has been building traction since. As of 2011, the area certified under all standards represented 9% of the world s forests. The area continues to increase at a rate of about 8% a year 1. Forest Stewardship Council (FSC) certified forestland (Figure 1) is growing even faster at about 11% a year. In mid-2011 FSC totaled 354,100,000 acres worldwide. The United States with 33,811,000 acres of FSC forest places third behind Canada and Russia (Figure 2). Figure 1- Growth in Global FSC Certified Area Direct Benefits of FSC Certification Initially, advocates thought that forest certification would be spurred by direct price premiums for certified wood. While some manufacturers are enjoying higher prices for sales, most say price benefits have been limited. Where they have experienced increased value for end products, higher prices paid to landowners producing the wood are not common. Although landowners in some mill woodsheds are reporting premiums in the range of 5% to 20% for certified wood, 1 UNECE, FAO,

2 counting on price premiums in current markets is optimistic, as the market is still coming to scale and gaining full efficiency. There are, however, other tangible direct and indirect benefits related to FSC certification for both small and large landowners. Figure 2 FSC acreage in the top 15 countries. Most of the U.S. FSC supply comes from the Lake States and Northeast Regions. Highlighting a region of concern in the U.S., red bars show relative acreage of FSC certified land in thirteen Southeast states compared to other top producers. The South is losing business to other regions in part due to its lack of FSC supply. Market access is the key direct financial benefit of certification. It is closely linked to the recent phenomenon of market globalization. Not that long ago forest products companies needed locally produced wood, but, even with a resurgence of Buy Local campaigns that is less true today. Because of globalization and in particular transportation infrastructure, forest industry functions related to raw material purchases and manufacturing processes can become geographically separated. Two consequences are common: 1. While there may be shortages of wood or grades of wood (like FSC-certified wood) near a mill, there is no shortage of wood on a global scale. Today, a paper mill or solid wood manufacturer can bring in logs, chips, pulp or lumber from distant sources 2

3 by rail or container ships, often at no greater cost than local sources. 2 The net effect is that wood producers across the U.S. and in Canada, Russia, Uruguay, New Zealand and other far flung countries have become direct competitors to family forest owners that used to supply local mills. If mills want FSC-certified wood but can t buy it locally, they have the option to turn to other sources as illustrated in Figure Low shipping costs also make it feasible to manufacture products elsewhere. A company can and will close local plants and shift production to another region or country. They are motivated by lower labor costs and opportunities to build with newer technology, access capital or to be closer to alternative raw materials including better supplies of certified wood. There is also a substantial risk that a manufacturer could easily lose established customers wanting certified products they cannot supply. The customer can switch to a new supplier halfway around the world, potentially causing the original company to close plants due to a drop in business. Lost markets in either situation can setback local timber growers. Figure 3 - Highly efficient container shipping is one factor opened the door to globalized trade. Photo: Jdnx's Photostream, flickr.com 2 For example, in 1956 it cost $5.86/ton to load and unload a cargo ship by hand. Today, using containers, it may cost 16 cents or less per ton. Railroads can move a ton of freight 423 miles on a single gallon of fuel. (Al Schuler, USDA Forest Service, 2008) 3

4 Together, factors related to globalization like those described above are causing declines in U.S. timber harvests and prices that peaked in 1990's but have been falling since. Companies striving to counter these trends are employing a number of strategies including building global relationships and aggressively developing branding, product identity and product value. 3 They are adding new services to differentiate their products, and the provision of certified products is one of the fastest growing changes. 4 While they may get higher prices, their primary focus is on regaining and holding market access through the real and perceived value forest certification gives their products. The same approach can benefit family forest owners seeking to sell timber in highly competitive global markets. While most consumers do not yet seek certified products, at a business-to-business level forest certification is highly advantageous. Of the various forest certification options available, FSC demand is the overwhelming leader by a margin of four to one among North American manufacturers based on chain of custody certifications (Figure 4) FSC SFI/PEFC Canada, Mexico & Others United States North America Total Figure 4 - FSC Chain of Custody certificates held by primary and secondary manufacturers outnumber other standards by over four to one in North America (Aug 2011). 3 Peter Ince, et al, USDA Forest Service, Buehlmann, et al, Forest Products Journal, Vol. 60 No. 6,

5 Large landowners including forest products industries, real-estate investment trusts, and public forests owned by states and counties were first to recognize the value of FSC branding. They hold the vast majority of certified forestlands. Only 8% of the certified acreage is in smallholder ownership worldwide 5, and the picture is no different in the U.S. The certification trend is also not unique to the U.S. Take another look at Figure 2 and it is apparent that global competition in the forest certification arena is keen. Major players in Canada, Russia, South America and elsewhere have staked strong positions around FSC. Family forest owners in the U.S. risk a disadvantage relative to large owners worldwide if they do not become connected with certified markets. Market access is a valuable direct certification benefit that family forest owners cannot afford to ignore. Indirect Benefits of FSC Certification Major indirect economic benefits include avoiding the loss of sales or being force into offering price discounts due to lack of certification. While markets currently may not be offering many price premiums, anecdotal evidence tells of sellers giving price concessions ranging from 5% to 25% in buyers markets demanding FSC supplies. Another example from Lake States markets in 2008 shows that producers working on non FSC-certified public lands faced the risk of being phased out of pulpwood supply contracts. 6 Although non-certified landowners may be able to continue selling wood, their bargaining position can be significantly weakened. From an administrative perspective, FSC participants speak of other valuable indirect economic improvements stemming from forest certification. There is better communication between workers and management, less use of costly pesticides, fewer safety-related losses, better followthrough on commitments, better records resulting in tax savings, and more investments in maintenance and capitol development on certified lands. Some landowners are also receiving payments for ecosystem services like carbon sequestration that require certification as a prerequisite. Family forests having FSC-certified plans also have access to federal cost-sharing incentives offered through Natural Resources Conservation Service (NRCS) or the federal Farm Service Agency. Through an agreement 7 with the U.S. Department of Agriculture, FSC-certified programs qualify for federal Forest Stewardship Plan benefits, including access to cost sharing funds for practices like tree planting and habitat improvement and other financial incentives. 5 Shoana Humphries, FSC-IC, Wisconsin DNR, FSC-USDA agreement is pending final approval by the Secretary of Agriculture as of August 16,

6 Figure 5 - North American River Otter. Photo: Dmitry Azovtsev, flickr.com The dollar aside, the indirect environmental benefits of forest certification are what many family forest owners value most. Foresters writing FSC-certified management plans are required to provide landowners with a broader range of environmental considerations than under more traditional timber production plans often aimed at maximizing the cut and minimizing investments. That s good news to most family forest owners who say forest health, wildlife, water, recreation, scenery and the value of the land as a legacy to leave their children rank far ahead of timber sales. Timber producers are more respectful of operational regulations and Best Management Practices when they know an internal reviewer or certification auditor might inspect their work. Logging companies send their best crews to certified land. They do a better job of avoiding sensitive sites during adverse weather conditions. They are more careful and damage fewer trees in the harvest process. Professional loggers bet their reputations on good work and make considerable investments themselves in training and certification. When it comes time to bid on harvests, loggers are also known to give preference to FSC-certified forests because they have more marketing options. Direct of FSC Certification There are both direct and indirect expenses (Figure 6) to set up a certification program. Large landowners may hold an individual FSC certificate and bear the costs themselves, or a group entity (the most common approach to certify family forests) may address costs on behalf of group members. In either approach, the land management organization must hire a third-party auditor and prepare for and participate in audits that occur every year. The audits examine administrative operations as well as performance on the land. Both group managers and individual landowners may receive Corrective Action Requests (CARs) that must be addressed to receive or maintain certification. Direct audit costs for an individual FSC certificate will typically start at about $10,000 covering a five-year term for a relatively small owner with 2,500 acres and climb based on acreage and management intensity. That would not be a practical expense for most family forest owners, and so group certification has become popular. Direct audit costs for a five-year certification contract could run an estimated $35,000 for a family forest group with 100 members (with perhaps 5,000 to 50,000 acres total). A super group with upwards of 40,000 members and 2 million acres could expect to pay in the neighborhood of $120,000+ for a five-year audit contract. That would cover the certification body s time, travel and earnings for the initial audit and four annual checkups. Internal audit costs to prepare for reviews, participate in audits and manage Corrective Action Requests could be in the same expense range. 6

7 Initial Evaluation Audit Annual Surveillance Audits Preparation for Audits Participating in Audits Addressing Corrective Action Requests Development of Policies for Environmental, Social, & Economic Performance Criteria Compliance with Management System Criteria for: Forest & Resource Inventory, Planning, Implementation, Monitoring, Records & Reports Figure 6 - Direct and Indirect Certification External Audit Internal Audit Direct Certification Indirect Certification Total Certification The larger the group, the lower the cost per member, direct audit costs falling from about $70 per member annually for a small 100-member group to less than $1 per member annually for megagroups. The main reason large groups are relatively inexpensive to audit relates to sampling techniques that require visits to only a small percentage of properties in large groups. Less than 1% of the members of a 40,000 participant group might be visited over five years compared to a third or more of the members of a small group. An important advantage many family forest owners experience is that governmental agencies, environmental foundations or forest industries will often pick up the cost of certification audits or heavily subsidize them. As a result, a large number of family forest owners pay nothing toward direct costs. Landowners in other unsubsidized groups may pay modest fees ranging from $20-$200 annually, depending upon how quickly the group ramps up to scale. Audit costs for FSC certification are on par with other forest certification systems and are not any more expensive. 8 8 Fred Cubbage, et al,

8 Indirect of FSC Certification There are also indirect costs participating landowners pay if not in cash then perhaps by giving up an old practice. Indirect costs, sometimes called compliance costs, might take the form of: Retaining a percentage of trees to function for wildlife habitat rather than cutting everything that s salable Setting aside buffers along stream channels or wetlands to protect water quality or reserving some areas to protect endangered wildlife and plants Using fewer chemical pesticides and tolerating ingrowth of some natural herbs, shrubs or trees Fixing gullies so they don t wash out roads Communicating with neighbors about property boundaries or anticipated harvests Installing safety precautions like gates or signs when appropriate Getting a forest management plan and forest inventory Keeping records of harvests or a journal of management work Most landowners who become involved with certification find the required adjustments not only agreeable but in step with their objectives and well worth the investment. Figure 7. Certification compliance may require contracting with trained resource management professionals. Photo: Juan Carlos Reyes / FSC Group organizations handle many other activities that translate into indirect costs for certification. Group managers may develop an operating manual, set technical forest management specifications, monitor harvests, prepare reports, etc. Oftentimes, existing state forest stewardship programs, consulting forestry businesses and industrial landowner assistance program have most of the infrastructure already in place. The adjustments needed to comply with FSC standards are manageable but require a genuine commitment to responsible forestry. 8

9 While there are direct and indirect costs, there are many worthwhile benefits in FSC certification for family forest owners. Landowners get better and more comprehensive planning guidance. They receive reassurance from the audit process that they are on the right course. They can be in a stronger bargaining position when it comes time to sell timber. Their FSC-certified supply helps keep local wood markets open, manufacturers in business and neighbors employed. FSC is not just for big landowners. Family forests have a big stake as well. FOREST STEWARDSHIP COUNCIL-US FSC Trademark