Inflation’s Impact on Contract Logging
With sincere apologies to my high school English teacher, Mrs. Johnson (she tried her very best), and knowing that article composition is well outside of my limited wheelhouse, allow me to attempt to convey what effects inflation has had on a “typical” contract logging business.
In this article, I will trade back and forth between two hats: a logger’s viewpoint with forty years of hard knocks experience; and the current Board Chairman of the Carolina Loggers’ Association, offering how the CLA is working to help with the situation.
Arcola Logging Company/Arcola Timber Transport is typical when it comes to logging contractors in the southeastern United States. Partnered with another VA logger, we are fully independent, buying 100% of our own stumpage, and work primarily in northeastern North Carolina and southeastern Virginia. Arcola runs two crews – one concentrating on clearcuts and chipping, the other smaller crew with thinning capability. We also do 100% of our own trucking. We maintain ten trucks, running eight full time.
We face the same common issues we all hear about: the dwindling availability of qualified employees (both in the woods and truck drivers), stumpage availability and production markets, and, of course, cost inflation which is the focus of this article. One important point I need to stress: when talking about logging costs, the word “typical” does not apply. There are so many variables in each operation that we all operate vastly differently, and generalizations should be avoided when working with these figures. One of the few perks I claim of being in my sixties is that I do know it all, so each day, I exercise my vast knowledge and come up with the day’s “plan.” By 6 am, with employee issues, truck/equipment issues, quotas and markets, the weather, someone’s Mama’s stubbed toe, and quite a few other possibilities, I am shown how very little I actually do know. So many variables, and they all need to be considered when discussing logging costs because they come into play daily.
My 23-year-old son, who is out here with me now, likes to remind me that I already have one foot in the grave, with the other possibly joining it at any time. I do remember the inflation of the 1970s being 7 to 12 % for several consecutive years and loan interest rates of 15 to 20% were the norm. Wood producers at that time were not as capital-intensive businesses as we are today, and most barely survived the 2-to-3-day work weeks then. I am shown every day that I have no crystal ball and certainly only hope the current published national inflation rate of 8% doesn’t linger and our slight economic recession doesn’t turn into a full-blown economic downturn.
One item the CLA is working towards publishing is an online inflation calculator, where each individual logging operation can use their own numbers to estimate their own rate, particular to their operating parameters. In doing this, we maintain the strong viewpoint that logging and trucking are completely separate operations, and the costs and variables associated with each need to be calculated and analyzed individually. Doing a few very elementary calculations, I am making a rough “guess” that most logging operations will face annual cost inflation of 10 to 18% this calendar year 2022, with off-road fuel, labor costs, equipment costs, and parts/repairs leading the way. General economic consensus says that capital-intensive businesses with low-profit margins suffer the greatest during high inflation, particularly in tough environments that require frequent equipment replacement.
Watching the Mid-Atlantic fuel pricing, we can easily track what fuel costs have historically been, and the CLA has already published a calculator to aid individual businesses in seeing the effects of cost change. Factor in the impact of social media and an activist liberal government policy towards the labor pool, and you can see what this will do on top of labor costs already adjusted for today’s inflation. Coming off a few years of Covid-related manufacturing slowdown – dealers have no equipment and vehicles to sell – on top of sticking with high initial retail pricing, like any other business, they must find alternative ways to keep the lights on.
Parts sales and labor rates are the obvious targets, and if you are familiar with truck/equipment maintenance and repair at all, then you are acutely aware of the trend away from being able to “do it yourself” and relying heavily on the manufacturer/dealer. This reduces the end user’s ability to control costs directly. A common effect is the “whipsaw” effect, when costs rise quickly, and income is much slower to catch up. Sound familiar?
In the “Great Recession” of 2008-2009, a lot of small businesses survived by putting off capital purchases. Most, including yours truly, learned that this necessity was a bad option – the type of cash flow versus profit margin environment we normally operate in makes a recovery from punting capital purchases down the road option very risky and difficult to see the light again. Loggers’ options for addressing this inflationary period are typical for most small businesses, and they start with knowing where you stand on fixed versus variable (operating) costs. There is not much you can do to change your fixed costs except when it comes time to “renew” these fixed costs. Do you push capital purchases further down the road or take more risks, such as lowering your amount of insurance?
There are more avenues for addressing inflation in the production costs column – such as changing your hours of operation, changing job parameters to work closer to home or shorten skid distance, eliminating any labor buffer of extra employees, etc. I attended an excellent presentation by a representative of a major equipment manufacturer a few weeks ago, and he had numbers to actualize what a lot of us in the industry were already thinking: that for several years now, logging equipment productivity has plateaued.
The equipment’s physical size and operator limitations are two major reasons for this. So, for the last 4 or 5 years, we have already absorbed (without production increases) the large capital increases of annual inflation and mandated technology. Take the Tier 4 emissions systems, which not only add fixed and operating costs but reduce an engine’s achievable lifespan by recirculating “used” air back through it. To summarize this paragraph: if your operation has worked towards efficiency in years past, there is very little a logging operation can do within itself to address today’s inflated costs.
Now to pull out the crystal ball and predict what the future holds. (Who has a lot of confidence in me doing that?). I can give you my one foot in the grave and the other following closely behind a logger’s experience ideas. One scenario is to purely let the market decide what happens. In this scenario, if the economy stays healthy, we’ll whipsaw back and forth between rising costs and catch-up rates until they stabilize. If the economy falters and consuming mills drop production, many loggers will go out. Good ones by decision and poor ones by default. Scenario number two is one I believe loggers should support: a genuine relationship where loggers, procurement foresters, mill representatives, and virtually all involved understand costs, what is happening, and work towards a sustainable forest products industry.
This effort will require somewhat of a paradigm (that’s a $10 word thrown around) shift to include more communication and understanding along with a market economy. Too much to hope for? I hope not, and the CLA is working towards this goal – we are loggers, and we understand our end of the business, but we also recognize we need and ask for input from others in the industry who are interested enough to provide.
So, Mrs. Johnson, if this FRA publication makes it to your retired English teacher’s reading material, please don’t grade it. You cannot take back my diploma. For everyone else: I hope I provided some thoughtful material that contributes to the FRA effort to strengthen this supply chain.