Economic Outlook
The pace and scope of interventions into the financial and other markets exploded during the past month as governments and central banks around the world attempt to head off a global economic catastrophe. U. S. gross domestic product contracted in 3Q2008 amid employment concerns that slowed consumer spending.

In October, the Institute for Supply Management reported the following changes in the performance of the wood and paper industries from September:

Forest products manufacturers should anticipate more adverse conditions as the U.S. housing market continues to search for a bottom, the dollar appreciates against most currencies, and falling oil prices cheapen transportation of imports.

The above is an excerpt from the November issue of the Forest2Market� Economic Outlook. To learn more about the F2M� Economic Outlook or to subscribe, click here.

Update: Reauthorization of Timber Payments to Rural Counties
In our June newsletter, we wrote about the failure of Congress to reauthorize The Secure Rural School and Community Self-Determination Act of 2000, which provided help for rural communities affected by the reduction of timber harvests from federal lands. We have good news and bad news to report about this story.

Here is what we said then:

The discontinuation of the payments has had serious consequences. Many of the affected counties have taken drastic steps in order to deal with the resulting budget shortfalls. Some counties fired sheriff's deputies and released prisoners; others closed libraries and slashed funds for road maintenance.

The good news is that Congress reauthorized the timber payments program in October as part of a $700 billion bailout package and will provide more than $500 million for public schools, road maintenance, job creation, and stewardship programs in 2008. Over 700 counties in 41 states are eligible for payments.

The highest payments go to states in the West. Under the formula approved in October, Oregon will receive the largest timber payments—about $254 million in 2008—followed by California ($63 million), Washington ($43 million), Idaho ($43 million) and Montana ($32 million). These figures are roughly 90 percent of the 2006 payment amounts.

Congress has authorized funding for the new bill through 2011, though the payments will decrease over the four-year period: down to approximately 81 percent of 2006’s level in 2009, 73 percent in 2010 and just 50 percent in 2011.

The bad news is that the phase down may become a phase out. Many acknowledge that the ultimate goal of the Congress is to discontinue the payments. At the inception of the timber payments program, the government recognized that timber sales from federal lands were the main source of tax revenue for the counties. Once conservation measures restricted these sales, the timber payments program was enacted to help counties make the transition to alternative sources of revenue. Some argue that the counties will have had ample time to make this transition by 2012.

Another reason for a possible phase out has to do with the amount of the payments. Calculations for the payments are based on an average of the county’s three highest timber-producing years since 1986. Since the late 1980s saw some of the highest timber production ever in the West, many counties are making more money through the timber payments program than they were during all but peak production years for timber harvesting. Even Oregon governor Ted Kulongoski, who called the reauthorization of the bill “a lifeline,” said that no one should expect payments beyond 2011. "This is the end of it. What we have to do in these coming four years is develop a strategy" to replace the federal payments in county budgets.

To read the original story, visit our website: click here.

Update: January’s Russian Timber Tax Hike Delayed
In October’s issue, we provided an overview of the effects that Russia’s proposed timber tariff increase might have on worldwide markets if it went into effect. The Russians planned to boost the tariff over 300 percent in January 2009, to 80 percent of log value, a move that may have had serious repercussions in the primary markets for Russian timber: Europe and Asia. In early November, Russia’s Prime Minister Vladimir Putin announced that they would postpone the tax increase for 9-12 months.

The primary reason for this move is the state of the global economy. According to the Interfax News Agency in Russia, Putin provided this explanation, “Aware that cuts in our (timber) exports to Finnish companies amid the world financial and economic crisis could lead to cuts in production and entail social consequences after jobs are cut, the government deems it possible to put off a rise in customs duties.”

It is likely that the Russians are more worried about their own economy than they are Finland’s, however. According to Wood Resources International, after reaching record highs in the fourth quarter of 2007, log costs for Russian timber hit a two-year low in the third quarter of 2008, as the Russian economy began to slow. A slowing housing market reduced domestic demand. Demand in the export market also decreased, partially because of the slowing global economy and partially as countries like Finland, China, and Korea searched for substitutes as the tariff increase loomed. Whether the delay in the tariff increase will stop this drain on demand for Russian logs is unclear.

If you read our earlier story, you’ll remember that Russia planned this prohibitive tax increase as a way to encourage creation of, and investment in, a local timber processing industry. Putin addressed this issue in the announcement: “[A]long with retaining the current level of customs duties, we will offer potential investors, including Finnish ones, a full package of additional fiscal stimuli for investment in the Russian timber industry in the near future.”

To read the original story, click here.

Legislation Watch
Since 1986, companies that produce electricity from biomass and then sell the output to the grid have been eligible for a tax credit. This credit is currently 1-2 cents per kWH. In context, this tax credit is substantial. The cost to the consumer of one kWH averaged about 10.5 cents in the United States in August 2008. In the South, the average was about 9 cents, and in the Pacific Northwest, it was roughly 7 cents (www.eia.doe.gov).

The forest products industry has never benefited from this tax credit, however, because the electricity they produced from biomass is used onsite. The amount of demand that forest products companies remove from the grid because they generate their own power is significant: paper mills generate 64 percent of their own energy and wood products mills generate 74 percent of theirs. Because of this, Congressman Mike Michaud from Maine has introduced H.R. 7290 in the U.S. House, a bill that would extend the credit to companies producing electricity for onsite use.

The resolution has been referred to the House Ways and Means Committee for discussion. If you would like to contact your representative to encourage him or her to co-sponsor and support the bill, go to www.house.gov.

Bioenergy Hot Spot: Georgia
On November 20, when Woodlands Alternative Fuels announced that it would build a wood pellet plant in Meigs, Georgia, few were surprised. Like Woodlands Alternative, many bioenergy companies have been flocking to Georgia over the last couple of years. There have been so many, in fact, that the state has dubbed a large swath of the state the Bioenergy Corridor. Many credit the state’s Bioenergy One Stop Shop with this success.

In April 2006, Georgia formed the Georgia Renewable Energy One-Stop Shop. The One-Stop Shop, which is now part of the Georgia Center for Innovation in Agriculture, holds working meetings in which pre-screened businesses are given an opportunity to present and discuss their bioenergy projects with representatives from over 20 state and federal agencies. The companies leave with the contacts they need to get started. The resulting streamlined permitting process takes just 90 days in most cases.

Georgia has also adopted income tax credits to offset the costs of installing biomass power plants and other renewable energy technologies. The credit covers up to 35 percent of the cost of a solar, wind, geothermal, or biomass installations. For businesses, the ceiling for the credit is $500,000, though the credit cannot exceed tax liability. Taxpayers are also eligible for credits resulting from the transportation of wood waste to biomass facilities on a per-ton basis.

When Woodlands Alternative opens in June 2009, it will join three other pellet plants (including Fram Renewables), a cellulosic ethanol industry led by Range Fuels (which is currently building the first commercial scale facility to produce ethanol from wood), and multiple wood-based power plants (like the one that Rollcast Energy will build to supply Santee Cooper with electricity). Because of these projects and others like them, we select Georgia as our Bioenergy Hot Spot this month.

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