Selling Timber at a Loss

"Below-cost" timber sales may well become the dominant public lands management issue of the second half of the 1980s. Both industry and the Congress have questioned facets of this practice, and the issue now is coming to a head with a challenge raised by a group of ten environmental organizations led by the Natural Resources Defense Council and the Wilderness Society.

In an important 1984 decision, Forest Service Chief Max Petersen upheld several Colorado forest plans that environmentalists claim were economically unsound and included below-cost sales. The ten environmental groups have asked the secretary of agriculture to review the chiefs decision. Rejection of the appeal promises a filing with the courts and extended litigation. Some believe that the below-cost issue eventually will be decided by the Congress. The House Appropriations Committee already has pressed the Forest Service on its accounting practices.

History and rationale

For years, the Forest Service has sold timber from public lands at prices that often have not covered the cost of the sales. For example, the Forest Service reported that 37 percent of national forest timber sold in 1983 carried prices that were less than costs. Even in 1978—a year of high timber prices—about 22 percent of national forest timber was sold below cost.

Below-cost sales mostly occur in locations where costs are high because of the need to build an access road, and when the volume or value of the harvested timber is low. This practice is common in several of the Forest Service's ten regions, including the Rocky Mountain, eastern, and Alaskan regions. By contrast, high-volume, high-quality forests such as those in the Pacific Northwest and the southern regions have many timber sales where receipts exceed costs.

The Forest Service rationale for below-cost sales has three principal components, all of which are incorporated in its planning process. First, the Forest Service argues that while the dollar receipts of a timber sale may not cover its costs, these receipts capture only part of the social benefits created by the harvest. These include such non timber and non marketed benefits as deer, bear, and other desirable wildlife that flourish in managed habitats, and access for recreation, forest management, and forest protection, including fire control. As the Forest Service points out, its multiple-use legislation explicitly recognizes non market benefits and requires that they be considered in its management programs.

Second, the Forest Service maintains that a simple comparison of total costs with total receipts is an inappropriate economic measure because many of the costs are capital costs that provide medium- to long-term services. Capital costs, most would agree, should properly be amortized over time, but existing government accounting procedures typically do not adequately address this issue. The costs of road building, for example, are charged against the first sale of timber from the areas served by the road.

Third, the Forest Service says that below-cost timber sales often are required to provide "economic stability" to timber-dependent communities. Such communities, the Forest Service asserts, would suffer severe hardship if timber sales were limited to those that show a "profit."

Environmental critics argue for a strict financial criterion—at least as a starting point current receipts should cover costs. Although most environmentalists would allow exceptions if it were clearly demonstrated that net nonmarket benefits were large enough to offset the deficit generated by the timber sales, such a demonstration is rare. Moreover, say the critics, timber harvest and road building often mean soil erosion, ugliness, and long-term loss of undisturbed areas, and these negative effects ought to be considered in any assessment of net benefits. Errors may be made, environmentalists concede, but good stewardship of the forest requires favoring caution and prudence.

Who's right?

A disinterested observer can find merit on both sides of this issue. For a large portion of timber sales, particularly in the Pacific Northwest and in the southern regions, harvest receipts do cover harvest costs and hence the below-cost complaint does not apply. In fact, it might be argued that timber-harvest levels might sensibly be increased in these regions.

For a second group of sales, an accounting system that recognizes net non-timber values and properly distinguishes between current and capital costs surely would find that many below-cost harvests are justifiable as part of a broad, multiple-use management regime and meet the goal of maximizing net public benefits.

Finally, for some below-cost harvests, even a realistic assessment of non timber values probably would not economically justify a sale. Continued harvests on these lands would require non economic justification or the rationale of providing economic stability to local timber-using industries.

The below-cost issue is almost certain to remain a bone of contention for some time to come.