Economic Outlook - [Excerpted from the January 2008 F2M® Economic Outlook]
Headwinds buffeting the US economy appear to be strengthening, as investors hunker down to wait out increased pressure from high oil prices, continued contraction in the manufacturing sector and an unemployment rate that topped 5 percent for the first time in two years.

The solid wood industry in the US South shows some ambiguity: the volume of southern exports declined 9.3 percent, whereas the volume of treated products increased by 58.9 percent. Paper, which has defied the gravitational pull of a slowing economy, may finally come back to earth. Despite higher production numbers, paper products fell from the Institute for Supply Management’s (ISM) lists of top-performing industries or industries with growth in new orders.

Where the economy will go from here is open to speculation. According to Forest2Market® analysts, expectations of a continued slowing seem justified.

To learn more about the F2M® Economic Outlook or to subscribe, click here.

Cellulosic Ethanol: Opportunities for timber in the new energy bill
The forest and forest products industry received a small boon from passage of the Energy Independence and Security Act (EISA) 2007. President Bush signed the bill into law in December. The EISA 2007 raised the Renewable Fuels Standard to 36 billion gallons per year by 2022, 16 billion gallons of which must be cellulosic ethanol. Cellulosic ethanol represents a new revenue source for the forest sector, as it can be made from plant materials ranging from wood waste and logging slash to orange peels and switch grass. It is considered more sustainable than corn ethanol, because the raw materials necessary to produce it do not compete with food sources.

The EIASA 2007 will pump hundreds of millions dollars into the development of biofuels and the infrastructure necessary to support its widespread use with up to $725 million in loans and grants. Biofuel grant opportunities include:

• $500 million in development grants to encourage development and production of advanced biofuels (excluding corn ethanol) for fiscal years 2008-2015.

• $25 million annually for ethanol production and research in states with low ethanol production rates

• $50 million specifically for cellulosic ethanol research in 2008

• $200 million in grants for advanced biofuel infrastructure development from 2008 to 2014.

The finished bill offers no subsidies for planting cellulosic ethanol feedstocks (available to corn ethanol for years)—although a provision for biofuel crop subsidies may still squeak through in the Farm Bill. Nor will the burgeoning biofuel industry receive the $2.6 billion in tax cuts enjoyed by oil producers. Still, EISA 2007 opens the door to an entirely new revenue stream for the forest and forest products industry.

The US Senate Farm bill: Tax credits and loans for cellulosic ethanol
The US Senate passed a Farm Bill in December which could provide $2.3 billion in federal support to biofuels, half of which will go to development of cellulosic ethanol. President Bush has threatened to veto the bill, citing inadequate reforms, and it must still be resolved with a similar passed by the House in July. The Senate bill includes $1.1 billion for biomass crops, cellulosic ethanol plant construction, and to help refiners buy biofuel feedstock. An additional $1.1 billion would go to tax credits for biofuels. Cellulosic ethanol could receive up to $1.28 a gallon in credits—67 cents for small producers of cellulosic ethanol, the current 10 cent credit to all small producers, and the long-standing 51 cent tax credit for blending ethanol into gasoline.

Forest Carbon Offsets: At the end of the hype could be a pot of gold
A growing number of individuals, businesses, and manufacturers are going carbon neutral in response to concerns about climate change. To proponents, the carbon offset market represents a viable and cost-efficient opportunity to fix an ailing environment and stirs aspirations of a ‘green’ legacy that can be established today. The vision pumped more than $54 million into the fledgling US market during 2007, says a recent NY Times article. Forest landowners stand to gain from this rising trend, as current afforestation and forest management practices could translate into dollars. Forests are natural carbon sinks, acting as large scrubbers that capture and store carbon dioxide. So, if you know how much your trees have grown, you can measure the amount of carbon captured in it. As such, forest carbon is an ideal source of carbon offset credits, which can then be purchased by individuals and companies alike. Not the actual tree—just the carbon that the tree absorbs.

As with the dot-com boom, a number of services have cropped up with the growing hype surrounding carbon offsets and skeptics are waiting for the bottom to fall out, as there is no federal mandatory regulation of the US market. It is important to recall, however, that the dot-com boom (despite some spectacular failures) resulted in a robust and legitimate market. So after a few of the snake-oil hucksters have been neatly thrashed by the FTC in a recently held hearing into how carbon offsets are advertised, the winners of the carbon market most likely will be standing. Whoever emerges, forest landowners interested in selling a commodity they already own stand to make a lot of money.

Industry Highlight: Interstate Paper positions itself for the future
In a climate of increased global competition, rising energy costs and a rapidly depreciating dollar, the future of the US kraft linerboard industry relies on a commitment to advanced technology and improved quality. Interstate Paper LLC at Riceboro, Ga. presents a model of how this can be achieved not by asking its employees to ‘do more with less,’ rather with an investment of more than $100 million to increase efficiency, production capacity and quality.

Interstate Paper, bolstered by the commitment of its privately-held parent company Interstate Resources, has focused much of its investment into quality improvements. “A lot of larger companies might not have invested in us, but our owners did and we’ve been successful,” says vice president and general manager of the Riceboro mill, Gene Millard.

In the same spirit, improvements made by Interstate Paper at the Riceboro mill demonstrate the company’s longstanding commitment to southeastern Georgia. Since 1998, the company has increased annual production by 40,000 tons through a number of quality enhancements including:

• Improved linerboard smoothness and density with a new topwire former and soft nip calender in its kraft linerboard machine.

• Greater access to and storage of its chip inventory with a state of the art radial chip stacker/reclaimer.

• Added fiber strength and uniformity with a new Hot Stock Screening system.

• Increased output of paper with new dryer felt rolls and other improvements designed to increase the paper machine running-speed.

Additionally, the use of a bubbling fluidized bed (BFB) boiler has enabled the company to generate 14 megawatts of electricity per hour, about 50 percent of the mills overall energy requirement, using only wood waste and black liquor, a cellulose and lignin by-product of kraft linerboard production. The BFB boiler helps reduce output of carbon into the atmosphere and, in conjunction with other environmentally savvy practices, demonstrates the company’s dedication to environmentally responsible practices. According to Interstate Paper vice president Tom Norris, future enhancement efforts will be aimed at increasing use of recycled fiber, which accounts for 15 percent of the mills overall fiber requirement.

Interstate Paper is a major employer in ten counties surrounding its home in Liberty County, Ga. In the midst of closures and increased international competition, Interstate Paper is positioned well in Riceboro, Ga. to compete globally.

Forest2Market sponsors the FRA Bio-Energy Wood Supply Chain conference
Forest2Market® is a sponsor of the Forest Resource Association’s (FRA) upcoming Bio-Energy Wood Supply Chain conference scheduled for April 13-14, 2008. The conference will bring bio-energy entrepreneurs and wood supply chain managers together to explore New Opportunities and New Issues in the rapidly emerging biofuel and bio-energy markets. Panelists will address the Drivers, the Technology the Wood Supply Chain and the Economics of harvest, use, transport and storage of biomass. The conference will be held at the Marriot Grande Dunes, Myrtle Beach, South Carolina, directly following the FRA’s 2008 Annual Meeting.

For the lowest rates, register for the conference by February 28, 2008 or call the FRA for more information at 301-838-9385.

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