The Lumber Industry; The Proposed Consolidation and Its Relation to the Northwest

An Address Delivered by Mr. Charles S. Keith, President Central Coal & Coke Co., Kansas City, Mo. P,resident Oregon-American Lumber Co., Vernonia, Ore., Before the Twenty-Second Annual Convention Oregon Bankers Association, June 3 and 4, 1927 -Gearhart-By-The-Sea.

l[r. Char]es S. Keith

Mr. Chairman and Gentlemen:

A year ago I agreed, if conditions would permit, to address you on the subject, "The Lumber Industry, the Proposed Consolidation, and the Relation of the Industry to the Northwest," which I am discussing today. Circumstances arose that prevented my doing so then.

I am glad to have the opportunity to discuss with you some of the problems confronting the lumber industry. The lumber industry's problems are not only the problems of those engaged directty in the industry, but they are also the problems of those who are, in whole or in part, dependent upon it in its various phases, to-wit: Conservation, Utilization, Employment, Consumption, Taxes, Banking, Merchandising, and Transportation. O,ur problems are those which affect the investment of those engaged in the industry individually; the Community, which is dependent upon the industry for support; the State, through the exploitation of its natural resources; and the Nation, which is dependent upon the industry for the product, to house its people, to maintain and to build its railroads and shipping facilities. The prosperity of the Community, tfue State, and the Nation is intimately related to the success of this enterprise.

I welcome this opportunity to discuss before you today these matters, in the hope of a broader understanding of the industry's problems.

I will treat this subject principally from the point of view of Fir, which is the dominant wood on the Pacific Coast, and only from the point of view of the Fir producing territory. Fir is probably the best general utility wood that grows in the American forests. lt is equal to any such wood for any purpose, and superior to other woods for specific uses. It can, and does, displace more competitive woods in consumption than any other wood. As an alt-purpose wood, it has no equal, yet it is the most abused of all woods, and this is principally due to one of its greatest merits, i. e., it will not sap stain and discolor. Consequently it can be, and has been, shipped and used in its green state, resulting in an unfavorable reputation. It has only one real competitor in general consumption, and that is Southern Pine. Southern Pine is a fast depleting industry. Fir must replace it. We have been disappointed in the expected decline in Southern Pine production. In anticipation of this reduction, quite a considerable development has been made in thr Fir region. In 1919 a very careful survey was made of the Southern

Pine industry from the Virginias to Texas, including the entire territory of Southern Pine production. Each county or each parish of each state was visited by trained men, and each and eyery sawmill in the district was surveyed. Some 5400 plants were found and studied. From the report of this investigation we concluded that the production 9f Southern Pine would decline 50 per cent by 1925. In the year 1923 we discovered that the Forest Products carloadings in the Southern Pine territory had increased rather than decreased. So, another survey was started in 1923, and finished in 1924. In the second survey, we found 12,063 mills, 451 of which produced approximately 9 million feet of lumber, or 56 per cent of the total, and the rest of the Southern Pine production was produced by 11,612 mills. The small mills produced 44 per cent of the total production. The development was due to the fact that as the prices for lumber in the South increased, timber which was not considered merchantable in 1919 came into production through the medium of these small mills. This character of production reached its peak in 1925. From the survey of 1923-24, it was concluded that if Southern Pine production decreased geometrically with the deptetion of mill owned timber, by the end, of 1926 there would have been a decline of 3,732,000,000 feet of production. But the engineers making the study reported that this would.not occur, inasmuch as the small mills had only reported the anrount of timber they presently owned, and that they could secure additional woodlot and cutover timber, and so, many of these mills would continue their life indefinitely. Recently it became necessary to make another study of the situation to determine what has actually occurred and what its probable effect on Fir would be. We studied the carloading figures on Southern pine, published by the American Railways $ssociation and the Interstate Commerce Commission, the Government reports on production, and data from other sources. Here we found that the year 1925 showed an increase over 1924 in Southern Pine production, instead of a decline, but that the year 1926 indicated a decline of 1,765,000.000 feet from 1925. The year 1926 was the first one in which Southern Pine production actually declined since the study made in 1919. Every year from 1919 to 1925, production increased. A thorough investigation of current production through competent sources in the South developed the further fact that we could anticipate a decline in 1927 of two billion feet lrom 1926. Last year the Southern Pine production of our Kansas City group declined 14 per cent, as against

1925. This year our estimate of production shows a 23 per cent decline. Production to date shows a decline of 24 per cent. Further, we found that large iryrills are now in competition with small mills in the purchase of cutover and woodlot timber; and that many small mills were going out of production. The thought I am trying to convey to you is this: The anticipated decline in Southern Pine production may have resulted in the development of West Coast production in advance of actual requirements, and it may have caused some over-production. I am not prepared to admit this conclusion, however. The study of the mills in production in 1923 and. 1926 on the Coast indicate that notwithstanding the construction of such new mills, the total increase in capacity production was only 65 million feet per annum. Many mills had ceased production. It was developed further that there is 505 million feet of production on the West Coast which is idle from financial or economic causes, and which could be brought into production should markets expand or values increase.

Building in the United States from 1919 to 1926, during this period of expansion of lumber production in the South and West, has been increasing each year, the year 1926 being the greatest year in volume of building contracts for construction in the history of the United States. The building contracts let for the first four months this year are withirL l% per cent of the same period last year. The expansion in building in this period has not only absorbed the increase in production but also the liquidation of lumber stocks since 1923.

We have been led to believe thbt the production of the West Coast is very flexible, and that it could be readily increased 25 per cent to 30 per cent. Experience has demonstrated that this conclusion is in error. The. greatest period of stimulated production was that of the year 1923, the year of the Japanese disaster. We thoroughly investigated the expansion of production following the earthquake. To do this we studied the operation of 101 identical plants in Oregon and Washington, producing approximately 50 per cent of the total production of those two states, for the period of 8 weeks prior to and. l0 weeks subsequent to the Japanese earthquake. The figures disclosed an actual expansion in production of l.4l per cent, instead of 25 per cent or 30 per cent. During this same period, this percentage of increase, as applied to the total production on the West Coast, indicated a total increase of 39 million feet of production. Taking the years 1922, 1924, and 1925, the third and fourth quarters thereof, we found that the Japanese consumption in the fourth quarter of the year generally exceeded that of the third quarter by 47.7 per cent. dn application of this percentage to the third quarter of 1923 indicated that the excess amount of business from Japan over normal in the last quarter of. 1923 was only 43 million feet. Consequently the re-allocation of distribution meant that Japan took only 4 million feet off the general market, in addition to the increased production. At that time the market psychology was very strong. Everybody concldded the Japanese earthquake would bring about greater demand for our products, and prices would go higher. The manufacturers were encouraged to ask higher prices for their product. This psychology, together with the small diversion of a portion of production from California and the North Atlantic Seaboard, resulted in substantial increases in prices, which were disproportionate to the actual relation of supply and demand.

An analysis of the situation as to why we did not secure a great deal more business from Japan disclosed the fact that the country was naturally disorganized and normal business was dislocated by reason of the disaster, which transferred consumption from normal requirements to that of rehabilitation. Subsequently Japan did not take lumber for rehabilitation in addition to its ordinary requirements, and only took 43 million feet more than its normal and natural requrrements,

As I view the situation, the difficulty on the West Coast is not a question of over-production, because at the end of practically every year we have found the stocks approximately the same as they were at the beginning of the yedr. In other words, the trade has taken practically all of the production. T'herefore, there has not been, in fact, any substantial over-production, if any. The difficulty is not so much a question irf over-production as it is a question of merchandising. The merchandising situation has been affected first, by preparation. Fir lumber 'has not been prepared in a comparable way to that of its competitor. There is a lack of uniformity in grades. There is also improper distribution, resulting in over-selling congested markets. Consequently, low prices have been developed in such markets, to which freight rates were added when quoting delivered prices to other markets. This has adversely affected the whole realization structure.

Another factor that has entered into the problem of merchandising is that fact that we have had a decided economic change in methods of doing business. The difference in time of transportatinn has resulted in traffic moving to destination in l3lrdays at the present time, as compared with 60 or 90 days prior to 1923. This. change in transportation time has operated to release to consumption a great quantity of stocks in transit in the United States. In order to visualize the effect of this change, we must know that practically 120 million feet of lumber is put in transit each day. That is, it is loaded and shipped, and is represented by accounts receivable. Consequent- ly 30 days of such shipments taken out of transit resulted in the release of between 3 and 4 billion feet of lumber to consumption, and was equivalent to an increase in production to that extent. But it went further than that. Stocks of lumber in the distributors' and consumers'yards throughout the country, built up in anticipa- tion of delay in transportation, had to be liquidated. When the time of transit was reduced, naturally the retailers' and consumers' stocks were liquidated in proportion to the new time. So we have had liquidation, first, in lumber in transit, and, second, in surplus retail and industrial stocks. The third effect has been the release of hundreds of millions of dollars of capital employed in the industry. 'fhe buyer is now able to anticipate his requirements 2 or 3 weeks, instead of 3 or 4 months. He now buys as his trade requires it. Consequently we say he buys from hand to mouth. He buys in.smaller quantity and more frequently. Many only buy when they l-rave made a sale. There has never been a time in the history of the industry rvhen the consumer worked so close to production as now. This condition has accentuated the problem of seasonal demand. The experience of the industry is that 80 per cent of the current production of lumber is consumed in January, February and March; that 125 per cent of the current production is consumed in April, May, June, and July; and that for the balance of the year, consumption 1nd supply are practically stabilized. This necessitates new methods. The Fir industry has been in the habit of selling against production, and not against stocks. In other words, sales have been made, in many cases, 60 to 90 days in advance of production. This, because the buyer was forced to anticipate his requirements in that way. Today lre is not required to so anticipate his needs, and consequently sates must be made against stocks rather than production. The value of service is .being daily accentuated. There must of necessity be some reservoir to provide for the fluctuation in seasonal consump- tion. This means the provision of facilities to carry stocks in periods of seasonal under-consurnption, with which to meet demand in such periods oJ over-consumption. Not to exceed 30 per cent to 40 per cent of the plants on the West Coast have such facilities. Recent figures showing stocks on hand at 98 companies, totalting 860 million feet, disclosed the fact that l0 companies had 500 million feet of stock. Consequently, mills that have no such facilities are of necessity either forced to curtail in such periods or to sell their lumber on an unwilling market, with the natural consequences of each. The cost of adjusted production can easily become al great as the decline in market values. Taxes, insurance, and interesl never cease. Idle day labor is always present. Administrative and sales organization must go on. The sum total of these costs is very great. As an expedient, such adjustment is justifiable; as a common tliet, it should be avoided. It will never be possible efficientlv to conduct the business unless the product is pioperly preparecl, -and runless sales are made against stocks, and not againt production. It has been my experience that whenever a season is started with low prices, low prices generally prevail throughout the year. Notwithstanding the thought that has existed that prices of lumber on the Coast have been affected by competitive prices of Southern Pine, the figures show that Southern Pine prices have declined 82c since 1923, as compared with the decline in Fir prices in the same period of $8.37. In other words, the decline in Souttrern Pine valrres has been only 10 per cent of the decline in Fir, or, to put it another way, Fir prices have declined, so far as Southern Pine is concerned, when we consider the dual proposition of the small mill, as well as Fir, competition. Fir has declined $7.55 more than justified by its competition. The industry and the community have suffered an unnecessary economic waste. It would seem that Southern Pine prices would have declined in greater amount. Had the West Coast industry been in position to prepare its product properly for the market; had it been in position to store lumber in times of under consumption, to sell against in periods of over-consumption; and had it been organized to sell its product to the trade direct, I am lree to say that I believe prices of West Coast woods would have increased instead of declining. Had Fir not declined, Pine woutd lrave advanced.

These conditions are fundamental. There is a feeling that the drying-of West Coast lumber for the trade is too expensive a propo- sition for the industry to undertake; and yet, in our personil experience, we have found that this is not true; that thiJ lumber can be manufactured and prepared in this manner, just as cheaply as otherwise, with less degradation than air drying, arrd compared to qemi-dry or green lumber, with a saving of approximately 15% p_er cent in freight rates. Degradation in air drying, aciording to Government tests, range lrom 17 per cent to 80 per cent, with piob- ably an average of 4O per cent. Whereas, our own experienie in kiln drying is less than 4 per cent. For the product prepared as the trade wants it, the trade is willing to, and has paid more than' our competitors' prices.

There is another factor in this situation that we should not forget, and that.is, whenever an industry does not prepare its producf to meet the consumer's requirements, it is inviting the competition of other woods and substitutes, and is literally diggidli its own grave. :.

We recognize the danger of substitute gompetition. The wortd

(Continued on Page 44)

(Continued from Page 43) has been familiar with the uses of wood since the dawn of history, and it has been used by all peoples through all ages. 11 is oniy in the last 20 years that the advent of mineials in d-ompeti[ion witir wood has.been so- pronounced, and this has been pariially due to the fact that we have not turned oui our producf in thi proper lnanner for such uses. The effect of the speiulative buildingin ?he last five years,- _wherein poor construction and poorly prepa"red and rnterior materials has been used, will be felt very greally in the future, unless something is done now to overcoire-the -situation by education of the industry and the public. We have also paid the penalty of the so-catled fire preventioh campaigns conducted'by the insurarce 6omp-anies. To my mind these cimpaigns have -been waged.largely for the -purpose of directing pubfic ittention away trom the tact that it is paying exceedingly high insurance rates. Most fires are caused from conients and nil con-struction. ln 1922, according to a survey of the engineering department of the Nationai Lumber Manufacturers Association, the reported fire loss in the l]lit^.4 Stltes was 9405,000,000, or approiimately g1.75 to each S1000.00 of insurable wealth. This same source aiso says that the tre_nd of fire loss has; slowed up steadily for the last seieral years.

In other words, the fire toss at its maximum in the last siveral years was $1.75 per- $1000.00 of insurable wealth, and yet the rate of fire^insurance will average about $1.75 per $i00.00,-making the cost of insurance more than ten times the fire loss.' The lMest Coast Trade Extension Bureau has undertaken to promote the use of its products, as has the National Lumber Manufacturers Association to promote the use of w-ood. As yet, so far as they have gone and are going, these campaigns are inadequate, as cofrpared with what our competitors_are doing. Generilly'speakingl the consumption 9f qny product in general use, should progress pibpo.- tionately with. the in-crease _in population and with the changed standards of living. - Notwithstanding the fact that the population of this cou-ntry has -increased substantially since 1909, consumption of softwood lumber has declined 6.4 per cent. At the same timi this has_ taken Olace in total softwood consumption, the consumption of Southern Pine and Fir has increased approximatety lO per ient, while that of Fir itself has increased 87 per cent. So, while-we have held our own in consumption, so far as volume is concerned. as compared with previous standards, we have not progressed as we should have. I 6gure that the consumption of lumber in the United States should have been in 1925 approximately 73 billion feet, as asainst aoproximately_39 billion feet produced. Ilowever, had consump-tion bein as great as 73 billion feet annualty, the forests of the Uniied States could not have supported such increased production. So, the tumber ildustry as a whole has not been substantially hurt by reason of this situation. Regardless of the inroads substitutes havl made, or wilt make,.these inroads will not be as great or any greater than the depletion of the timber supply. From-a study of'thi present supply of merchantable Southern Pine and Fir timber, privately o*ned, in the South, Oregon and Washington, and all of the iimber in British Columbia in the Fir belt, we found 455 billion feet. Present consumption is approximately 25 billion feet per annurn. So, such timber will only support present production approximately l8 years. Government owned timber in the same belt in Oregon ind Washington will add 182 billion feet, which will add only 7 years' life. (Jneconomic taxation is an urge to production, causing timber to be operated in advance of its requirements. This results in a tendency to over-production; destructive competition; lowering of values; and causing low-grade timber, after being felled, to be left in the woods to decay or burn because it will not pay the additional cost of manu- facture. Proper economic laws taxing output, rather than timber, would remove the urge of taxation on production and permit such timber to come into production when it was needed. Iligher values would permit the manufacture of this timber into lumber and would result in greater utilization. But no tax. either on income or on output, should be adopted by any one State in advance of its adoption by other states in the same producing territory. If such tax were assessed in Oregon and not in Washington, the producers in Oregon would be at a decided disadvantage in competition with the producers in Washington. Further ufilization of the production through the use of odd lengths and odd widths, and closer refinement, would have the tendency to increase the life of the forest and reduce the cost to the consumer. Therefore, it is in the interest of the public that our forest be consumed at no greater ratio than at preseni, and effort must be made to increase the utilization of forest and mill waste.

The National City Company made a study of the economic situation in the Fir, as well as the whole lumber industry, and their report is, in part, as follows:

"The lumber industry as a whole is not a 'dying industry' in the sense that its chief asset (that is, standing timber) is likely to decline ,rnaterially in value or to fall into disuse at a rate faster than the supply of lumber will decline through exhaustion of the raw material.

"That the industry as a whole is a very much disorganized industry-many species of lumber-thousands of small producers-a high percentage of non-integration, particutarly in the Pacific