Governor's Advisory Committee on Chip Mills

Draft Final Report

C. SUSTAINABLE ECONOMIC AND SOCIAL IMPACTS

The previous section contained two perspectives of some of the key ingredients of sustainable forest management. One of these, the Sustainable Forestry Initiative of the American Forest and Paper Association, was oriented primarily to on-the-ground management activities that would contribute to sustainable forestry (Table 5b). The perspective of the Forest Stewardship Council (Table 5a) was somewhat broader in nature. One feature that stands out about the latter is that half of the management principles for sustainable forestry focus on people, as opposed to the forest per se. From respecting rights of indigenous peoples, as well as property rights in general and existing laws that reflect important societal values, to assuring the more general use of the wide variety of forest products as a means of enhancing economic and social (in addition to environmental) benefits -- all of this implies that sustainable forest management is not simply about forests, but about people as well.

This points to a second theme within the last section. If people have evolved within, and by their actions both affect and are affected by the complex ecological web that has traditionally been referred to as the ‘natural environment,' then sustaining the well-being of that ecological web inherently entails sustaining the social, economic, and psychological well-being of the people who are a part of it. While this does not preclude speaking in terms of cause and effect relationships between humans and their ‘environment' (e.g., ‘the weather affect people,' ‘people pollute the environment,' etc.), this should not be allowed to mask the fact that human and environmental health and well-being are interdependent parts of the same ecological system. In this light, it makes perfect sense to recognize, as does the Governor's Advisory Committee (see figure in introduction to Section II), that a sustainable forest resource base and its management both contribute to and are dependent upon a sustainable environment and sustaining the social and economic well being of people. While it remains practical to discuss each of these latter ideas separately -- as is done in the next two sections on "Economic and Social Sustainability" and "Environmental Sustainability" -- their interdependent roles in this complex ecological web is a basic assumption underlying all that follows.

The economic impacts of chip mills are experienced in a variety of ways. Direct impacts are felt in the number of jobs the mills create and the income earned by those occupying such jobs; as well as in the value of the products the mills produce as inputs to further economic activity within the wood products industry. Another set of impacts is manifest in the effects of the chip mills' economic activity on other firms in the wood products industry, especially those that are capable of utilizing wood processed by the chip mills in the manufacture of higher-value products. Further economic impacts are felt indirectly by other industries dependent on the status of the forest resource that will be affected by supplying wood to the mills. Among these, the outdoor recreation and tourism industry is among the most prominent; and this in turn is closely linked to the overall environmental effects triggered by for the demand for chips. With respect to the forest resource, the economic impacts of the mills will also be experienced in the income derived by landowners who sell wood to the mills and loggers who harvest the timber. That process will in turn be structured by the markets created by the mills to which landowners respond. All of the above merit some attention when considering the current and potential economic impacts of the chip mills in Missouri. Finally, it is important to recognize that in addition to economic impacts, a wide array of broader social consequences -- not the least of which are new challenges and opportunities for collective action to ensure sustainable forest management in Missouri -- will emerge from the ‘chip mill issue' in the state. Some of these will also be briefly considered later in the section.

Hardwood Markets and Sustainable Management

A first point of interest centers on the fact that in order to ‘plug into' the forest products sector of the local, regional, national, and international economies, the chip mills require inputs for their production process. This creates a demand for those inputs and in the process establishes a market for (in this case) harvested timber. Keeping in mind the vital linkages between chip mill demands and forest practices conducted on the ground to meet those demands, a first question that naturally arises is : What kind of hardwood market created by the mills would produce the best results in terms of the forest practices employed to meet that demand? Alternatively, what would an ideal hardwood market look like, where "ideal" signifies that it would allow landowners to take maximum advantage from a profitability standpoint of employing sound management practices to enhance the sustainability of their forestlands? The characteristics of such an ideal hardwood market were described by Gulden (1999) as part of his study on export chip mills in Arkansas that was introduced at the end of the last section. These characteristics may be found in Table 7.

Table 7 . Characteristics of an ideal hardwood market (Source : Gulden 1999)

1) It would be open to large, rough and rotten trees that are unsuitable for sawlog products.

2) There would be no limits on the species taken. All hardwood species could be used.

3) It would take pulpwood and tops from sawtimber thinnings, especially at volumes that would be inoperable if not for the fact that saw timber were being cut.

4) It would take pulpwood and tops from hardwood-pulpwood thinning.

An ‘ideal' chip market would first of all accept large cull trees. Moreover, all species -- down to 5" diameter breast height, the smallest wood generally taken by the mills for processing -- would be accepted. This second criterion reflects the fact that when ‘undesirable' species are left behind, subsequent stand dynamics and, ultimately, forest productivity, are affected adversely. Thus, for example, if hickories and red cedar were not harvested due to their undesirable characteristics in terms of utilization for chips, a tract that could have been regenerated into an oak-dominated forest would likely be converted into a hickory- and red cedar dominated-forest, which has far lower value in terms of both timber and a variety of non-timber forest benefits.

Thirdly, the ideal market would accept growing stock (and cull) from thinnings of sawtimber stands. As a rule, the smaller trees in these stands are the runts of the litter. Removing them can expand the crown space of the dominant trees, increase photosynthetic capacity, increase mast production, and increase log size. An important corollary here is that an ideal market would accept this material even for relatively small volumes that might be produced from thinnings of stands on individual tracts. This reflects one of the critical economic factors that intervenes in the linkage between standing timber and actual utilization of timber supply. For given the large number of relatively small tracts of NIPF lands in the state, it is often simply economically impractical to haul relatively small volumes of thinned materials from a tract to, for example, a chip mill. The transportation costs, when combined with those for conducting the thinning operation itself, would exceed the income generated from the sale of the thinned material to the chip mills. As a consequence, trips to the chip mill are likely to occur far more frequently not with thinnings, but at the point of final sawtimber harvest. But as was evident in Section II, in many cases it is the intermediate thinnings that can contribute to much greater volumes for that final harvest. In short, an ideal hardwood market would provide a source for all thinnings on all tracts at all stages of stand growth.

The fourth characteristic of an ideal market for chips highlights the fact that it would be most beneficial to conduct thinnings in pulpwood-sized hardwood stands just as they are developing into sawlog hardwood stands. This would be a most valuable tool to increase the productivity of hardwood sawtimber. Moreover, this in turn would increase hardwood mast production, thereby providing a way for oaks to mature from medium- to large-sized trees with all of the attendant benefits in terms of timber, wildlife, recreation, aesthetics and water, that result from such a process.

In examining the markets actually created by the chip export mills in Arkansas, recalling again that this is a very small segment of the overall chip mill industry in the state, Gulden found that they do indeed take a certain measure of rough and rotten material, thus satisfying the first of the four ideal market characteristics. With respect to the second criterion -- i.e, that all species are taken by the mills -- this does not appear to be the case for the export mills in Arkansas. These mills do not take hickory, which is very difficult to debark. Nor do they take red cedar, which is another important element in Arkansas forests.

When it comes to providing an opportunity to thin the pulpwood from sawtimber stands, the export chip markets did not meet this criterion. Gulden describes the typical scenario in Arkansas that he observed. A chip mill procurement forester, when comparing a particular tract on which only small trees could be taken to an adjacent tract where the landowner was placing no constraints on the trees taken, will always attempt to procure the wood from the latter. The economics of the situation dictate the choice. And so for market scarcity considerations, thinning the pulpwood from sawtimber size hardwood stands seldom if ever occurs in Arkansas, or if it does, it occurs for only about one out of every twenty harvests.

With respect to the fourth criterion, i.e., whether the export chip market provided an opportunity to thin the hardwoods in a hardwood/pulpwood-size stand, the answer was ‘no' for the same reasons as above. It was simply too easy to find landowners who did not want to constrain immediate yields from harvests by requiring that, for example, a hundred of the better quality trees be left per acre. From the perspective of a wood procurement forester obtaining a supply of wood for the mill, other economic disincentives further contribute to discouraging a thinning-type harvest, and thus meeting the last two criteria in Table 7. This kind of harvesting can require a different configuration of equipment than some contractors have. It requires machines that are more nimble in the woods. It requires a more careful operation by the equipment operators in order to avoid doing damage to the residual trees and then dealing with a dissatisfied landowner as well. It means that harvesting a 40 acre block, for example, would require more time on the part of the operator to do a careful job relative to the volume per acre being removed. Harvesting that leaves a hundred of the best trees in the stand, as opposed to removing all commercially valuable material, brings a lower per acre value at that point in time. (As demonstrated earlier, this is clearly not the case from a longer time perspective.) So for all of the above reasons, the incentive for the procurement forester is that if there are two areas of similar capacity available for harvest, and one has constraints on it and the other does not, the site without the constraints will undoubtedly be cheaper to log, and will also bring the highest profit.

In summarizing the experience of export chip mills in Arkansas, Gulden concluded that these mills have not provided the market to do the kind of hardwood thinning that it was hoped they would be able to provide. Although rough and rotten trees are taken, some species such as hickory and cedar are not taken in Arkansas. Pulpwood thinning from below is impractical; and together with the variety of economic reasons noted above, the overall result is that the market falls far short of what would be considered ideal.

As noted in discussing Table 6, the limited scope of the Arkansas study suggests caution in inferring broader behavioral patterns. So just as with the situation involving landowner forest practices in response to chip mill markets, whether this will be the case in Missouri is uncertain. Again, however, this conclusion suggests that the link between a market for wood chips and better forest management may indeed be tenuous -- this time due to mill restrictions on wood inputs and lack of encouragement by the mills for practices which, while leading to better forest management, would serve to reduce the volume immediately available as inputs to chipping operations.

Chip Mill Interactions with Landowners and Loggers. When purchasing wood from landowners or loggers, or hiring the latter to harvest timber already purchased, the chip mills participate in the wood products market as a consumer of timber and logger services.. There are four basic modes through which timber is procured by the state's two chip mills.9 First, a landowner may contact the mill and ask its representatives to come out and provide an estimate of how much the mill would pay for a certain acreage of trees. Secondly, a landowner -- or a forestry consultant or forester from the Missouri Department of Conservation acting on behalf of a landowner -- may send out a call for bids on a particular tract of timber. Thirdly, a timber procurement officer for the mill may cruise the local area, note tracts with the aid of ownership books, go to the courthouse and find out who owns particular tracts of interest, and contact the respective landowners to see if they are interested in selling timber. Finally, loggers may bring wood to the mill site; such wood is referred to as gatewood.

The majority of the timber in Missouri is bought from landowners by loggers and then taken to the mills. Most loggers work within a circular area of within 30 to 35 miles and become acquainted with landowners within that area. The origin of wood procured by the mills can, however, vary substantially over a given period of time. Thus, for example, at the Canal Industries mill at Scott City, in 1999 the percentage of wood that was gatewood -- i.e., brought to and purchased at the mill -- was about 50% in January and only 10% in June. The remainder was controlled stumpage -- i.e, wood purchased under timber contract from a landowner or his/her representative.

When buying timber from a landowner, the chip mill enters into a contract with that individual. Contracts are written to provide protection for both the landowner and the mill during the life of the transaction. Contracts may have specified provisions for adhering to state and federal regulations, plus any other addendums that are acceptable to the two parties -- e.g., requirements for restoring roads, the use of best management practices, etc.

At the Canal Industries mill in Scott City, contracts for wood purchases take the form of either a lump sum or ‘pay-as-cut' contract, with the prices agreed upon by both parties. In essence, the contract is a timber deed involving the landowner and the mill. For a lump sum contract, the buyer (here, the chip mill) is given title to the trees; thus by virtue of the timber deed the chip mill owns the timber. If the contract is of the ‘pay-as-cut' form, the landowner actually maintains the title to the trees until they are harvested. It should be noted, however, that entering into a lump-sum contract does not prevent the landowner from selling the land while the timber deed is still in force and before the timber has been harvested. This does happen occasionally, and it can cause obvious problems for the new landowner who, while possibly knowing that some sort of timber deed exists, is not aware that he or she no longer actually owns the timber. The timber procurement specialist for the chip mill -- who is generally a trained forester -- also checks every tract of timber purchased for liens or encumbrances that could tie up that timber's value. In cases where these exist, the mill would have to obtain a release from the lien holder in order to buy the timber.

The chip mill puts together a logging plan for any such timber purchased on private land. Elements of the plan may include how the tract will be logged, when the roadwork will be done, and identification of SMZ's (streamside management zones), which are buffer areas adjacent to streams that are not harvested. Other environmental concerns such as springs, hazardous waste sites, endangered species, etc., may also be considered in the plan.

After the timber rights have been purchased, the chip mill then hires loggers as independent contractors to harvest the site. The mill's contract with the loggers may contain provisions specifying actions that must be followed to meet certain objectives of the landowner. The procurement forester who buys the tract supervises the logging and generally visits the site frequently while the operation is in progress. This individual also supervises closing the sale out. It is generally preferred to have as much of the closure work as possible performed by the logger; but some activities cannot be accomplished with a skidder, and the mill may bring in larger equipment if required.

In light of the above, it is evident that depending upon the method of wood procurement, a chip mill has more or less opportunity to influence the kind of forest management employed on private lands in supplying timber to the mill. In those situations where the mill contracts with the landowner, whether initiated by either party or in response to a call for bids, there is ample opportunity to incorporate sound forest management for chip harvests into the harvest plan. Whether this involves informing the landowner that there may be other options than, for example, clearcutting for chips and that these can be profitable, is entirely another matter; and the kinds of economic concerns and responsibilities of the procurement forester would seem to weigh rather heavily against this. In a similar vein, the chip mill has the opportunity to ensure that the logging crews they hire meet certain requirements such as, for example, harvesting with the use of best management practices. Canal Industries states that they do require such practices of their loggers. The verification process is, however, exclusively internal.

On the other hand, in purchasing wood at the gate, the chip mills do not have the same kind of opportunity to directly influence forest management practices that were employed to harvest that timber. The mills could, of course, insist that all wood be brought be harvested with the use of best management practices. This would require, however, some sort of verification component or option. On an overall basis, the potential for exercising social responsibility on the part of the mills in contributing to sustainable forest management via the timber procurement process varies with the sources of the wood. Recognizing the economic imperatives of any such firm, the extent to which sound forest management is actually practiced in supplying wood to the mills depends at this point -- and to the extent the mills can influence that process -- on a process involving good faith and social responsibility on the part of the mill forester supervising the operations embedded within a monitoring and/or verification system that is exclusively internal to the mill operations.

Economic Impacts of Chip Mills : Forest Products and
Tourism Industries

When considering the current and potential economic impacts of the two chip mills in Missouri, several kinds and/or levels of effects are relevant. On the one hand, the mills generate direct economic impacts on Missouri's economy in terms of the value of products produced, employment and income generated in that process, and through the potential benefits of trade. The economic activities of the mills also affect other segments of the state's wood products industry. Of particular interest here are those small- to middle-sized firms that might serve as alternative potential consumers of wood inputs going to the mills. Especially important here are those firms that manufacture higher quality ‘value added' wood products. The chip mills may also impact the economic performance of other industries in the state dependent on the status and health of Missouri's forest resources as ‘inputs' for goods and services other than wood production. Foremost among these is the state's outdoor recreation and tourism industry.

At the present time, assessing both current and potential impacts of the state's two chip mills is an extremely difficult task, especially given that the mills have just become operational within the past three years. Data on production levels is extremely scarce, and only limited and often anecdotal information is available on employment and trade effects. Trend lines for any of these variables are only beginning to be established. This is also an area in which there is very limited data from other states. This has been recognized, and efforts are underway in some states (e.g., North Carolina) to remedy this lack of information on economic impacts of the chip mill segment of the wood products industry. However, results of that effort and others like it (e.g., in Virginia) will not be available for at least a year.

Given the above constraints, the following discussion blends the limited information available with a variety of points raised during the course of the hearings conducted by the Governor's Advisory Committee in considering the impacts of the chip mills on Missouri's economy. There the attention centered as much around what such impacts might or could be as on what they have actually been during the short period in which the mills have been operating. In doing so, attention is given to certain more general considerations that are relevant to the present day ‘chip mill issue' in Missouri. This cannot replace, however, the need for further, more systematic research that is required on this subject, along with the resources needed to support that research.

Chip Mills and the Forest Products Industry. The forest products industry is an important component of Missouri's economy. It ranks in the top half of manufacturing industries in the state, encompassing about 6% of the state's manufacturing work force. The industry employs 25 thousand workers with a payroll of in excess of $680 million. In 1996, there were approximately 500 primary processors in the wood products sector of the industry -- i.e., those firms that manufacture a product from previously unprocessed raw materials such as logs or bolts (Missouri Department of Conservation 1996). In addition, almost 600 firms were listed in 1995 as secondary wood processors -- i.e., firms that produce finished or semi-finished products from a previously manufactured raw material (Missouri Department of Conservation 1995).10

The direct economic impact of chip mills is experienced in the value of the products they produce, the employment and income generated by their operations, and the nature and pattern of trade generated from their activities. The two mills themselves have together generated a very modest number of jobs -- less than 40. Added to that, of course, are the secondary impacts of logger employment stimulated by the demand for chips. While hard numbers with respect to overall production are difficult to obtain, in terms of trade all of the chips generated by the two mills are exported to out-state pulp and paper mills for processing. Missouri itself has no such facilities.

With respect to employment, one concern regarding the chip mills, but also characteristic of most resource-extractive industries, is the low number of jobs they create relative to those provided by the aggregate of secondary processors of wood products. This grossly disproportionate relationship for wood products in general is illustrated in Table 8. When considering jobs created per million board feet of timber, it is evident that jobs produced by secondary processors producing high quality or

Table 8 . U.S. Employment Created by Various Timber Products (Source : Mater 1998)

Process                                                Additional jobs created

logs to lumber                                   3 jobs per million board feet
lumber to components
(e.g., furniture parts)                          Another 20 jobs per million board feet
components to high-end consumer
goods (e.g., furniture)                        Another 80 jobs per million board feet

value added products dwarf those generated by extractive processors.11 This also illustrates a more general idea that the way to higher profits is not always necessarily through increasing the volume of wood cut or processed, but may be through producing higher value products. More (and often higher skilled) jobs are created per unit of wood in value-added processing than in less labor intensive areas such as logging and chip mills. Both workers who make their living from the forest and the communities in which they live gain, because both forests and the jobs will be sustained.

With respect to the ‘chip mill issue' in Missouri, concerns involving the above revolve around the kind of wood that is processed by the mills; and whether or not some of the logs going through the mill could yield more economic value -- in terms of both products and jobs and income -- if they were utilized by value-adding secondary processors to make products such as furniture parts or furniture, finished lumber and millwork, flooring-paneling, and so on, as opposed to being run through the chipper. A second interrelated concern is whether the demands generated by the chip mills, and the concurrent wood flows to meet those demands, will adversely effect the survival of any or all of the small secondary wood processing firms in southeast Missouri.

The question of ‘what is going through the mills' has been one of the more vexing ones for the Governor's Advisory Committee throughout the course of the hearings. It is central to a number of the concerns involved in the overall ‘chip mill issue.' In section A it was shown that Missouri has an extensive volume of cull material in its forests; and in section B it was further pointed out that good forest management, which would in part involve removal of cull material, offered an enormous opportunity to increase growth and enhance forest sustainability. The chip mills were also seen as providing a viable market for that cull material. The solution would be complete, therefore, if the mills were processing primarily cull material, or at least substantial quantities of it, and in the process not taking the higher quality trees, which would then be available for value-added processing. Again the answer lies in what is going through the mill.

As with many aspects of this issue, the answers offered have been mostly anecdotal in nature. There is some evidence that what is being chipped by the two major mills in Missouri contains a lot of wood for which there is a better use. At the same time, on a statewide basis and with the usual caveats on making specific inferences from such broad figures, if about one-third of the standing material in Missouri forests is cull, then when an acre is clearcut, two-thirds will be growing stock, and within that there will likely be some bigger and/or better quality trees. In his Arkansas study, Gulden observed that the chip mills will understandably encourage the cutting and removing of what they feel they can utilize. He noted that most of the stands in Arkansas that the export chip mills were harvesting did have some sawlogs in them; and that the chip mills were not paying the landowner the sawlog value for the sawlog component, but rather buying all the standing timber on the site for a bulk price. He also observed that some of the chip mills had such contract concerns that they essentially chipped sawlog material; while others were sorting out the sawlog material and reselling it to a hardwood sawmill at a much higher price. From a particular mill's perspective, both existing markets and outstanding contracts will in part dictate the mill's action. In the latter instance, for example, if there is pressure on a mill to fill 300,000 tons of chips by the following month, then everything that goes through the mill is going to be chipped.

As is the case with many facets of the ‘chip mill issue,' the Governor's Advisory Committee is faced with estimating the significance of this question and adopting a range of actions -- from doing nothing and hoping for the best to articulating some sort of "gatewood policy" which itself could involve anything from encouraging or mandating that mills buy only from certified loggers to imposing requirements that a certain percentage of processed wood be low grade material. Whatever the conclusion is, it would likely reflect the view that in purchasing wood the mills should have to assume some responsibility for where the wood comes from and for the actions of the wood suppliers.

The potential impacts of the chip mills on small firms in the secondary wood processing segment of the industry will, of course, depend in part on how the above question of what goes through the mill plays out over time. However, these markets have been volatile for some time, well before the chip mills arrived. There has been a relatively high turnover rate in the numbers of medium and small hardwood sawmills or wood processing plants in the state for a number of years. Thus while the chip mills will likely encourage some competition, which may contribute to driving some mills out of business, at this stage it is unlikely that they will be the sole cause for these firms exiting the industry. However, depending on the kind of wood utilized by the mills, over time a continued use of high quality wood by the chip mills could intensify the volatility of the secondary wood products market to a greater degree than would have otherwise occurred.

Chip Mills and the Tourism Industry. Tourism continues its rapid growth and strong position as a major force in national, state and local economies. A 1994 estimate of the impact of tourism on the United States economy states that the tourism industry produces 13.4% of the national GNP, employs 11 million people, and generates more than $50 billion in tax revenues (U.S. Department of Commerce). Correspondingly, this national impact plays itself out at the state level. Through the first three quarters of the fiscal year (July 1998 - March 1999) domestic tourists and travelers in Missouri spent an estimated $4.1 billion, up nine percent from the first three quarters of FY98 (University of Missouri, Tourism Research and Development Center). Demographic and psychographic indicators, as well as discretionary growth measures, all predict continued demand for tourism services across a wide spectrum of travel and recreation activities. Every state engages in marketing its natural, cultural and socio-economic landscape as a potential destination worthy of tourist visitation and subsequent expenditures. Missouri is no exception in taking a pro-active stance to compete for an increased share of the tourism market. Tourism is often proclaimed to be the state's second largest industry.

Within the broad tourism spectrum, natural resource based tourism (often referred to as nature-based or eco-tourism) has reported the most rapid growth rate within the industry. This subset of the tourism array often includes more passive or less consumptive recreation experiences, which are dependent on a sustainable natural resource base as a prerequisite to a quality experience. Outdoor recreation activities such as wildlife and scenic viewing, photography, camping, trail hiking and biking, and historical and cultural education require that ecosystem variables of forests, prairies, wildlife habitats, rivers and streams provide the ‘product' that outdoor recreation enthusiasts seek. Although potentially less consumptive (and often termed ‘passive') in nature, these leisure pursuits accentuate the serious business of recreation. From the perspective of the U.S. Forest Service, for example, recreation has been identified as a central component of its economic future (Newsweek, September 6, 1999). In part this reflects the trend that nonconsumptive recreational activities are growing in popularity relative to traditional outdoor recreation pursuits (Duffus and Dearden, 1990). The number of people who travel primarily for passive wildlife recreation increased at an average annual rate which exceeds all other wildlife-oriented recreation (Knight and Gutzwiller 1995). Missouri's current tourism theme, "Where the Rivers Run," portrays the unique natural resource base Missouri possesses for such tourism experiences.

Due to its distinctive landforms and scenic qualities, South central Missouri is the locus of a significant portion of the 15% of forestlands in the state under public ownership. The Mark Twain National Forest, as well as parts of the National Scenic Riverway System, state conservation lands, and state parks and historic sites are all part of this recreation resource base that reflects public response to the continuing growth in demand for outdoor recreation and tourism experiences in Missouri. At the same time, these lands are intertwined with an extensive array of privately-owned lands that contribute to the outdoor recreation and tourism experience in a variety of ways. Missouri's private forests provide the ecological continuity and landscape-level mosaic within which its public lands are situated. In addition to being an integral part of the scenic experiences of tourists and recreationists who visit this part of the state, they are increasingly seen as destinations for certain kinds of recreational outings. The leasing of private forestlands for hunting, and to a lesser extent hiking and camping, represents an increasingly popular role that such lands are playing in the area of outdoor recreation, in addition to their provision of scenic amenities as part of any recreational outing. Landowners derive income from making their lands available to meet a strong demand, while protecting the ecological integrity of the resource as well. Moreover, nothing precludes many of these activities being undertaken within a broader framework of sound forest management, which may include timber harvests as well.

The economic effects of the chip mills on the tourism industry in Missouri will be a direct consequence of the mills' effects on a variety of characteristics that make natural settings in the Ozarks desirable places to visit. In the aggregate these features comprise the landscape, which may be enjoyed by tourists for its scenic and other aesthetic qualities, as a source of knowledge, contemplation, and so on. Moreover, as will be considered in more detail in Section D, the chip mills will exert their primary environmental impact indirectly through the kinds of forest practices that are employed to supply the mills with chips. Since these will commonly involve clearcuts, it is through their effects that the primary impact of the chip mills on tourism and outdoor recreation will be felt. Thus, for example, if large and/or improperly situated or conducted clearcuts become widespread , this could discourage many tourists from visiting the Ozarks, especially those with primarily nonconsumptive interests; and this in turn would weaken the livelihood of those involved in the tourism and hospitality industries in the region. As with many other problems affecting environmental sustainability, proper management could go a long way towards avoiding the problem to begin with.

On an overall basis, therefore, it is certainly possible that the location, size, and frequency of clearcutting practices in response to chip mill demands could impact tourism in the Missouri Ozarks; but at this point in time there is limited information even to construct scenarios depicting exactly what those affects might be.

Economic Incentives for Landowners and Firms

The capacity of Missouri's private forestlands to supply goods and services to the citizens of the state is a function of both private and public investments. Investment needs of well-managed forests differ from many other businesses. The investment must be held for long periods of time before financial returns are realized. Interest costs on invested capital must be paid for long periods of time. Forests have a low degree of liquidity; and the investments are subject to a low return rate relative to alternative capital investments. For these reasons, fiscal and tax incentives become important mechanisms for sustainable management on private forestlands.

Fiscal Incentives. Fiscal incentives are payments made to private forestland owners to help stimulate investments by reducing or offsetting large, initial capital costs and by improving rates of return. In this way, incentives encourage and reward investments in sustainability for long periods of time. An effective form of fiscal incentive is the cost share program, as exemplified by the federal Forestry Incentive and Stewardship Incentive Programs, both of which provide cost shares for implementing management practices such as reforestation and timber stand improvement.

The Forestry Division of the Missouri Department of Conservation serves as the primary technical consultant for all of the landowner cost share programs which have a tree component. These include the Conservation Reserve Program (CRP), the Forestry Incentive Program (FIP), the Stewardship Incentive Program (SIP), and MDC's Forest Cropland Program (FCL). During FY98, the agency made over 590 landowner contacts under CRP and provided planting plans for most. Through FIP, the Department was able to plant an additional 146 acres of trees, do timber stand improvement on 747 acres, and naturally regenerate 151 acres. Under the Stewardship Incentive Program, MDC accomplished the following management activities : 2250 acres of reforestation; 151 acres of natural regeneration; 2910 acres of timber stand improvement; 121 acres of wildlife enhancement; and the harvesting of more than 1 billion board feet of timber. Finally, the Department made 110 inspections of privately owned Forest Cropland during FY98 (Missouri Department of Conservation 1999).

Considerations of these kinds of programs at the state level in Missouri has been complicated by the lack of a viable funding source to pay for them, especially in light of the distinctive constitutional amendment that affects availability of funds for government allocations in Missouri (i.e., the Hancock Amendment). These programs are also viewed by some as less than entirely adequate due, ironically, to the long-term nature of the investments they are intended to stimulate. Some landowners are simply unenthusiastic about investing in such practices for which it will be such a long time before financial benefits are realized.. One innovative suggestion presented to the Governor's Advisory Committee involved creating a program (at the federal level) modeled on the federal Conservation Reserve Program (CRP) that would reward landowners for good management with an annual payment (e.g, $10 per acre) up to a certain limit for approved management practices. A state program along these lines might achieve positive results; again, however, the question of funding would have to be resolved. Any type of fiscal incentive at the state level is faced with a similar situation.

Tax Incentives. At a minimum, tax policy should promote savings and long-term investments in forest management, foster equity with non-forestry investments, be easy to administer and understand, and remain stable over long periods of time. Several federal taxes impact private forestland owners in distinctly different ways. As recently as 1994, for example, it was reported that among individual and family landowners, estate tax concerns were a driving force behind land sales (Northern Forest Lands Council 1994). However, the Taxpayer Relief Act of 1997 will make federal tax liability begin at an estate value of $1 million in 2006, or $1.3 million if the estate is part of a family-owned business (National Research Council 1998). In addition, exclusions from the estate are allowed for up to 40% of the value of forestland which is placed in a qualified conservation easement.

Other federal tax policies impact landowners in both positive and, at times, burdensome ways. The federal reforestation tax credit (not to exceed $1000 annually) has been widely used by nonindustrial forestland owners. On the other hand, the capital gains tax on forest income can be a major disincentive for long-term forestry investments. The Taxpayer relief Act did make some significant adjustments in the treatment of capital gains income from timber investments. For most owners, the capital gains tax dropped from 28% to 20% on timber sold after July 1997, and can drop to 18% for timber held five years beyond December 2000 (National Research Council 1998). One of the most burdensome federal tax policies affecting private forestland owners involves the tax treatment of management cost deductions. In order to claim a deduction for expenses such as site preparation, planting, vegetation control, and the like, individuals must record these expenses and then deduct them from income earned when the timber is sold. This treatment of capitalizing regeneration costs discourages many private forestland owners from managing and conserving their forests for long-term private and public benefits.

State and local tax policies provide another avenue for influencing the actions of private forestland owners with respect to sustainable forest management. Local governments rely on property taxes to raise revenues. In many states this has caused a significant tax burden on forestland owners, in large part because the agrarian property tax system has become hopelessly outdated. The situation in Missouri is, however, somewhat different than in most states. for most forestland owners in the state, property taxes are relatively low. Although this is undoubtedly appreciated by Missouri landowners when compared to their counterparts in other states, the low property tax rate also has the effect of precluding the use of the property tax as an incentive (e.g., via a tax credit) to practice good forestry.

Another way of using the tax policy to provide incentives for sustainable forest management -- as opposed to a primary focus on raising money to fund government operations -- is through the use of a targeted severance tax. Such a tax may be levied on the value of the harvest (e.g., at 6%) to be paid by the forestland owner. Part or all of the tax may be refunded to that individual if he or she required the use of best management practices in the conduct of the harvest. The logic is one of creating a viable incentive to practice good forestry with the concurrent potential of eliminating the monetary impact of the tax. Receipts from the tax may be earmarked for encouraging sustainable forest management, such as, for example, educating landowners and providing them with further incentives to insist that best management practices be used when they have their timber harvested.

Business Incentives for Forest Products Firms. Publicly-funded incentives can also be a tool for encouraging development of natural resource-based and other industries and businesses in the state. State and local incentives have been ranked fairly high by business executives as significant factors in their decision where to locate and expand. About 4/5 of business executives consider these incentives important to their location decision. The Missouri Department of Economic Development (DED) uses incentives to encourage businesses to locate or expand in the state if it appears that significant social and economic benefits would be derived by Missouri citizens from such actions. At times companies, communities, or legislators may ask DED to use incentives for a business location or expansion project. The department will then analyze the proposal using an econometric model which, among other things, provides estimates of the social benefits and costs of the expansion or location incentive. DED and the community in which the business is locating then prepare a proposal addressing location criteria, and both participate in negotiations with the firm considering the action. Finally, the firm decides whether or not to accept the incentive offer.

Three basic kinds of incentives are used : a) financing incentives; b) tax credits; or c) job training incentives. These in turn may be associated with 4 types of incentive programs defined according to their primary purpose. These include : a) competitive programs, which are designed to help Missouri better compete with other states; b) redevelopment programs, which are designed to help develop properties in areas that would not normally be developed without an incentive (e.g., brownfields); c) entrepreneurial development programs to encourage new business start-ups; and d) community development programs to aid communities in developing infrastructure.

Incentive programs may also be described in terms of their overall flexibility of administration by DED. Discretionary programs are those which the Department has leeway to administer without many strings attached. Formula-based programs such as, for example, tax credit incentives, are created in law by the General Assembly, and thus conditions are often specified more rigidly with respect to their administration. In FY1998, the DED dispensed $61 million in incentives distributed over 252 projects. These led to a new annual payroll for more than 13 thousand jobs and almost $1.4 billion in investments by firms. The net benefit to the state in terms of new tax revenues was almost $250 million.

There are a number of incentives that would be available to a forest products manufacturer. Some focus on development in specific locations (e.g., enterprise zones), some on job training, and others on development in conjunction with public infrastructure or other projects in which a community is partly involved. The location of the chip mill owned by Canal Industries at Scott City was assisted through the Community Development Block Grant Industrial Infrastructure program in conjunction with an original project involving a grant to Scott County. Improvements were put in the SEMO Port Authority and the grant was approved for $312,000. Scott City committed $67,000 to the project. As a requirement for a private business to participate in this program, all the facilities had to be publicly owned. They are placed primarily in publicly owned areas and they require the participation of a company or companies to create private investment and jobs. The SEMO Port Authority, after working out an arrangement with Canal Wood to locate and supply the requisite number of jobs, was then able to approach DED with an application for assistance through CDBG Industrial Infrastructure program.12 Canal Wood had an original investment of $10.45 million with a commitment to creating 20 new jobs. The company has met its investment and jobs commitments, and as of May 1999 the grant was in the process of being closed out.

In the above case the incentive benefited a chip mill as part of a community development project in which four other firms received benefits as well. Incentives may also be provided to in-state businesses to expand or diversify their product lines. With respect to the forest products industry, for example, the Governor's Advisory Committee strongly endorses the idea of focusing incentives on those firms and industry segments that through expansion or diversification can provide substantial new jobs (in the aggregate) as well as enhance the value-adding process to primary timber products.

In addition to incentives originating exclusively in the Department of Economic Development, other state agencies such as the Departments of Conservation and Agriculture may also contribute to enhancing the production of forest products in Missouri and the marketing of those products via expanded export opportunities. This strengthens the key economic component of trade by keeping the value added part of the process, along with the associated jobs and income, in the state, while deriving income from final product sales elsewhere, thus facilitating income flows into Missouri.

Finally, rural economic development is not driven as much by resource dependent industries as it was in the past. These industries do still play an important role in a local community's economy. But qualities like communication, education, and the quality of life supported by rural amenities have become increasingly important in sustaining rural economies. Firms contributing to solidifying this significant component of rural social infrastructure should also be able to take advantage of the various opportunities to benefit from kinds of public incentives described above that are available to firms in the state.

Innovative Institutional Arrangements

In addition to the range of economic impacts and opportunities that have come to the forefront with the arrival of the chip mills in Missouri, a variety of broader social implications and options have become evident as well. In searching for a solution to the problems and challenges associated with the ‘chip mill issue,' one striking impact has been the emergence of one of the most wide ranging and comprehensive dialogues on Missouri forestry in years. At the same time, such debates present the opportunity to forge new linkages among the diverse participants in the state forestry community, and in the process perhaps establish more effective social arrangements to collectively engage in the challenges that will surely be experienced in the years ahead.

A broad group of government, industry and private organizations, as well as the 300 thousand nonindustrial private forestland owners in the state, will ultimately affect whether sustainable forest management in Missouri becomes a reality. Many institutional structures could enhance the ability of all groups and individuals to interact with one another in addressing the challenges faced by the state's forestry community. During the course of discussions by the Governor's Advisory Committee, several ideas were presented that outlined novel social arrangements that could be initiated to help make sustainable forestry a reality. These included the ideas of landowner management and/or marketing cooperatives, community-based forestry initiatives, and a statewide Forest resource Council. Each of these is considered briefly below.

Marketing Cooperatives. The basic idea underlying this type of organization is that of getting a group of landowners together in a given area to facilitate the marketing of wood products that would be uneconomical to sell on an individual basis. It was noted earlier that for some individual landowners, selective harvesting may be uneconomical due to lack of wood volume. Some landowners they may even opt for liquidating larger tracts in order to meet a certain desired level of return. In some areas, a marketing cooperative may help make selective harvesting practical and contribute to sustainably managed forests as well. Some landowners with smaller tracts have ventured into electronic marketing, in which they can solicit bidders from all over the country. While that particular innovation may have both positive and negative potentialities from a sustainable forestry standpoint, such a marketing tool collectively managed on behalf of a forestry cooperative could be a valuable asset.

Community-based Forestry. In southeastern Missouri, a committee was formed comprised of private landowners, University of Missouri Extension personnel, representatives from the Natural Resources Conservation Service, community development specialists, and foresters from the Missouri Department of Conservation for the purpose of looking at community forest initiative actions. The idea of the group centered around two basic objectives. First, the group was interested in developing methods to educate landowners about sustainable forest management in a manner similar to the Master Tree Farmer Program (see Section V); and secondly, the group wanted to assess how such practices might help revitalize communities by enhancing the sustainability and productivity of their forest lands. Although the group applied for a grant from the Ford Foundation, they were not successful in their efforts. Nonetheless, this noteworthy effort exemplifies the kind of approach that will become increasingly important precisely because it recognizes and tries to address the linkages between education and community as essential ingredients of sustainable forest management. This it serves as an exemplary model for future efforts in this direction.

Statewide Forest Resource Council. One innovative idea presented to the Governor's Advisory Committee focused primarily on a long-term, potentially beneficial social impact which encompassed, but also extended beyond, the issue of chip mills in Missouri. Its focus was on the establishment of a lasting institutional structure to ensure that the entire forest resource base in Missouri would remain in the forefront of social consciousness. The idea was that of establishing a permanent Forest Resource Council for the state of Missouri. The Council would be comprised of various interested

citizens, interest group and industry representatives, and university and state natural resource personnel, and would be responsive to natural resource and environmental issues, both current and future, that affect the state. One critical and often overlooked function of the Council would be to provide an ongoing forum for public discussion on emerging and potential natural resource issues in the state. With such a body in place, for example, topics such as the ‘chip mill issue' would likely have been discussed and debated long before it became necessary to establish the Advisory Committee with a limited time frame to do its work. Another task of the Council could be the development of a comprehensive long- and short-range research plan to further examine this issue and others of importance to Missouri's forests and natural resources. The legislative establishment of such a Council would provide a solid basis for its functioning. State agencies such as the Missouri Departments of Conservation and Natural Resources could provide the seed monies to the Advisory Council for addressing the chip mill and other issues. The state of Minnesota offers a current example of where this idea has been successfully employed (Table 9).

Table 9 . Minnesota Forest Resources Council : Structure and Responsibilities (1998)

Minnesota Institutions for Cooperative Engagement
of Interests in the Development and Implementation of Major
Forest-Resource Policies and Programs

Forest Resources Council

Structure: A 13-member governor-appointed council representing a broad range of organizations with interests in the use and management of the state's public and private forests.

Responsibilities: Major responsibility is to secure interest-group engagement in the development of forestry programs and concurrent commitment to their implementation. Specifically responsible for development and application of comprehensive timber harvesting and forest-management guidelines, and the establishment of mechanisms to facilitate coordination and planning across large forested landscapes with diverse ownership patterns. Also responsible for providing oversight to programs involving timber-harvester education, statewide information management, continuing education of natural-resources professionals, broad statewide public-education activities, coordination of priority forest-research efforts, and monitoring of resource conditions and guideline application. Advise governor and various levels of governments on major forest resource issues.

Measure of Success: The state's forests, communities, and economies sustained by effective application of programs developed and implemented by persons and organizations with interests in the sustainability of the state's forest resources.

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