12. Markets, policy incentives and development of forest plantation resources in the United States of America - Daowei Zhang^[135]

INTRODUCTION

In 2000, the population of the United States of America (U.S.A.) stood at 281 million people, with a population density of 31 persons/km². In the last half century, the population grew at an average rate of 1.25 percent annually. In 1990, about 25 percent of the population lived in rural areas, compared to 60 percent in 1900 (Table 1).

The country’s gross domestic product (GDP) in 2000 was about US$9 963 billion and per-capita income was US$30 069 (U.S. Bureau of Census 2001). The service sector (including trade, financial and other services) accounts for 56 percent of the GDP; agriculture, construction, manufacturing and transportation contribute 31 percent; and the remaining 13 percent comes from the government sector.

The total land area of the U.S.A is 2 263 million acres (916 million ha), of which 33 percent or 747 million acres (302 million ha) are forest land (Smith et al. 2001; Figure 1). Another 35 percent is classified as rangeland, 21 percent as cropland and the rest are residential, commercial and industrial lands (Cubbage et al. 1993). About 40 percent of the total land area is federal and state government land; the rest is privately owned (U.S. Bureau of the Census 1991, p. 201).

Source: Smith et al. (2001)

Figure 1: Land and forest area distribution in the U.S.A., 1997

Forest land is further classified into timberland, reserved forest land and other forest land. Timberland covers 504 million acres (203 million ha) or 67 percent of the total forest land and is the primary source of timber production (Smith et al. 2001). To be classified as timberland, areas must be able to produce at least 20 cubic feet of industrial wood per acre annually (or 1.41 m³/ha/year) and have not been withdrawn from timber production for legal and administrative reasons. Reserved forest land covers 52 million acres and is managed as parks and wilderness areas for non-timber use. Other forest land (191 million acres) is land not capable of producing industrial wood on a commercially viable scale, but is important for watershed protection, wildlife habitat and other uses. About half of the country’s “other forest land” is located in Alaska.

The forestry sector has four components: forestry, wood products, paper and allied industry and wood furniture industry. Combined, these contribute about two percent to the GDP. While the forest product manufacturing facilities are exclusively private enterprises, the owners of forest land include federal, state and municipal governments, and private industrial and non-industrial entities. In 1997, about 58 percent of the United State’s forest land was privately owned, but its share of timberland was 71 percent (13 percent industrial and 58 percent non-industrial private properties) (Smith et al. 2001).

Table 1: Population and economic indicators of the U.S.A., 1790-2000

Sources: Population data are from the U.S. Census Bureau web page
http://www.census.gov/population/censusdata/table-2.pdf and
http://www.census.gov/population/censusdata/table-4.pdf.
GDP data are from the U.S. Bureau of Economic Analysis web page:
http://www.bea.doc.gov/bea/dn/gdplev.xls.

Timber production rose rapidly during the second half of the nineteenth century from 76.8 million m³ in 1850 to 342 million m³ in 1900, and rising to 368 million m³ in 1910 (Figure 2). The shift to coal and oil for fuel, more efficient use of wood and use of wood substitutes, however, led to a slow decline in production that lasted until after the Second World War (Clawson 1979; Powell et al. 1993). By the 1940s, wood production was about 20 percent lower than in the early 1900s. After the war, great demand for housing and paper products resulted in increased timber production until 1990 when it reached a historical high of 530 million m³.

Sources: Clawson (1979); Sedjo (1991); Howard (2001)

Figure 2: Domestic production of forest products in the U.S.A., 1800-1999

The total consumption of industrial forest products has increased steadily since the Great Depression during the 1930s. The U.S.A. has been a net importer of industrial forest products since 1915 (Figure 3). While the volume of net industrial forest product imports increased in the last half-century, the share of net imports in total consumption varies widely. Historically little fuelwood is imported or exported.

The government encourages wood production to meet forest product demand and to conserve forest resources. As more emphasis has been placed on recreation and environmental services on public forests in recent years, the share of timber production from private forests has increased dramatically (Table 2, Figure 4). In 1997, timber production from public forests only accounted for 11 percent of total production, down from 25 percent in 1970. In the same period, timber production from non-industrial private forests increased from 48 percent to 60 percent, while that from forest industry lands remained nearly constant at about 30 percent.

Current policies and regulations regarding timber production and conservation on public lands are primarily governed by the 1976 National Forest Management Act (which superseded the 1897 Organic Administration Act), the 1964 Multiple Use and Sustainable Yield Act, the 1969 National Environmental Management Act and 1973 Endangered Species Act. The main policies regarding timber production and conservation on private lands are the 1980 reforestation tax incentive, capital gain tax treatment for timber income, various federal and state cost-share programmes for tree planting, the 1973 Endangered Species Act, the Clean Water Act and various state and local forest practice regulations.

Sources: USDA Forest Service (1964); Ulrich (1990); Howard (2001)

Figure 3: Domestic production, net imports and import share of industrial forest products in the U.S.A., 1900-1999

As of 1997, the U.S.A. had about 54 million acres (22 million ha) of plantation forests, which accounted for 11 percent of timberland or 7.3 percent of forest land (Smith et al. 2001). Two earlier estimates show that there were 13.5 million ha of plantation forests in 1985 (Postel and Hiese 1988) and 18.4 million ha in 1995 (Pandey 1997). The difference of 3.6 million ha between 1995 and 1997 could partly be attributed to different assumptions and estimation techniques used in the two studies. Intensive monitoring of forest plantations in the U.S.A. was not practised prior to 1990, but has recently been incorporated into nationwide forest inventory surveys, which are conducted every five to ten years based on fixed plots.

Table 2: Timber harvesting and forest land ownership in the U.S.A., 1952-1997

Source: Smith et al. (2001). NIPF = Non-industrial private forest

Source: USDA Forest Service RPA Timber Assessment homepage http://www.fs.fed.us/pnw/sev/rpa/

Figure 4: Share of timber production by ownership in the U.S.A.

INCENTIVES AND PLANTATION DEVELOPMENT

Forest plantation development in the U.S.A. can be roughly divided into three phases: initiation, acceleration and steady growth. The initiation phase corresponded with the period from the Colonial Americas to 1945. At the beginning of this period, tree planting was not economical and was rarely pursued by the government. In the later stages, tree planting became a voluntary and private initiative, strongly promoted by government policies and programmes.

The acceleration phase stretched from 1946 to 1976. Tree planting activities - fuelled by strong market demand and high prices for forest products, favourable tax policies and various government cost-share programmes - escalated during this period. Private tree-planting increased ninetyfold from an annual area of 6 336.6 hectares in 1946 to 572 000 hectares in 1976, representing an increase of 16 percent per year.

The steady growth phase covered 1977 to 1999. Private tree planting still expanded but at a much lower annual rate of 2.4 percent. In 1999, the private tree planting area was about 968 000 hectares, 69 percent higher than in 1976. Population and demand for forest products continued to grow, and changing public attitudes towards the environment resulted in several policies that affected tree plantations, such as the capital gains tax treatment for timber income and reforestation tax incentives.

Plantation development from colonial Americas to 1945: initiation phase

Overview

Timber harvesting and utilization of forest resources were the main forestry issues in the first four centuries of early American history (Clawson 1979). In 1630, forests covered about 46 percent of the land area that eventually became U.S.A. territory. Although aimed at conservation (and possibly production), the early forest regulations - such as the 1681 Governor (of Colonial Pennsylvania) William Penn’s proclamation that for every five acres of forest land cleared, one acre should be kept - did not call for tree planting on private or public lands. Land was cleared for agriculture throughout the country in tandem with population growth.

Despite this absence of tree planting efforts, the country had abundant natural forest resources to meet the great demand for forest products prior to 1900. When certain species (for example, spruce and white pine for making newsprint in the late nineteenth century) were becoming scarce, the U.S.A. turned to Canada’s abundant natural forests for these species.

In the first half of the nineteenth century, rapid deforestation occurred in several locations. Some prominent citizens (such as Henry David Thoreau, a writer, and J. Sterling Morton, a journalist) began to advocate tree planting. Morton’s proposal for a tree-planting holiday, to be called “Arbor Day,” was officially proclaimed in Nebraska in 1874. All other states followed and proclaimed their own Arbor Day over the following 30 years. In 1907, President Theodore Roosevelt called on schoolchildren in the country to “give a day or part of a day to special exercises and perhaps to actual tree planting, in recognition of the importance of trees to us as a Nation.”

These efforts generated some results. About one million trees were planted on the first Arbor Day in Nebraska. Other states also had successful tree-planting campaigns. For example, Minnesota planted 26 million trees in 1876 (Hodge 1879, p. 108). However, tree-planting activities were confined mainly to the Midwest region. The total area planted with trees through afforestation and reforestation was relatively insignificant before 1900.

Reforestation continued to be of little importance until 1930 despite warnings of timber famine and the call for regulating private timber harvesting by prominent foresters and conservationists, such as Gifford Pinchot. Nonetheless, the conservation movement that started in the 1890s led to the 1897 Organic Administration Act, which accorded custodial management directions for the Division of Forestry (later the United States Department of Agriculture [USDA], Forest Service) to establish and harvest forests within the boundary designated by the President.

It was not until early in the 1930s that 13 states passed seed-tree laws to ensure the continued productivity of forest lands. The laws mandated that trees must be left standing after a harvest. In the early 1970s, several states started to pass comprehensive state forest practice laws to promote reforestation. Now 14 states have such regulations.

The per capita industrial wood consumption declined slightly in the first half of the twentieth century as a result of the use of wood substitutes. Nonetheless, the rapid increase in timber consumption caught up with the country’s capacity to produce timber. In 1915, the U.S.A. became a net importer of forest products (see Figure 3). Large-scale tree planting experiments started in 1919/1920, one of which successfully reforested 12 700 acres in Louisiana using four major southern pine species (USDA Forest Service 1980).

Incentives

Perhaps the most significant incentive for developing private tree plantations is the United States Constitution that:

• requires the government respects and protects private property rights and adopts free-market capitalism; and

• limits the power of the government with respect to private property.

The Fifth Amendment of the Constitution states that private property shall not be taken for public use without just compensation. This amendment essentially eliminates, or at least alleviates, the worry and fear of private entities about government expropriation of their properties and investments. With relatively secure property rights (see Box 1), landowners are more willing to invest in long-term projects, such as plantations, under conducive market conditions.

The rising real prices - typically represented by the consumer price index - of timber and forest products are a market incentive for developing private plantations. Long-term price increases can stem from demand for products exceeding supply, reduced land area, declining resource quality, exceptionally rapid increase in labour costs or production capital. On the other hand, wood substitutes, technological improvements, discovery of new resources or reduction of input costs can keep prices at lower levels.

In the U.S.A., the most significant factors influencing the development of plantation resources were timber prices, government policy and technological advances. Figure 5 shows the real lumber and stumpage price indices. The lumber price index covered the period from 1800 to 1999, while the stumpage price indices are from 1910 and relate to national forests only. The real lumber price increased from 1800 to 1945 at an annual rate of 2.2 percent, indicating that lumber had become scarcer relative to demand. The rise in the prices of lumber and other forest products increased the stumpage value of the standing trees. Douglas fir and southern pine stumpage in national forests were rising. Not surprisingly, some forest industry firms found that natural forests were diminishing in size; costs of extracting natural forests were increasing (partly due to higher transportation costs); and regeneration and extraction of timber from forest plantations was becoming more economical. Private landowners began to plant trees in response to market demand. For example, Weyerhaeuser Company, one of the U.S.A. largest forest product firms, started reforesting its lands around 1904.

The very first government incentive for promoting tree planting was the Timber-Culture Acts of 1873 and 1874 (amended in 1876 and 1877). Under this “Act to encourage the growth of timber on Western Prairies,” any person who planted trees on 40 acres in ten years and kept the trees healthy was entitled to 64 hectares of federal land at the end of the eight years. As the objective of this Act was to patent federal lands, its impact on tree planting was questionable primarily because many settlers could not afford to plant and cultivate trees (Hodges 1879, p. 159). This Act was repealed by the 1891 General Revision Act, which also established national forest reserves (later to be reclassified as National Forests) (Libecap 1989).

The first modern government incentive for promoting private plantations was spelled out in the 1924 Clarke-McNary Reforestation Act. This Act authorized the Secretary of Agriculture to cooperate with land grant colleges and universities^[136], and state agencies to assist farmers and small-scale forest land owners in the production and distribution of seeds and seedlings for the creation, maintenance and utilization of woodlots, shelterbelts, windbreaks and other forest growth.

Sources: USDA Forest Service (1964); Ulrich (1990); Howard (2001)

Figure 5: Real price indices, in terms of 1992 prices (1992 = 100)

The very first government incentive for promoting tree planting was the Timber-Culture Acts of 1873 and 1874 (amended in 1876 and 1877). Under this “Act to encourage the growth of timber on Western Prairies,” any person who planted trees on 40 acres in ten years and kept the trees healthy was entitled to 64 hectares of federal land at the end of the eight years. As the objective of this Act was to patent federal lands, its impact on tree planting was questionable primarily because many settlers could not afford to plant and cultivate trees (Hodges 1879, p. 159). This Act was repealed by the 1891 General Revision Act, which also established national forest reserves (later to be reclassified as National Forests) (Libecap 1989).

The first modern government incentive for promoting private plantations was spelled out in the 1924 Clarke-McNary Reforestation Act. This Act authorized the Secretary of Agriculture to cooperate with land grant colleges and universities, and state agencies to assist farmers and small-scale forest land owners in the production and distribution of seeds and seedlings for the creation, maintenance and utilization of woodlots, shelterbelts, windbreaks and other forest growth.

This Act also initiated federal and state cooperative efforts to control wild forest fires. The states have since assumed most of the funding and provided the personnel for fighting fires on private forest lands. Federal funds are now used to train and equip local fire departments for forest protection measures. Since the 1920s, forest fires on private lands have largely been kept under control. This, in combination with extensive fencing to control cattle grazing (Anderson and Hill 1975), assured private landowners of the protection of forest plantations from wildfire and livestock damage.

More significantly, the 1928 McSweeney-McNary Act authorized the Secretary of Agriculture to establish forest experiment stations for cooperative research on reforestation and forest product development. This legislation paved the way for federal forest research agencies and programmes that still exist today.

Finally, two federal programmes encouraged tree planting on private and public lands. Under President Franklin D. Roosevelt’s New Deal, implemented between 1933 and 1945, the Civilian Conservation Corps (CCC) assigned millions of young people to build and protect facilities in America’s parks and forests, including tree planting. In total, 2.3 million acres (930 000 ha) of lands were planted from the mid-1930s to the mid-1940s, some of which still exist today (Moulton and Hernandez 2000). Most of these tree-planting activities were on public lands. Although the main objective of the CCC as a Great Depression programme was to provide employment to thousands of young people, it set a precedent for government intervention in tree planting and increased timber supply in the coming decades.

Another federal programme was the Agricultural Conservation Program (ACP) that encouraged farmers to address soil erosion problems. Authorized in 1936, this programme provided assistance to agricultural producers for up to 75 percent of their costs of long-lasting conservation practices (mostly tree and grass planting) that would not have been carried out without assistance. This programme was phased out in 1995.

Impact of incentives

The first official estimation of tree-planting activities in 1928 showed that trees were planted on 125 000 acres (43 000 ha) of private lands, accounting for 63 percent of the 200 000 acres (81 000 ha) of land planted in the country. The total area increased to nearly 270 000 acres (110 000 ha) in 1931 and 427 000 acres (173 000 ha) in 1935 (Figure 6).

The area planted increased to 519 000 acres (204 000 ha) in 1940. Between 1941 and 1944, only 75 000 acres (30 000 ha) were planted, although it is not clear how these areas were divided between public and private lands (Zillgitt 1958). Between 1928 and 1945, the total area planted was 5.4 million acres (2.24 million ha), half of which could be attributed to the CCC. However, private forest land owners started to plant trees in response to market demand, even before the CCC and ACP were implemented.

Source: Moulton and Hernandez (2000)

Figure 6: Tree planting in the U.S.A., 1928-1999

Summary and lessons learned

Forest resources were abundant and tree plantations were not economical in most parts of the U.S.A. until about 1900. After timber prices had risen substantially tree planting became a voluntary activity under the free-market system with relatively secure private property right arrangements. The conservation movement and the establishment of the USDA Forest Service raised the public awareness of forest issues (for example, potential timber famine). Several legislative acts that promoted forest regeneration research and fire prevention, and provided subsidies to landowners, encouraged tree planting on public and private lands between the 1920s and 1930s.

Plantation development between 1946 to 1976: acceleration phase

Overview

The U.S. economy declined for two years after the Second World War and then expanded for the most part until 1976. The real GDP grew at about 3.1 percent annually on average in this period. The total GDP in 1976 was 2.5 times greater than that of 1945. The population rose from 142 million in 1945 to 215 million in 1975, increasing at an annual average rate of 1.4 percent. The per capita GDP nearly doubled in 31 years, increasing from US$11 000 in 1945 to US$19 000 in 1976 (both in 1996 dollars).

Increasing population and rising incomes translated into high demand for industrial forest products such as paper and wood products, and forest services (for example, recreation). Demand for paper products outpaced demand for other forest products, and prices for paper and lumber escalated (Clawson 1979). Increases in lumber prices forced some users to switch to steel and plastic, plywood and other engineered wood products. Industrial forest product imports, which came primarily from Canada, had also multiplied, peaking at 14 percent in 1950, and helped to alleviate the shortage of domestic supply (see Box 2). Finally, electricity, oil and other energy sources had largely replaced fuelwood until the 1973 energy crisis, and the annual per capita consumption of industrial forest products averaged at 1.72 m³ in this period.

The investment climate for plantations became promising. Scarcity of forest products led private landowners - large- and small-scale - to increase tree planting drastically. The total area planted amounted to 37 million acres (15 million ha) in this period, 20 percent of which was on public lands, and the rest evenly divided between industrial and non-industrial private lands.

At the same time, additional forestry education programmes were set up in land grant universities. All forestry programmes started to embark on research, in addition to the traditional teaching responsibilities. Most schools also had steadily increasing budgets and numbers of scientists devoted to research (Cubbage et al. 1993). The 1962 federal McIntire-Stennis Act authorized the Secretary of Agriculture to provide technical assistance and financial support to state colleges and universities. In 1987, McIntire-Stennis funds amounted to US$17 million. Other sources of funding, such as state appropriations and external grants, doubled the total research budget to at least twice that amount.

Forest research conducted by universities, the USDA Forest Service, private firms and collaboration among these institutions covered a wide range of topics and led to breakthroughs in genetics, tree breeding, nursery management, planting techniques, herbaceous weed control, pest and disease control, fertilization and plantation management. Applying these results to forest plantations increased productivity and economic returns to landowners. For example, Pritchett and Comerford (1982) report that gains in pine volume due to fertilization averaging 50 cubic feet/acre/year (3.5 m³/ha/year) for 15-20 years are common in southern coastal plains. Similarly, Allen (1987) finds that gains in pine volume could be as high as 80 cubic feet/acre/year (5.6 m³/ha/year) for newly planted stands or 100 cubic feet/acre/year (7 m³/ha/year) for established stands. Martin and Shiver (2002) document that improved genetics significantly reduced the percentage of fusiform infection and increased pine volume by 11 to 19 percent, and that herbaceous weed control contributed another 39 to 45 percent in volume growth in a 12-year old pine plantation. Borders and Bailey (2001) showed the real rate of return for loblolly pine plantations using intensive site preparation, complete control of vegetation and annual fertilizer application was eight to 12 percent.

Federal and state governments have provided technical assistance to forest land owners since the 1937 Cooperative Farm Forestry Act. A federal funding programme was established for providing technical assistance to farm woodland owners employed by the state governments. This Act was superseded by the 1950 Cooperative Forest Management Act, which broadened the clientele and served to include non-farm private forest land owners, harvesters and primary processors (Skok and Gregersen 1975). In 1978, the Cooperative Forestry Assistance Act consolidated all previous cooperative legislation. Many forest industry companies and consultants also independently provided forestry assistance to non-industrial private forest land owners.

A few firms required assisted landowners to give them the first right of refusal to the landowners’ timber, but the majority of the companies merely asked to be notified about the sale of timber so that they could make an offer, before or along with other buyers.

Parallel to the public technical assistance programme was the forestry extension programme that provided forestry information and education services to landowners. In 1914, the USDA and the state land grant universities set up agricultural and forestry cooperative extension services in all 50 states. A separate congressional authority for forestry extension services was granted in 1978. Funding for extension was provided by federal, state and local communities. Extension foresters took a leading role in disseminating research findings to public and private foresters, and information on timber prices and costs to landowners.

Incentives

The primary incentive for private landowners to plant trees in this period was the increase or expected increase in the prices of forest products. Forest industry companies, in response to demand for paper products, planted trees for pulpwood production. As stumpage prices rose (Figure 7), non-industrial private forest land owners planted trees with the expectation of generating high economic returns (relative to the risk of owning timberlands). Falling agricultural commodity prices also persuaded some landowners to convert their agricultural lands to forest plantations (Alig et al. 1980).

Relatively secure property rights, stable macro-economic policies and relatively low income taxes provided stable investment conditions throughout the period.

The Soil Bank Program (SBP) was a significant government incentive during the period. The Soil Bank Act of 1956 was designated to withdraw land from agricultural production and convert it to conservation use. From 1957 to 1960, the USDA paid landowners part of the establishment costs and annual cash payments (typically US$10-12/acre/year) for up to ten years to maintain cropland in permanent cover (mostly trees or grass). Through the SBP, trees were planted on 2.2 million acres (880 000 hectares) of private croplands (Figure 6, Moulton and Hernandez 2000), 95 percent of which was in the southern U.S.A.^[137] Trees are still found on most of these plantations long after the cash payments were discontinued (Alig et al. 1980), indicating that landowners valued their tree-planting investments.

The SBP was primarily prompted by an agricultural economic crisis and the need to reduce surplus crop production to enhance farmers’ incomes and reduce federal government agricultural subsidies. In 1974, the federal government implemented the Forest Incentives Program (FIP), which provided cost-share funding and was especially targeted at the development, management and protection of timber and forest resources on private forest lands. Cost-share agreements may be annual or multi-year (3-10 years) (see Box 3), but the SBP had a greater impact in increasing the size of forest plantations in a short time.

Sources: Data for delivered pulpwood price (US$/cord) and planting cost (US$/acre) (both are averages for 12 southern states) are from Kline et al. (2002); and data for sawntimber stumpage (US$/mbf) (Louisiana only) are from Howard (2001).

Figure 7: Private stumpage price and plantation cost indices in the southern U.S.A. in terms of 1992 prices (1992 = 100)

Table 3: Funding and tree planting area under various cost-share programmes

Sources: Cubbage et al. (1993); Gaddis et al. (1995); Stein (2002, personal communication); McClure (2002, personal communication)

The second, perhaps more significant, government programme was the capital gains tax treatment for timber income. In 1944, new legislation allowing timber to be treated as long-term capital gains for tax purposes went into effect. Prior to that, only individuals who were not involved in commercial timber production and who sold timber occasionally could claim capital gains taxes. The legislation extended this benefit to individuals and corporations engaged in the timber production business (Siegel 1978).

Under the capital gains treatment intended to benefit investors in long-term endeavours such as timber growing, only 40 percent of capital gains income was taxed, compared to ordinary income. For example, individuals who were taxed at the maximum marginal rate of 50 percent on ordinary income would pay only (40 percent)5(50 percent), or 20 percent, on timber sale income and other capital gains. This assistance did not apply to corporations, who received a tax rate differential between ordinary income (46 percent marginal tax rate) and capital gains (28 percent marginal tax rate) (Cubbage et al. 1993).

Government policies can indirectly provide incentives to forest plantations as well. At the height of the environmental movement in the 1960s and 1970s, various environmental laws were enacted. Most notable are the National Environmental Policy Act of 1969, the Endangered Species Act of 1973 and the Federal Water Pollution Control Act (Clean Water Act) Amendment of 1972. The significance of these laws gradually appeared over time as they collectively reduced timber harvesting on public lands (see Box 4). The Endangered Species Act has been successfully used by environmental groups to stop or delay timber-harvesting activities on public and private lands.

On the forestry side, the environmental battle focused on clear-cut practices. The result was the National Forest Management Act of 1976. The major provisions of the Act require:

• Public participation in the planning process of national forests;

• Regulations for the preparation and revisions of the management plans;

• Resource management guidelines for controversial management activities such as clear-cutting; and

• Economic analysis of alternatives.

This Act, developed along the lines of the National Environmental Policy Act, gave citizens and interest groups the power to use administrative appeal processes to stop or delay USDA Forest Service actions on national forests. It is this law and other environmental legislation that created a near gridlock on, and high costs of, timber harvesting in national forests. Reduced production from the national forests in turn exerted pressure on private forests.

Rising planting costs acted as a deterrent to investments in plantations. From 1951 to 1971, plantation costs in the southern U.S.A. nearly quadrupled, and then declined somewhat in the next three decades (Figure 7). The increase in plantation costs before 1971 was due to increases in labour and equipment costs in mechanical site preparation and machine planting. Since 1971, these cost components have been steady or have declined. For example, substitution of less expensive one-pass mechanical site preparation for the more expensive two- and three-pass mechanical site preparation systems contributed to a moderation of overall mechanical site preparation costs. In addition, moderation of fuel and energy costs and substitution of chemical for mechanical treatments have reduced planting costs in the last 30 years.

Impact of incentives

Private forest land owners planted 29 million acres (11.6 million ha) or 78 percent of the total planted area in the country between 1946 and 1976. While government subsidies such as the SBP had little impact on industrial landowners’ tree-planting decisions, they significantly influenced small-scale landowners’ decisions to switch from agriculture to forestry. The SBP alone contributed 15 percent to the total plantations on non-industrial private lands in 31 years.^[138]

The impacts of all three federal incentives or cost-share programmes (SBP, ACP and FIP) can be better illustrated at the regional level in the south. From 1951 to 1999, 12 southern states (Alabama, Arkansas, Georgia, Florida, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia) accounted for 68 percent of the total area planted with trees in the country. Private landowners in these states accounted for 78 percent of all private planting in the country in the same period. The cost-share tree planting area accounted for 5.3 million acres (2.12 million ha) or 47 percent of all areas planted by non-industrial private landowners^[139] and 23 percent of all areas planted by private landowners in these 12 states from 1951 to 1976 (Figures 8 and 9). Obviously, federal cost-share programmes had a major impact on plantation development in the southern U.S.A. in this period.

More importantly, plantations on private lands were expanding in this period, as the economics of plantations worked in private landowners’ favour. The combination of tax incentives, cost-share arrangements, increased demand for timber, higher biological growth due to technological advances and macro-economic policy had a positive impact on plantation development in the first three decades after the Second World War.

Source: Kline et al. (2002)

Figure 8: Cost-share tree planting areas by programmes in the southern U.S.A., 1951-1997

Source: Derived from Kline et al. (2002)

Figure 9: Share of trees planted under cost share programmes in non-industrial private planting and all private planting in the southern U.S.A., 1951-1997

Summary and lessons learned

As forest resources became scarcer after the Second World War, tree planting appeared to be more economical than exploiting natural forests in the long term. The following factors pointed to a reasonable economic return for landowners who planted trees:

• Timber prices had risen substantially;

• Tree growth could be increased based on improved technology;

• Favourable capital gains tax treatment reduced income tax on timber; and

• Through cost-share programmes, the government subsidized tree planting.

These positive factors had a greater impact than the single negative factor - increasing costs of tree planting early in the period. Consequently, tree planting became a private and voluntary economic activity especially in the South and Pacific Northwest where climate and soil conditions favour rapid tree growth.

Plantation development between 1977 and 1999: steady growth phase

Overview

Despite experiencing a period of high inflation in the late 1970s and early 1980s, the country’s economy continued to grow in the next two and half decades at an annual rate of 3.2 percent on average. By 2000, its total GDP was more than double that of 1976. In the same period, the population increased from 215 million in 1975 to 281 million in 2000, at an annual rate of 1.1 percent. The per capita GDP increased nearly 75 percent in 25 years, from US$19 000 in 1975 to US$32 776 in 2000 (all in 1996 US dollars).

Demand for forest products continued to rise (Figure 3). At the same time, more public forest lands were set aside as protected areas, or had logging bans imposed and had roads closed after 1964 when the Wilderness Act was enacted (Smith et al. 2001). Consequently, the share of timber production from public forest lands started to decline in the late 1970s (Table 2; Figure 4), and the volume of timber harvests from public lands started to decline in absolute terms in the late 1980s when the Northern Spotted Owl was listed as an endangered species. The states of Washington, Oregon and California are affected most by this listing.

Industrial timber production and net forest product imports increased during this period (Table 2). Both were subjected to fluctuations, but net import was more sensitive to changing economic conditions. For example, the share of net imports of industrial forest products in total consumption declined dramatically in 1975, 1980 and 1990 to 1992, when the country was in recession or economic growth slowed down. Imports served as a reservoir to bolster the shortfall of domestic production. Annual per capita consumption of industrial forest products increased modestly from 1.72 m³ (1946-1976) to 1.78 m³ (1977-1999).

The trend of real lumber price remained unchanged during this period. This was largely due to increased production efficiency, imports and the use of substitutes such as engineered wood and non-wood products. Similarly, the price of paper products was stable, largely due to paper recycling, paper imports and the increasing use of computers. Consequently, the real price of stumpage was also constant, except in the late 1970s when timber was sought as an asset to hedge against double-digit inflation, and in the early 1990s when the listing of the Northern Spotted Owl created a temporary timber shortage in the country.

Research and development activities by the USDA Forest Service, after several decades of increase, started to decline in the 1980s. The total number of research scientists dropped from 985 in 1985 to 537 in 1999 (National Research Council 2002). Forest product technologists constituted the largest proportion of experts lost, while the number of ecologists and social scientists experienced the largest increase. Forest research in colleges and universities remained steady or grew only slowly during the same period. Research conducted by the industries was curbed as a result of mergers, acquisitions and other cost-cutting measures.

The investment climate for tree plantations was not as favourable as during the 1946 to 1976 period due to a lack of price appreciation of forest products and government policies. The total area planted with trees was 58 million acres (23.2 million ha) during this period. However, annual private tree plantations only increased at a modest rate of 2.4 percent - far below the 16 percent annual rate of increase during the acceleration phase. Some nine million acres (3.6 million ha) (17 percent) were on public lands, 28 million acres (11.2 million ha) on forest industry lands and 21 million acres (8.4 million ha) on non-industrial private lands. Until 1987, the forest industry continued to plant more areas than non-industrial private forest land owners. Since 1988, the industry and non-industrial private landowners have roughly planted equal areas.

Incentives

Demand for forest products continued to expand. Although this did not translate into higher stumpage prices, forest land owners could still rely on technological improvements to increase the productivity of timber stands. At the same time, the declining cost of establishing plantations (Figure 7) helped to generate an adequate return on investment.^[140]

Indeed a few publications (Washburn and Binkley 1990; Zinhkan et al. 1992; Sun and Zhang 2001) document that timberland investment was a low-risk investment that generated a comparable or even higher returns (about 12-16 percent in nominal terms) than assets at the same risk level from the late 1970s to the mid-1990s. These were due to price change, productivity increases and land appreciation during this period.

Meanwhile, a 1980 reforestation tax incentive provision was enacted to allow landowners to receive a tax credit against their income tax for timberland investment. Subsequently, private landowners could receive both federal tax credits and deductions on their income tax for planting trees. For up to US$10 000/year of reforestation (or afforestation) expenses, the legislation allows a ten percent investment credit plus deduction of the expenses over an eight-year schedule, instead of waiting to deduct expenses at the time of harvest. The investment tax credit cannot exceed US$1 000 annually. The amortized deduction requires that one-fourteenth of the investment be deducted in the first and eighth years respectively, and one-seventh in the second through the seventh years. If investors take the full ten percent investment credit, they can deduct up to 95 percent (instead of 100 percent) of the reforestation expenses. This tax incentive remains in effect today.

In addition, aimed at fighting government budget deficits, the Tax Reform Act of 1986 eliminated the preferential taxation rate for capital gains income, including timber, by reducing the amount of income excluded from taxation to zero. It also reduced the individual maximum marginal tax rate from 50 percent to 28 percent. The brackets for marginal tax rates were changed several times since 1986. In 1996, capital gains treatment was partially re-enacted, which means gains from long-term investment such as timber will be taxed at a lower rate than ordinary income.

Various federal programmes also provided incentives to landowners. The ACP existed until 1995.^[141] The FIP was the only federal cost-share programme specifically targeted at enhancing productivity and increasing timber supply. In 1996, the FIP was enlarged and broadened into the Stewardship Incentive Program that promotes stewardship of multiple forest resources. The Environmental Quality Program and Wetland Reserve Program also had minor impacts on tree planting even though this is not their primary focus.

In total, forestry cost-share programmes are found in 18 states (Mehmood and Zhang 2002). Under these programmes, federal or state governments provide 50 to 75 percent of the site preparation and tree-planting costs for qualified landowners. The Conservation Reserve Program (CRP), on the other hand, provided qualified landowners a 50 percent cost share and an annual rental for lands retired from agriculture. Started in 1986, the CRP was similar to the SBP and was intended to conserve soil, water, grazing land, wetland and wildlife by taking surplus cropland out of production. Some 2.3 million acres (920 000 ha) were planted with trees under the CRP - larger than any other cost-share programmes in this period (Figure 4).

Finally, the federal government established a technical assistance programme - Forest Stewardship Program (FSP) - in 1990 to encourage better non-industrial private forest management. Public foresters, employed by state and federal governments, were asked to provide technical assistance, including preparing management plans, educating landowners about multiple use and best management practices. The programme has enrolled some 25 million acres (ten million ha) of non-industrial private forest lands.

One disincentive during this period was the partial government regulatory expropriation of private property. Under the Constitution, private property owners receive compensation when their properties are expropriated for public use. In 1922, the U.S. Supreme Court (Pennsylvania Coal Co. v. Mahon (260 U.S. 393 [1922]) recognized that legitimate government regulations could expropriate private property by reducing its value to zero. In this case, property owners are also entitled to full compensation. However, when property values are reduced but not to zero, the property owners will receive no compensation at all. This traditional all-or-nothing compensation and increasing environmental regulations on private forestry practices have had a negative impact on private investments in silviculture because the property valuations and management activities are frequently restricted or regulated with no guarantee of full compensation (Zhang 2001b; Zhang and Flick 2001). With restriction, landowners are likely to reduce their expectation of future returns and thus decrease investments in silviculture. On the other hand, full compensation could lead landowners to invest excessively in tree planting.

The second disincentive stemmed from environmental campaigns against forest plantations (Williams 2000). Some radical groups, such as the Earth Liberation Front, have even physically violated genetic research facilities (Forestry Source 2001). Landowners have yet to be influenced by such sentiments against plantations, but in the long term, plantation development could be negatively affected by these actions.

Impact of incentives

On average, trees were planted on 2.2 million acres (880 000 ha) of private lands annually during this period. In comparison, only 2.3 million acres (920 000 ha) were planted under the CRP. This indicates that market forces, driven by demand and supply, rather than cost-share programmes, have guided private tree planting.

The area planted under cost-share arrangements accounted for 6.8 million acres (2.72 million ha) or 43 percent of the total area planted by non-industrial private landowners and 17 percent of the total area planted by private landowners in the 12 southern states from 1977 to 1997. This compares with 47 and 23 percent, respectively, from 1951 to 1976 (Figures 8 and 9). The federal and state governments could still subsidize more private landowners as 64 percent of the land harvested in the south in the early 1980s was left to reforest itself (Kaiser and Royer 1983).

A large proportion (79 percent) of the land was left to natural regeneration because of the owners’ misperception that their sites would reforest to pine naturally; 51 percent was due to high reforestation costs involved; 41 percent can be attributed to the long gestation period; and 40 percent was the result of using the revenues from the harvests for other purposes.^[142]

On the other hand, tax incentives could have played a more substantial role in enhancing returns to landowners who then invest more in tree planting. Guertin and Rideout (1987) indicate that the 1986 elimination of capital gains tax treatment of timber income reduced financial returns on all sites. This meant that some marginal sites became economically unproductive. Royer and Moulton (1987) report that 59 percent of landowners who planted trees claimed the reforestation tax incentive and only 48 percent used some type of federal or state cost-share programmes, indicating that there were insufficient cost-share funds to subsidize all landowners.^[143] Dennis (1983) also concluded that the reforestation tax incentives had favourable impacts on timber investment returns of non-industrial private forest land owners. For landowners in the 40 percent tax bracket, average loblolly pine investment rates of return increased from 6.9 to 8.4 percent; returns on Douglas fir investments increased from 7.3 to 8.2 percent.

While the area of trees planted by non-industrial private forest land owners increased, the area planted by the forest industry declined in the 1990s. Overall, private tree planting activities increased only slightly if CRP planting is not considered. The decline of industrial timberland ownership by 3.4 million acres (1.36 million ha), or five percent, from 1977 to 1997 (Table 2) explains to some extent why forest industry firms planted fewer trees. Most of such lands was sold to other corporations, especially timberland management organizations that administer timberlands for pension funds and insurance firms. A small portion of these lands was sold to developers.

Summary and lessons learned

The annual rate of tree planting grew more slowly between 1977 and 1999, compared to the 1946-1976 period. The area planted reached a record level of 3.3 million acres (1.32 million ha) in 1988 when tree-planting under the CRP was at its peak. The rate of tree planting by non-industrial private landowners remained unchanged in the 1990s, while that of the forest industry declined. The sluggish prices of forest products, restructuring of the forest industry, disinvestment in timberland (sale of timberlands to other corporations) and the forest industry firms’ new emphasis on productivity rather than size of timberland ownership all contributed to the decline in the forest industry’s planting activities.

Several factors worked in favour for tree plantation development including:

• Continued growth in population and economy, which translated into high demand for forest and non-timber products;

• Lower plantation establishment costs;

• Advancement in technology;

• The federal reforestation tax incentive; and

• Various government cost-share programmes.

Factors that impeded rapid forest plantation development were:

• The elimination of capital gains tax treatment for timber income in 1986;

• Depressed timber prices due to increased imports of forest products;

• Increased partial government regulatory expropriation of private property rights; and

• Environmental campaigns against tree plantations.

CONCLUSIONS AND FUTURE DIRECTIONS

The United States Constitution protects private property rights, and thus encourages landowners and other investors to engage in long-term projects such as tree planting. However, prior to 1900, forest resources were abundant and timber derived from natural forests could easily meet the demand for forest products. After the First World War, tree planting became financially attractive because of three main factors: timber became scarce and timber prices rose substantially; wild forest fires were under control; and extensive fencing had minimized open grazing.

While the early sparks of tree planting were private endeavours for profits, government policies and programmes (for example, the CCC and ACP) provided incentives and funding to many other landowners for tree planting. Since the Second World War, federal and state governments have used various cost-share programmes to encourage planting successfully. Plantation establishment costs were also reduced, which enhanced financial returns for landowners. However, these programmes were criticized for being inefficient and inequitable (see Box 5). While they undoubtedly raised profitability and increased wood production domestically, their primary purpose was basically environmental in nature (for example, reducing severe erosion by taking cropland out of production). The single exception was the FIP, which specifically focused on enhancing timber supply from non-industrial private forest lands.

Forestry-related tax incentives were directly aimed at enhancing the profitability of the forest industry. Applicable to all landowners, they were more equitable and widely accepted. Therefore, federal capital gains tax treatment for timber income and the reforestation tax incentive perhaps had a bigger impact in attracting landowners to plant trees than cost-share programmes. The elimination of capital gains tax treatment, along with the stagnation of forest product prices, contributed to the decline of the forest industry’s tree-planting activities in the 1990s.

In addition, research conducted in public institutions (public universities, the USDA Forest Service and state forestry agencies) and private industrial firms increased the productivity and certain traits of trees. The dissemination of technological advances through publicly-funded technical assistance, extension, private consultants and forest industry firms’ landowner-assistance programmes aided their rapid adoption in the field.

When considering investment in tree planting or any other long-term endeavours, landowners or other investors look for political stability, secure property rights, sound economic and trade policies, favourable tax policies, a competent labour force and suitable infrastructure. In these respects, broadly referred to as the “investment climate,” the U.S.A. is generally considered an attractive environment. However, when regulations negatively affect private land values and forest management activities significantly, and landowners are not compensated for losses, these landowners will logically try to sidestep these regulations. In addition, some landowners may also be influenced by environmental protests against forest plantations.

All these factors point to the risks and returns of private plantation development. It could be expected that the area under tree plantation will continue to expand if: (1) the combination of timber price appreciation and productivity increase outstrips increases in plantation establishment and management costs; and (2) public policies enhance the financial returns of forest plantations. In fact, due to diminishing timber supplies from natural forests and increased demands for forest products, forest plantations are perhaps the only way to strike a balance between forest conservation and satisfying growing demands for timber products.

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