Mill Closures Impacts on Logging Businesses in the Lake States - What Can We Learn from an Alabama Case Study

by  Shawn Baker, Forisk Consulting and Tim O'Hara | Vice-President of Government Affairs, & Manager, Lake States Region

During the pandemic, the demand for printing and writing paper dropped significantly. As a direct result, several paper mills in the Lake State Region shut down temporarily or permanently. The largest closure was in Wisconsin Rapids, WI, a mill that consumed a substantial amount of pulpwood and served as a regional economic base

The other day, a forester mentioned that he had not seen a decline in the number of logging businesses, something that he had anticipated this winter logging season. Several factors are likely contributing to this delay in the expected impacts of COVID-19, including the timing of the closures and assistance provided through various government stimulus packages like the Paycheck Protection Program (PPP).

The idling of the Wisconsin Rapids mill occurred following the winter harvest season of 2020. During the winter months, the region’s paper mills purchase up to 60 percent of their annual fiber needs. This effectively delayed the worst production impacts to logging businesses until after the spring breakup.

The other major factor was the funding provided through the PPP. This support made available through COVID-19 pandemic stimulus legislation provided forgivable loans to businesses that experienced economic impacts caused by the pandemic. Many logging businesses rightfully took advantage of the PPP to remain viable during a time of great uncertainty. The two months of payroll support provided by these loans further delayed the worst impacts of mill closures.

The question that remains is what impacts can be expected when a large consuming mill closes. What are the potential effects on the region’s logging businesses? To answer this question, we can look at past mill closures in other areas of the country. In 2014, a major paper mill in Courtland, AL, closed permanently. This closure removed the largest wood consumer in the northwest corner of the state.

A recent analysis of the Courtland mill’s closure on logging employment by Forisk Consulting, a forestry research company, found that the worst impacts to employment were delayed. In the short-term, loggers consumed capital and savings in hopes of the mill reopening. When compared to a similar-sized market in the central portion of Alabama, the long-term effects are apparent (Figure 1). While employment fell only one percent the year after the closure, employment fell by 15% in northwest Alabama over the next three years, while the central Alabama market saw employment growth of one to two percent.

Indexed Logging
Figure 1. Logging Employment Changes in Two Alabama Markets Following Closure of Pulp Mill.

Logging is a high-volume low margin business. Small changes in volume harvested can quickly eliminate profit margins (Figure 2). Many logging businesses are accustomed to dealing with weekly and monthly production variability. Extended production declines, however, endanger these businesses as few have access to additional capital and cash flow. The passage of the latest COVID-19 stimulus package provides additional funding to businesses impacted by the pandemic. In addition, up to $200,000,000 in funding was also provided to the Secretary of Agriculture to provide relief for timber harvesting and timber hauling businesses. If logging businesses take advantage of these loan and grant programs, and they should, it may allow them to maintain economic viability. During this period, if the region’s markets improve, mills reopen, or new markets present themselves, the negative financial impacts could be minimized.

Profit Margin
Figure 2. Effects on Logging Business Profit as Annual Production Declines.

Authors: Shawn Baker, Forisk Consulting and Tim O'Hara | Vice-President of Government Affairs, & Manager, Lake States Region
Last modified on Thursday, 21 January 2021 11:39