Other Voices: Will the proposed hardwood checkoff raise pallet prices?

Editor’s Note: The following column by Chaille M. Brindley, publisher of Industrial Reporting Inc., is part of Modern’s Other Voices column.
The series features ideas, opinions and insights from end users, analysts, systems integraters and OEMs. Click on the link to learn about submitting a column for consideration.

The catalyst for the column is the recently published draft proposal from the U.S. Department of Agriculture (USDA) for a hardwood checkoff program to be levied on major U.S. sales of hardwood lumber, plywood, and lumber products, such as unfinished flooring, cants and railroad ties. As the editor and publisher of Pallet Enterprise, Modern asked Brindley to explain the program. This article is reprinted with permission from Pallet Enterprise.

In a separate note, Brindley tells us that “a checkoff [program] would slightly raise prices for some pallet users at some point.” He adds that a number of pallet lumber producers are against the program because they believe it will add cost that might be good for hardwood lumber producers, but add little real benefit to low grade lumber sectors, such as pallets. For those pallet users interested in learning more and commenting on the proposed program, the USDA has extended the comment period to February 18, 2014.

The National Wooden Pallet & Container Association has also published information on the proposed program.

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Just about everybody in the hardwood industry, including pallet and packaging companies, knows that the opposition is winning the public relations battle. Preservationist groups and others that attack wood products are very effective in making people think that cutting down forests to make things is a bad idea. But nothing could be further from the truth. And yet what is not clear is the way forward to solve this dilemma.

Leaders in the hardwood industry are joining together to push for the launch of a checkoff program to fund promotion, product development and research programs. The softwood industry started a similar program last year after approving it in 2011. And the U.S. Department of Agriculture (USDA) recently published a draft proposal for a hardwood checkoff program to be levied on major U.S. sales of hardwood lumber, plywood, and lumber products, such as unfinished flooring, cants and railroad ties.

“Pallets and most finished, value-added products are not included in the assessment,” said Grace Terpstra, a spokesperson for the Blue Ribbon Coalition (BRC) leading the checkoff program campaign. The checkoff program is expected to collect about $10 million annually for industry promotion and research.

Similar to the “Got Milk” campaign for milk, checkoff programs are used to fund generic marketing and research efforts that favor the entire industry not just one company. The BRC contends the checkoff program is needed to boost consumption of hardwood products both domestically and around the world. The idea is that industry promotion can drive growth from new markets as well as new product lines.

One of the problems is that the hardwood industry is fragmented with 85-90% of the U.S. manufacturers being small businesses. Thus, individual hardwood producers struggle to compete in the marketing and product development arena against alternative products made from plastics, metal or bamboo that tend to be sold by large companies with big budgets.

The USDA commented, “Academic researchers have estimated benefit-to-cost ratios for promotion programs across a broad range of commodities in the range of 4:1 to 6:1, indicating that for each dollar of promotion at least four to six times that amount is generated in new revenues, profit or surplus to the industry.”

A comment period is currently open until February 18, 2014. Once that period closes, the USDA will review comments and use feedback to shape the final program. Then, the federal government will release a final proposal that will be voted on by the industry before a checkoff program can be officially launched. It could still take a year or longer for the entire process to be completed.

While finished pallets are exempt, the reality is that raw materials will be hit with the assessment. This could drive up prices slightly, but given the fact that the rate is 1% or less, the impact should be negligible on the market.

Green sawmill producers and kiln operating facilities with annual sales in excess of $2 million will be subject to the checkoff. The checkoff fee applies to all hardwood lumber and products remaining as a board or block, such as cants and railroad ties sold by U.S. mills into domestic and foreign markets. All operations with annual sales greater than $2 million will pay $1 per $1,000 of sales. Concentration kiln drying yards producing over $2 million will also pay $1 per $1,000 on all sales of kiln dried lumber minus the amount already paid for green lumber. Hardwood plywood mills producing over $10 million of annual production will pay $3 per $1,000 of production. These various thresholds mean that smaller companies will be exempt from paying the checkoff fee.

Additionally, manufacturers with outbound sales over $2 million in some value-added products, including finished strip flooring and molding, will be subject to the checkoff fee at a lower rate of $.75 per $1,000 with a reduction for green lumber purchases. Other finished goods with multiple-components or complex products, such as pallets, furniture or cabinetry will not be directly covered by the checkoff. Both domestic and export products will be covered by the checkoff fee.

The Hardwood Checkoff would be administered by a board of industry members selected by the Secretary of Agriculture. For the initial year, board nominations are put forward by the industry through the BRC. Industry groups, regions or individuals may nominate candidates. Those nominations will be reviewed and approved by the USDA.

The idea of a checkoff raises some key questions for everyone in the hardwood sector to consider. You have to start out realizing that different parts of the industry have varying interests. So for example, if promotion and research help create new markets for industrial hardwoods, the pallet and crosstie sectors now have more competition for a limited supply. Or growth in grade markets could lead to more industrial supply as a byproduct of increased grade demand and production.

Advocates for the checkoff contend that a rising tide will lift all ships, leading to more benefit for all sectors. That could indeed be true. But you have to consider that, while the number of sawmills has decreased as the result of contraction in the U.S. hardwood market, the real bottleneck may lie more with the logging segment of the supply chain. Unless something is done to improve the availability of timber and loggers to harvest it, growth in markets could put cost pressure on already strained supplies. It is true that the higher grade markets are more likely than low-grade markets to boost revenues to make the logging sector more competitive for labor. But then again, with the surge in natural gas and petroleum markets in this country, even a strong grade market may not be enough to attract young labor.

Some sectors already have strong marketing programs, such as the crosstie market. The Railway Tie Association (RTA) has administered a voluntary marketing levy on its members for years. Will the checkoff factor those trade promotion dollars when figuring out fees? The current proposal does not consider money already spent by certain sectors. Of course, cumbersome exemptions would make the fee difficult to calculate, administer and collect. Simpler is better, but it could also lead to fairness and value problems.

There seems to be growing concern among the industrial markets that the checkoff program might benefit the grade markets more since those are the industry interests leading the way on this initiative. While the BRC has stated that the interests of industrial markets will be considered and receive their fair share of marketing dollars, some industrial users of hardwood have speculated that the reason they are not exempt is that the grade interests want the low-grade sectors to help cover the costs of marketing high-end products. The fact is that if low-grade segments, such as cants, crossties, slabs and waste lumber were exempt, the total amount of money available for the checkoff would take a big dip. With about $10 million per year estimated to be collected, the total budget pales in comparison to the amount spent by other raw material producers, such as the plastics industry.

The draft proposal states that “Seats on the Board must be apportioned based on the volume of covered hardwood produced and sold in geographical areas.” This helps make sure that the interests of various species are considered. But it doesn’t really do much to address the perception that the checkoff might not fairly represent the interest of low-grade markets compared to high-grade markets. Is the volume based on the actual board footage or the dollar volume? This is where clarification could help assuage the fears of some markets. At the same time, the USDA won’t want to have to jump through too many hoops in terms of requirements that every little market segment be represented.

Some suggest the checkoff is the industry’s best hope to create collective marketing solutions. Others contend that the Hardwood Checkoff will squeeze marketing budgets that are already cash strapped.

Some people view the proposed checkoff as unwanted government intrusion into the marketplace. But remember that the USDA only starts checkoff initiatives based on industry desire and feedback for such a program.

Is the proposed checkoff program a good or bad thing? That decision is really up to you.