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Governor’s Advisory Task Force Report on the Competitiveness of

Minnesota's Primary ForestProducts Industry

July 2003

Members of the Governor’s Advisory Task Force on theCompetitiveness of Minnesota's Primary Forest Products Industry

Matt Kramer - Commissioner, Department of Employment and Economic Development (Task Force Co-chair)

Gene Merriam - Commissioner, Department of Natural Resources (Task Force Co-chair)

Dave Epperly - Land Commissioner, St. Louis County

Gene Foster - Vice President, Minnesota Operations, Boise Paper Solutions

Howard Hedstrom - President, Hedstrom Lumber Company

Clarence Johnson - C. O. Johnson Logging

Joe Maher - Senior Vice President and General Manager, Blandin Paper Company

Ron Salisbury - Plant Manager, Potlatch Corporation

Susan Stafford - Dean, College of Natural Resources, University of Minnesota

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Description of Need . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Task Force Charge and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Implementation of Task Force Recommendations . . . . . . . . . . . . . . . . . . .3

Introduction, Background and Context . . . . . . . . . . . . . . . . . . .5Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Minnesota's Forest Products Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Trends in the Primary Forest Products Industry . . . . . . . . . . . . . . . . . . . . .6Location of Minnesota's Major Forest Products Employers . . . . . . . . . . . .6Oversight and Structure of Advisory Task Force Assessment . . . . . . . . . .7Assessment Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Implementation of Task Force Recommendations . . . . . . . . . .11

Analysis of Key Competitive Factors . . . . . . . . . . . . . . . . . . . .13Global, National, and State Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Assessment of Competitive Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Factor 1: Wood and Fiber Availability and Price . . . . . . . . . . . . . . . . . . .13Factor 2: Permitting and Environmental Review . . . . . . . . . . . . . . . . . . .16Factor 3: Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Other Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Factor 1: Wood and Fiber Availability and Price . . . . . . . . . . . . . . . . . . .25

Factor 2: Permitting and Environmental Review . . . . . . . . . . . . . . . . . . .26

Factor 3: Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Factor 4: Energy Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Factor 5: Wood and Fiber Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Factor 6: Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Factor 7: Labor and Construction Costs . . . . . . . . . . . . . . . . . . . . . . . . . .30

Factor 8: Education and Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Factor 9: Forest Land Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Factor 10: Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Appendix 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

The Competitiveness of Minnesota's Primary Forest Products Industry

List of Figures and Tables

Table 1. Comparison of All Factors — Minnesota versus Other Locations . . . . . . . . . . . . .2

Table 2. Comparison of Net Imports and Exports of Pulpwood . . . . . . . . . . . . . . . . . . . . .14

Table 3. Comparison of Tax Treatment of Private Forestland . . . . . . . . . . . . . . . . . . . . . . . .16

Table 4. Comparison of Allowable Gross Vehicle Weights . . . . . . . . . . . . . . . . . . . . . . . . . .19

Table 5. Comparison of Third-party Certified Forestland Acres . . . . . . . . . . . . . . . . . . . .20

Figure 1. Major Primary Forest Products Industry Facilities in Minnesota . . . . . . . . . . . . .6

Figure 2. Minnesota's Imports and Exports of Pulpwood Roundwood and Chips . . . . . . .13

Figure 3. Aspen Pulpwood Stumpage Price Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Figure 4. Volume of Timber Sold by Ownership, Minnesota . . . . . . . . . . . . . . . . . . . . . . . . .15

Figure 5. Volume Sold from Minnesota's Public Lands . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Figure 6. Minnesota Total Annual Growth and Mortality by Administrator . . . . . . . . . . . .21

Sidebar: The potential for an intermodal freight terminal in the Duluth Harbor . . . . . . .19


Description of NeedThe primary forest products industry1 is vital toMinnesota's economy and forest health. The industryis especially important to rural Minnesota, wherehighly paid jobs are important to local economies. Ahealthy forest industry is also critical to managingour state's forests because forest management isconducted mainly through commercial timberharvest. In addition, commercial harvest helpslandowners and managers accomplish importantwildlife habitat management and providesrecreational opportunities.

The value of product output from Minnesota'sprimary forest industry more than doubled betweenthe 1970s and early 1990s. New investments in thisindustry created new jobs and additional economicactivity that benefited northern communities as wellas the Twin Cities. The situation a decade later standsin stark contrast. Since 2000, the state's primaryforest-based industry has reduced product capacity,resulting in a loss of over 1,000 jobs in greaterMinnesota due to machine shutdowns anddisinvestments (i.e. industry investments going toother states and countries). What has happened tobring about this change? The underlying causes of thecontraction are numerous, ranging from local toglobal in scope and impact. What can Minnesota stategovernment do to restore the state as a competitiveplace for investment in this industry?

Task Force Charge and FindingsIn response to recent employment losses in the state'sprimary forest-based industries, in March 2003,Governor Pawlenty established an Advisory TaskForce on the Competitiveness of Minnesota's PrimaryForest Products Industry to assess the long-termcompetitiveness of this manufacturing sector. Thenine-member task force included representativesfrom the Minnesota Departments of Employment andEconomic Development and Natural Resources,primary forest products and logging industries, St. Louis County Land Department, and theUniversity of Minnesota.

The Governor charged the task force to achieve twogoals:

1. Describe the competitiveness of Minnesota as a site for primary forest products industrymanufacturing, compared to a number of other states and countries; and

2. Identify potential policy and program changes toreduce barriers and constraints and to takeadvantage of opportunities for industry retentionand expansion.

The Governor requested that special emphasis beplaced on conditions that can have near-term impacton issues that are vital to maintaining a healthyprimary forest products industry. The task forceconvened four times between March and June beforeissuing its report to the Governor.

The task force's assessment found that investment inMinnesota for new equipment and facility productioncapacity between 1986 and 2001 was more than $3.5billion. More than $1 billion was spent on upkeepand maintenance. Market changes, raw materialavailability and cost, industry consolidation, andglobalization were found to substantially influencethe economic health of the state's primary forestproducts industry.

A primary focus of the task force's deliberations wasidentifying and assessing factors that were perceivedto be major impediments to competitiveness. The taskforce has identified 10 factors. They are (listed inpriority order):

1. Wood and fiber availability and price

2. Permitting and environmental review

3. Transportation

4. Energy costs

5. Wood and fiber quality (including third partycertification)

6. Taxation

7. Labor and construction costs

8. Education and research

9. Forest land productivity

10. Technology

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Executive Summary

1. “Primary” industry refers to producers of lumber, engineered wood products, and paper that are typically inputs to other industries.

Table 1. Comparison of All Factors — Minnesota versus Other Locations

The task force concluded that the state has substantialinfluence over several important areas impactingcompetitiveness — most notably production costsand investment environment. These two aspects arebecoming increasingly important as the industryresponds to global market conditions and trends.Factors one through three have the greatest influenceon the regional and global competitiveness of thestate's forest products industries.


2

Energ

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Trans

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Vehicl

e W

eight

Lim

its

Perm

itting

and

Enviro

nmen

tal R

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Woo

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Availa

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and

Pric

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Woo

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Fiber Q

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Taxat

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Labo

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Constr

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Educa

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Resea

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Fores

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Produ

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Techn

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Review

Better than MinnesotaB About the Same as MinnesotaS Worse than MinnesotaW

Table 1 summarizes findings of a benchmarkinganalysis of factors that affect Minnesota'scompetitiveness relative to other competitor statesand nations. The colors and letters show at-a-glancehow Minnesota compares to other benchmarkedstates and countries for each of the factors. A “B”(better than Minnesota) in a red box indicates that thecompetitor has an advantage over Minnesota. An “S”(about the same as Minnesota) in a yellow boxindicates that the competitor is about equivalent toMinnesota. A “W” (worse than Minnesota) in a greenbox indicates that the competitor is at a competitivedisadvantage relative to Minnesota. White boxesindicate insufficient data for an overall rating.

B B W B B WB W B WWisconsin

B B W B Mixed WMixed B BMichigan

B B B B B W WB B B SAlabama

B B B B B WB B BGeorgia

B B W B B WB B B WMaine

B B S B Mixed WB BTexas

S S W B B WB B BOregon

W B B WW B BWashington

B W B BBrazil

W W BChile

Tax

Systems

Differ

W BUnited States

B B B S WCanada

B B B B BSweden

B W B B BFinland

RecommendationsTo address the areas that are major barriers toenhancing the economic competitiveness of thissector within the state, the task force recommends thefollowing:

• Increase wood and fiber availability, quality,and production from public and private landswhile continuing to protect the environment.Previous studies2 have concluded the state cansupport increased timber harvesting activitywithout compromising important ecological andamenity values provided by its forest resources,assuming adequate investments continue to bemade in forest development that assuressustainability.

• Improve the effectiveness of environmentalreview processes to make Minnesota morecompetitive while protecting the environmentand providing public input. Processes and costsfor permitting and environmental review inMinnesota affect the forest products industrybecause timing of investments and the realizedproduction capacity can be key to the investmentpayback period. Streamlining processes to allowcomprehensive but efficient permitting andreview will reduce the time and cost to therequesting companies without reducingenvironmental protection.

• Improve the competitiveness of Minnesota'shighway, rail, and intermodal transportationsystem. The state's primary forest productsindustry depends on a reliable and cost-competitive system for transporting rawmaterials and finished products.

• Promote voluntary third-party certification offederal, state, county, and private forestlandsin Minnesota. Third-party certification is ameans of demonstrating that timber harvestingand forest management practices are beingcarried out in a manner that promotes the long-term ecological and economic sustainability offorest resources.

• Increase investments directed at improvingstate, county, and private forest health andproductivity. Additional investment in andemphasis on forest management will increase thesupply of wood and fiber available for the state'sforest products industries while continuing toenhance other important forest resource valuesand uses such as wildlife habitat, tourism, waterquality, and aesthetics.

• Create a business climate that encouragescapital investment in Minnesota's forestproducts industry. The task force identified anumber of ways the state can indicate itscommitment to maintaining a competitivebusiness climate for forest productsmanufacturing.

• Create a follow-up team to work with theGovernor's Office to formulate acomprehensive implementation strategy fortask force recommendations. The task forcestrongly encourages the Governor to givepriority attention to these recommendations andimplement them as soon as possible. The taskforce stands ready to assist in this effort.

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The task force's review of the economic climate forthe state's primary forest products manufacturing hashighlighted several significant obstacles to improvingthe industry's competitiveness in a globalmarketplace. Through this report, the task force hasidentified strategies to address these challenges.

Given the magnitude of these challenges and theirpotential impact on the viability of the state's forestproducts industry, there is a sense of urgency infollowing up on the actions needed to implement thetask force recommendations. While many of theserecommendations can be implemented within thestate's existing policy framework, some may requirelegislative action. Creating a follow-up team to workwith the Governor's Office is a critical first step.

Implementation of Task Force Recommendations

2. Generic Environmental Impact Statement on Timber Harvesting and Management in Minnesota, 1994.


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IntroductionThe primary forest products industry is vital toMinnesota's economy and forest health. The industryis especially important to rural Minnesota, wherehighly paid jobs are important to local economies. Ahealthy forest industry is also critical to managingour state's forests because forest management isconducted mainly through commercial timberharvest. In addition, commercial harvest helpslandowners and managers accomplish importantwildlife habitat management and providesrecreational opportunities.

The value of product output from Minnesota'sprimary forest industry more than doubled betweenthe 1970s and early 1990s. New investments in thisindustry brought new jobs and additional economicactivity that benefited northern communities as wellas the Twin Cities. The situation a decade later standsin stark contrast. Instead of new jobs, there are joblosses from machine shut downs, mill closings anddisinvestments (i.e. industry investments going toother states and countries). What has happened tobring about this change? What can Minnesota stategovernment do to restore the state as a competitiveplace for investment in this industry?

The underlying causes of this change operate atmultiple scales, from local to global, with farreaching scope and impact. Market changes,production costs, globalization, and investmentenvironment are all factors that influence whereindustrial production will grow or where it willdecline. These factors vary in degree of direct effecton market conditions in Minnesota. Thus the stategovernment's ability to change outcomes varies too.Unfortunately, some of the main drivers are marketbased, over which state government has littleinfluence. However, state policy can influence theproduction costs and investment environment withinMinnesota. These two aspects become increasinglyimportant as the industry responds to market changes.

Minnesota's Forest Products SectorsBefore exploring the causes of the changes inMinnesota's primary forest industries, it is important toidentify the product sectors most relevant to Minnesotaand review the most recent developments in each sector. “Primary” industry refers to producers of lumber, engineered wood products, and paper that aretypically inputs to other industries. “Secondary”industry refers to producers of finished products such as cabinets, windows, doors, and similar products.Although secondary manufacturers comprise more than half of Minnesota's forest products-basedproduction, this report focuses on the primary industrybecause large mills provide highly paid jobs that areimportant to rural communities, and because of recentjob losses in the primary industry.

The primary forest products industry has three mainsectors, which are often separated according to theproducts they produce: 1) paper/pulp, 2) engineeredwood products, and 3) lumber. Minnesota is best known for its paper sector, which is produced mainlyfrom aspen, spruce, and balsam fir. The paper sector also includes pulp, which is produced using hardwoodspecies such as maple and aspen. Oriented strand board(OSB) and engineered wood products comprise thesecond sector. OSB is an important product that hasreplaced plywood in home construction. The third sector includes lumber and sawlogs from hardwoods(e.g. oak, birch) and softwoods (e.g. white and red pine).

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Introduction, Background and Context

Trends in the Primary ForestProducts IndustryPaper producers have experienced strong productdevelopment trends over the past decade. Papers arethinner, stronger, and use less fiber. Global producerssuch as International Paper, Stora Enso, UPM-Kymmene, and SAPPI dominate this sector. Each ofthese companies, plus Boise, has a presence inMinnesota. During the last decade, producers inFinland and Sweden have been investing in new andrebuilt plants in Europe, and are now investing inChina. The past decade also saw the emergence ofnew producers of copy and coated papers. These newentrants, such as Asia Pulp and Paper, are nowproducing good quality product in places such asIndonesia and other places that previously had nopulp and paper industry. New computer-controlledprocess controls allow manufacturers to reduce thenumber of higher-cost, skilled papermakers tooperate the new machines. These process controlsallow the use of much lower-quality (and lower-cost)fiber. Combined with very large-scale computertechnology, these changes have resulted insignificantly reduced cost of producing product inthese new regions relative to existing locations such

as Minnesota. Globally, there are many more pulp producers andthey are geographically less concentrated than adecade ago. New investments — particularly inhardwood pulp production in Southeast Asia andLatin America, and also in the Nordic countries(Finland and Sweden) — have led to rapid growth inscale of assets. The increasing scale has driven downcosts, further pressuring producers in higher-costregions such as Minnesota.

The OSB and engineered wood sector is primarily aNorth American market. Growth has beenconcentrated in areas with low wood costs, includingnorthern Canada and selected regions in the southernUnited States. Aside from Potlatch's rebuild andcapacity expansion of its Cook OSB mill, there hasbeen little new OSB investment in Minnesota overthe past decade.

The lumber sector is also primarily a domestic NorthAmerican market characterized by a rapid productionincrease in Canada and a collapse in United Statescommodity prices. Former North American exportmarkets in Europe are gone, and the U.S. market isnow being targeted by European- and SouthernHemisphere-sourced lumber.


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Figure 1. Major Primary Forest ProductsIndustry Facilities in Minnesota

Oriented Strand Board (OSB) and Engineered WoodPulp and Paper

Sawmill (Over 10 million board feet per year)

Recycled FiberHardboard and Sheathing

Source: Minnesota Department of Natural Resources, 2003

Location ofMinnesota'sMajor ForestProductsEmployersFigure 1 shows the location ofmajor mills in Minnesota,including the larger OSB,pulp and paper, recycled fiber,and hardboard sheathingmills, as well as the largestsawmills. Mill location is abig factor in determiningmarkets for wood and laboravailability. All mills exceptsawmills utilize variousspecies of pulpwood-sizedmaterial, with aspen being byfar the largest component.Location also affectstransportation options andcosts for shipping raw andfinished materials.

Oversight and Structure ofAdvisory Task Force AssessmentIn March 2003 the Governor appointed a nine-member Advisory Task Force on the Competitivenessof Minnesota's Primary Forest Products Industry tolead the assessment, with the Commissioners of theDepartments of Employment and EconomicDevelopment (DEED) and Natural Resources (DNR)as co-chairs. Other members represent the primaryforest products and logging industries, St. LouisCounty Land Department, and the University ofMinnesota (task force members are listed inside thefront cover).

Assessment GoalsThe Governor charged the task force to achieve twogoals:

1. Describe the competitiveness of Minnesota as asite for primary forest products industrymanufacturing compared to a number of otherstates and nations; and

2. Identify potential policy and program changes toreduce barriers and constraints and to takeadvantage of opportunities for industry retentionand expansion.

The Governor requested that special emphasis beplaced on conditions that can have near-term impacton barriers and constraints that are vital tomaintaining a healthy forest products industry.

ApproachGuided by the task force, a working group withrepresentatives from DEED and DNR, the MinnesotaForest Resources Council, and the University ofMinnesota engaged public and private sector expertsto develop this assessment. The working groupconducted surveys during visits with 17 mills and 11loggers (Appendix 2). Key factors and specificmeasures to be assessed were determined from thesesurveys as well as from input from the Advisory TaskForce and public and private sector experts. Insteadof conducting research, data were obtained from “off-the-shelf” sources for the specific measures, thenanalyzed. By gathering and synthesizing these data,the assessment describes the current competitivestatus of Minnesota's primary forest products industryrelative to comparable industry sectors in severalother states and nations.

Detailed recommendations are presented in the nextsection, with cross references to the Analysis of KeyCompetitive Factors section on pages 13-24 and thetables in Appendix 1.

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8

The insights gained from contrasting Minnesota withother regions have led to recommendations for policyand program initiatives to address apparentcompetitive disadvantages in Minnesota. Ifimplemented, these initiatives will facilitateinvestments to capitalize on Minnesota's strengths, andthrough these investments, maintain the vitality ofMinnesota's primary forest industry. The Governor'sAdvisory Task Force on the Competitiveness ofMinnesota's Primary Forest Products Industry makesthe following recommendations, focused on thoserecommendations with a stronger local dimension.Each recommended action is followed by examplesand suggestions for achieving it. The agency ororganization that should be assigned responsibility forthe action is noted in parentheses at the end.

Increase wood and fiber availability, quality, andproduction from public and private lands whilecontinuing to protect the environment:

• Increase the volume of timber offered for sale onDNR- and county-administered lands, withinsustainable harvest levels (DNR and countyboards).

• Retain and enhance tax incentives for forestryinvestments by private forestland owners bymaintaining funding for the Department ofRevenue to implement the Sustainable ForestryIncentives Act [Minnesota Statutes, § 290C.03](Department of Revenue).

• Strongly urge the Superior and Chippewa nationalforests to increase their allowable timber harvestlevels (also called allowable sale quantity) andactually attain their full sustainable potential(Governor, U.S. Forest Service RegionalForester).

• Support research targeted at increasing forestproductivity and supplementing existing woodand fiber supplies. For example, researchersshould investigate forest regeneration andmanagement practices that foster productivity, useof short rotation tree crops, use of agriculturalcrop residues, use of technologies for increasingpaper recovery and recycling rates, and policytools including incentives that would foster suchefforts (University of Minnesota College ofNatural Resources).

• Maintain adequate investments in forestsustainability to mitigate significantenvironmental impacts of increased timberharvesting and forest management (DNR,Minnesota Forest Resources Council).

(See pages 13-16 for supporting analysis and page 25for benchmarking data.)

Improve the effectiveness of environmental reviewprocesses to make Minnesota more competitivewhile protecting the environment and providingpublic input:

• Strongly recommend the Minnesota Pollution ControlAgency (MPCA) continue efforts to implement astreamlined process that protects the environmentbut allows for improvement in Minnesota's overallcompetitiveness (Governor, MPCA).

• Strongly recommend the Environmental QualityBoard (EQB) establish a minimum threshold ofadditional timber harvest before requiring reviewof wood supply impacts of proposed forest productsindustry plant expansions (Governor, EQB).

• Designate an interagency environmental reviewproject manager for large forest industry expansionprojects (Governor, in consultation with MPCAand DNR).

• Devise a method whereby forest productscompanies could obtain construction permitsbefore a company board approves a capitalinvestment project (MPCA).

• Request that the Environmental Protection Agency(EPA) extend the time period for which forestproducts industry construction permits are valid(Governor, EPA).

• Establish a Forest Industry Group onEnvironmental Review and Permitting, patternedafter a similar Taconite Industry Committee, todevelop ways to help implement theserecommendations and to further increaseenvironmental review and permitting efficiencies(MPCA, DNR).


Improve the competitiveness of Minnesota'shighway, rail, and intermodal transportation system:

• Amend the law to make gross vehicle weight limitsmore comparable with those in neighboring statesfor vehicles hauling forest products (Governor,MnDOT, Legislature).

• Support efforts by the Duluth Port Authority tocreate an intermodal rail and truck facility forinbound and outbound forest products industryshipments (Governor, MnDOT).

• Seek competitive rail service by working withMinnesota's Congressional delegation to changefederal laws that now prevent railroad competition(Governor, Minnesota Forest Industries).


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Recommendations

Promote voluntary third-party certification offederal, state, county, and private forestlands inMinnesota:

• DNR should certify all state timberlands by 2005(DNR).

• Encourage voluntary private land certification(DNR, Minnesota Forestry Association, MinnesotaForest Industries, U.S. Forest Service State andPrivate Forestry).

• Encourage county boards to voluntarily certifycounty timberlands (county boards).

• Evaluate the feasibility of a single statewideauditing method that meets a third-partycertification program standard as well as theMinnesota Forest Resources Council (MFRC)forest management guidelines monitoringrequirements (DNR, MFRC).

• Encourage the U.S. Forest Service to pilot third-party certification of the Superior and Chippewanational forests (Governor, U.S. Forest ServiceRegional Forester, and Minnesota's Congressionaldelegation).

(See page 20 for supporting analysis and page 28 forbenchmarking data.)

Increase investments directed at improving state,county, and private forest health and productivity:

• Propose that the Legislature reestablish a dedicatedforest management fund whereby a portion of statetimber harvest receipts would be used forreinvestment in forest management andproductivity on state lands3 (DNR, Legislature).

• Consider legislation that enables the DNR andcounty boards to use bonding funds for forestmanagement investments to increase forestproductivity on state and county lands (DNR,Minnesota Association of County LandCommissioners, Legislature).

• Fully fund reforestation and forest improvementprograms on DNR-administered lands (DNR,Governor, Legislature).

• Increase funding to the University of Minnesotafor research efforts targeted at improving forestproductivity and augmenting fiber supplies (Universityof Minnesota College of Natural Resources).

• Increase funding to the University of MinnesotaExtension Service for programs that promoteinvestments in state, county, and private forestmanagement and productivity (University ofMinnesota College of Natural Resources).

• Encourage conversion of marginal and riparianfarmlands to production of fast-growing trees byoffering incentives to growers (Departments ofAgriculture and Finance).

(See pages 13-16 and 23 for supporting analysis, andpages 25, 28 and 32 for benchmarking data.)

Create a business climate that encourages capitalinvestment in Minnesota's forest products industry:

• Create a mechanism to enhance ongoingdialogue among county, state, and federalagencies, non-industrial private forest landownerorganizations, the Governor's Office, and theforest products industry to identify issues forfuture government action (Governor).

• Encourage co-generation energy production bytax incentives and other means and ensure thatstate regulations allow excess energy from co-generation to be sold into the regional energygrid at market prices (Departments of Commerceand Finance).

• Propose legislation to institute a tax exemptionrather than a tax rebate for forest productsindustry capital equipment purchases, and tobroaden tax exemptions to entire forest industryexpansion projects (DEED, Department ofFinance).

• Continue to enhance other important forestresource values and uses such as wildlife habitat,tourism, water quality, and aesthetics (Superiorand Chippewa national forests, DNR, countyland commissioners, and MFRC).

(See page 20-22 for supporting analysis, and pages27 and 29 for benchmarking data.)

Create a follow-up team to work with theGovernor's Office to formulate a comprehensiveimplementation strategy for task forcerecommendations:

• The followup team should include high-leveldecision makers capable of making incisiveaction recommendations to the Governor andLegislature (Governor).

• Develop proposals for the 2004 and 2005legislative sessions, based on task forcerecommendations (Governor's follow-up team).

• Develop additional long-term policyrecommendations for enhancing the competitiveposition of Minnesota's primary forest productsindustries (Governor's follow-up team).

• Initiate and oversee activities of the ForestIndustry Group on Environmental Review andPermitting (Governor's follow-up team).

• Report regularly to the Governor on progresstoward implementation of theserecommendations (Governor's follow-up team).


103. Counties already have and use a timber development fund created by MS §282.08. The DNR had such a fund from 1982 through 1989, when

it was terminated by the legislature.

Implementation of Task ForceRecommendationsThe task force strongly encourages the Governor togive priority attention to these recommendations andimplement them as soon as possible. The task forcestands ready to assist in this effort.

The task force's review of the economic climate forthe state's primary forest-based manufacturinghighlighted several significant obstacles to improvingthe industry's competitiveness in a globalmarketplace. Through this report the task force hasidentified a number of strategies that can be taken toaddress these challenges — strategies the task forcebelieves are critical to improving the economiccompetitiveness of this industry in Minnesota.

Given the magnitude of these challenges and theirpotential impact on the viability of the state's forestproducts industry, there is a sense of urgency infollowing up on the actions needed to implement thetask force recommendations. While many of theserecommendations can be implemented within thestate's existing policy framework, some may requirelegislative action. Creating the follow-up team towork with the Governor’s Office is a critical firststep.

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Global, National, and State ContextAlthough the industry sector trends identified earlier areplaying out globally and across the United States, thereare certain factors that are affecting Minnesota morethan others. In an industry where profit margins areincreasingly tight, these differences become important.Wood cost and availability of wood is one such criticalfactor. Another is the cost of transportation. Both ofthese factors can be affected positively by executiveand legislative actions. Other factors include what aretermed “hosting conditions.” Hosting conditions definethe prevailing environment for conducting business in astate or country and cover a wide array of factors.Examples include environmental permitting processesand standards, and local, state, and federal tax rates.Many hosting conditions can be changed by executivedecision. For example, the permitting process can bestreamlined and costs reduced, and permit conditionsmade standard and more predictable.

Assessment of Competitive FactorsThe assessment of Minnesota's competitivenessrequires an analysis of different kinds of data. The taskforce identified ten “factors” considered important forunderstanding how well Minnesota competes in theprimary forest products industry, including the pulp andpaper, OSB/engineered wood, and lumber sectors. Thissection discusses each of the competitive factors.Appendix 1 contains tables summarizing the importantattributes of each factor relative to other locations. Thefactors are treated in priority order, as determined bythe Advisory Task Force.

It is important to note that these factors may beinterrelated. For example, Factor 1: Wood and FiberAvailability and Price, Factor 5: Wood and Fiber Qualityand Factor 10: Forest Land Productivity are closely linked.

Factor 1: Wood and Fiber Availability andPrice

Significantly higher timber prices, particularly foraspen and spruce/fir, are contributing to the erosionof competitiveness in Minnesota's forest industrysector. During the 1970s and 1980s the state's vastsupply of aspen was among the cheapest woodavailable close to growing markets. This attractedsubstantial investments in aspen-based pulp andpaper and solid wood products manufacturing.Significant expansion of aspen demand by the firmsproducing OSB and paper ensued. However, rapiddemand growth with increasingly restricted supplyhas driven stumpage cost (defined as the value ofstanding timber) to the point where Minnesota hasthe highest U.S. wood costs for such grades. Toillustrate this point, aspen pulpwood typically soldfor $2 per cord when interest in OSB first arose.Today, at about $37 a cord4, standing aspen pulpwoodin Minnesota is more expensive than southern pine,an alternative fiber for producing OSB. (Some recentaspen transactions have been approaching $50/cord.)Similarly, strong growth in spruce/fir demand hasincreased stumpage costs for these species.

The tight fiber supply and relatively high wood costslessen Minnesota's competitiveness as amanufacturing location. Companies are reluctant toinvest in areas where the fiber supply cannot readilysustain increased consumption. The outcome of thisis a progressive decline in the quality of assets inMinnesota, further eroding overall competitiveness.Maintaining investments is critical to sustaining theoverall standard of technology to keep pace withglobal industry leaders and retain the long-termviability of the sector in Minnesota.

13


Analysis of Key Competitive Factors

Figure 2. Minnesota's Imports and Exports of Pulpwood Roundwood and Chips

0

100

200

Thousandsof

Cords

400

500

600

1998 1999 2000 2001

140 164

339

525

243278

202 190

Imports

Exports300

4. George Banzhaf & Company, Regional Comparison of Timber Prices (for Minnesota Forest Industries), May 2003. This report uses 2001 data.

Source: U.S. Forest Service Mill Surveys.Draft

Table 2. Comparison of Net Importsand Exports of Pulpwood

Better than Minnesota

Worse than Minnesota


14

Sources: Net I/E (U.S.): U.S. Forest Service State Pulpwood MillSurveys 2000 (Alabama, Georgia 1999). Includespulpwood roundwood and equivalent only.

Net I/E (international): Food and AgricultureOrganization Database. Includes all industrialroundwood and equivalent, including sawlogs.

DollarsPer

Cord

0

5

10

15

20

25

30

$35

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Minnesota

Michigan

Wisconsin

Maine

Quebec

Ontario

Figure 3. Aspen Pulpwood Stumpage Price Trends

Source: Regional Comparison of Timber Prices, George Banzhaf & Company, May 30, 2003.

Net Im

port/

Expor

t* of

Indu

strial

Pulp

wood

(milli

on co

rds)

.09 IWisconsin

.05 IMichigan

1.5 IAlabama

.27 IGeorgia

.58 IMaine

Texas

Oregon

Washington

4.50 IFinland

.02 EBrazil

6.80 EUnited States

.14 IMinnesota**

1.10 ECanada

4.90 ESweden

.78 EChile

* I = importsE = exports

** In 2001, Minnesota'snet imports rose tomore than 300,000cords (see Figure 2)due largely to highprices for Minnesotastumpage. 2001 datafor other states andcountries were notavailable.

Industrial pulpwood imports are indicative of woodavailability (supply) and primary forest productindustrial processing capacity (demand). Minnesotawas a net exporter of wood raw materials until thelate 1990s, but became a net importer in 2000 (Figure2). Imports have continued to rise since 2000, duelargely to high prices for Minnesota stumpage.

Table 2 compares Minnesota's imports with those ofother competitors. Minnesota exports the leastpulpwood relative to total forestland acreage amongcomparable states. Most of Minnesota exports are topulpwood mills in Wisconsin. Minnesota importshave continued to rise, driven largely by high pricefor aspen grown in Minnesota. Most of Minnesota'simports are aspen pulpwood from Canada, which hassignificantly less expensive aspen (Figure 3). Prices for aspen have escalated in Minnesota sincethe mid 1980s due mostly to increased demand(Figure 3). The increasing aspen prices are a double-edged sword — higher prices make forestmanagement a more attractive option for landowners,but higher prices also reduce Minnesota'scompetitiveness in the global marketplace.

Wood prices are especially relevant to competitionwith Michigan and Wisconsin. When compared tothese states, Minnesota has (Appendix 1, Factor 1table, page 25):

• The highest aspen pulpwood stumpage prices;

• The most rapidly increasing hardwood and aspenpulpwood stumpage prices in the last 10 years;

• The lowest hardwood sawtimber stumpageprices (likely due to lower quality);

• Higher jack pine sawtimber stumpage costs.(Jack pine comprises 52 percent of Minnesota'ssoftwood harvest utilized by sawmills and 26percent of overall harvest utilized by sawmills.)

Wood cost is a large component of production costand is a key driver of competitiveness. In the OSBsector, for example, wood fiber costs account forabout one-third of total production costs. Minnesotacompetes directly with all other regions in thepulpwood market, so pulpwood cost is an importantcompetitive factor for the paper and OSB sectors. Forhardwood pulpwood, Minnesota prices arereasonably close to those in the U.S. South, butsignificantly lower than in Finland, and significantlyhigher than in Brazil. For softwood pulpwood,however, Minnesota prices are considerably higherthan in the U.S. South.

Assuring and increasing the supply and availability offiber may ultimately help reduce upward pressure ontimber prices. Other factors, however, can delay oroverride these price effects.

Plantation forest acreage is one indicator of publicand, in many cases, private investments made toprovide raw material for the primary forest industry.Minnesota has made modest investments inplantations compared to many competing states andnations (Appendix 1, Factor 1 table, page 25).Countries such as Brazil, the U.K. and China havealready made huge investments in tree plantationswith new capacity being developed to utilize theresulting wood. In order to be competitive, U.S.states are working to increase plantation acreagesubstantially over the next few decades, especially inthe South. Since the 1980s, the U.S. South hasincreased the area of pine plantations by 60 percent,and the industrial wood output is projected toincrease by more than 50 percent between 1995 and20405.

Forestland ownership is an important factor affectingwood supply, via the owners' timber managementpolicies and intensity. The relative proportion ofprivately owned timberland harvested each year inthe U.S. is higher than that for public timberlands.Private land harvest in Minnesota increased greatlyfrom 1990-1994, increased very slightly through1999, and has declined in recent years (Figure 4).Most of the reduction in timber sold and harvestedfrom public land in Minnesota since 1990 hasresulted from reduced harvests on federal land(Figure 5). Minnesota stands well below most otherbenchmarked states in timber availability (i.e. thepercentage of total forestland available for timberharvest) (Table 1, page 2). Minnesota ranks wellabove Oregon and Washington, however, because oftheir large percentage of federal forestland. InCanada, most provincial forestland is available fortimber harvest and management, and provinces areby far the largest owners of forestland in Canada.

On public lands, state lands managed by the DNRand county land departments are an important sourceof timber. The federal lands have undergone a periodof change in which emphasis on timber productionhas been reduced relative to other outputs of theforests (Figure 5). In contrast, the county lands haveslightly increased and state lands have significantlyincreased the volume sold during the past decade.

15


Figure 4. Volume of Timber Sold by Ownership, Minnesota

Millionsof

Cords

0.0

0.5

1.0

1.5

2.0

2.5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

0.70

1.11

1.41

2.02 2.04 2.03 2.01 2.00 2.061.91 1.831.92

1.69 1.75 1.66 1.65 1.70 1.61 1.57 1.48 1.50 1.56 1.58

0.20 0.22 0.23 0.25 0.28 0.29 0.29 0.29 0.29 0.34 0.35 0.31

Private Land

Public Land

Industry

5. Prestemon, “Southern Forest Resource Assessment Highlights: The Southern Timber Market to 2040,” Journal of Forestry,October/November 2002, Vol. 100, No. 7. pp 16-22.

Source: Superior and Chippewa national forests, Minnesota Department of Natural Resources.

Private owners play a significant role in sellingtimber to Minnesota's forest industry. The volumesold from private land has fallen since 1999 (Figure4). To encourage owners to manage their timberlandsto maintain the long-term productive potential of theprivate forests, Minnesota has a new tax incentiveprogram called the Sustainable Forest Incentive Act(SFIA) [Minnesota Statutes § 290C.03]. The SFIAprovides a state-paid incentive to owners offorestland willing to make a long-term commitmentto good stewardship and management of their land.Most competing states offer some form of special taxtreatment for private forestland. Such incentive-basedprograms can help retain private timberland as aproductive ongoing source of wood and fiber. Table 3summarizes Minnesota's competitive position relativeto tax treatment of private forestlands.

Factor 2: Permitting and EnvironmentalReview

Because of variations in regulatory frameworksamong competing states and countries and limitedavailable information, the permitting andenvironmental review factor is especially challengingto assess. Based on available information, Minnesotais at a disadvantage relative to the permitting andenvironmental review processes of competing regions(Appendix 1, Factor 2 table, page 26). Theseprocesses take time and can impose operatingrestrictions on industry. When the processes arelengthy or unpredictable, or the compliance standardsattached to permits are overly stringent, this canaffect decisions on whether to invest in one state orcountry versus another.


16

Figure 5. Volume Sold from Minnesota's Public Lands

CordsSold

(thousands)

County Land

State Land

National Forests

200

400

600

800

1,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20010

314 337275 271 265 246 235 194 187 166 159

678750

604 574

540

623711

905

592508

612 573 528 640 599 570 586

621

613655 670

2002

Source: Superior and Chippewa national forests, Minnesota Department of Natural Resources, and Minnesota Forest Industries.

Table 3. Comparison of Tax Treatmentof Private Forestland

About the Same as Minnesota

Worse thanMinnesota

Source: Hibbard, Kilgore, Ellefson, Property Tax ProgramsFocused on Forest Resources: A Review and Analysis,January 2001.

Specia

l Tax

Tre

atm

ent

for P

rivat

e For

estla

nd

(Y=Y

es, N

=No)

YWisconsin

YMichigan

NAlabama

YGeorgia

YMaine

YTexas

YOregon

YWashington

YMinnesota

Recent experience suggests that Minnesota canimprove how it conducts permitting andenvironmental review and yet protect environmentalquality. Potlatch Corporation and Boise CascadeCorporation both had to undergo unpredictable, long,and expensive processes to obtain permits forproposed capacity expansions in Minnesota. TheMinnesota Pollution Control Agency (MPCA) hasacknowledged the need for improvement, hasundertaken a review of the recent experiences andhas initiated a process to adopt measures to avoid arepeat of the circumstances that led to theseoutcomes.

Regulatory differences across states and countries areimportant because they represent another hurdle toovercome. To maintain competitiveness, companiesmust be willing to make significant investments andrebuilds of existing machinery. Timelines toimplement investment and reinvestments are affectedby the amount of information and analysis deemednecessary to evaluate a project's environmentalconsequences and determine what is needed tocontrol those impacts. Extended permitting andenvironmental review processes represent anadditional and sometimes ongoing cost that furthererodes competitiveness.

The permitting and environmental review processesapplied in different jurisdictions around the world arefundamentally similar, but the regulatory frameworksthat these permitting and environmental reviewprocesses are based on can vary substantially. Someregulatory frameworks are very prescriptive withrespect to technology while others allow for morecase-by-case decision making. All regulatoryframeworks have their advantages and disadvantages.Environmental programs around the world areintended to limit adverse impacts from inappropriatedevelopment or operation of industries. Companiespropose a development project and describe theoperating scenario. The likely impacts to theenvironment, both positive and adverse, are evaluatedand mitigation is identified. These impacts are thenweighed by permitting agencies, with or withoutpublic involvement, and a permit is typically issued.Permits contain certain restrictions on emissions ordischarges, or include other controls on key aspectsof the proposed activity. In addition, monitoring andreporting obligations are also typically imposed.

Differences in time to obtain permits among statesand countries arise from the efficiency inimplementing the permitting and environmentalreview processes within their regulatory frameworks.The timeframe to complete permitting andenvironmental review processes in Minnesotagenerally exceeds two years, and can take three to sixyears for controversial forest products plantexpansions. In Alabama, however, OSB plants cancomplete required processes in two months.Comparable processes in Finland average eightmonths to a year, and are almost always less than twoyears. Permitting and environmental reviewprocesses in Sweden average 16 months, thoughoccasionally can take up to ten years6.

Differences in compliance standards can vary acrossstates, where some states assign limits that exceedfederal standards and some do not. Similarly, somenations are more restrictive than the United States,but others are not.

This assessment is not suggesting that environmentalprotection should be reduced. The primary industryfirms are committed to protecting the environmentand have a long track record of environmentalstewardship. Rather, the focus is on the processes andtime it takes for proposals to be evaluated and howmuch this costs the companies proposing the projects.Protracted approval processes affect cyclicalbusinesses such as the forest products industry,because timing of investments and the resultingincreases in production capacity can be key to thepayback period for the investment.

Alabama provides an example where streamlining theenvironmental review and permitting processesappears to be working. Alabama has implemented across-department one-stop approach to facilitate thepermitting process. The Alabama PermitCoordination and Development Center (PCDC)coordinates all permit applications and brownfielddevelopment applications. Under this approach, firmsseeking permits are guided through the permittingprocess by all involved state agencies workingtogether to prevent delays. For example, the PCDCconvenes a pre-application conference where thecompany and experts meet with agencyrepresentatives to discuss the specific requirements ofthe application and the necessary modeling needs.The objective of this process is to make permitting asstraightforward as possible, while ending up with anoutcome that meets the state and federal objectivesfor environmental quality. Minnesota has recentlyimplemented a similar approach for largeconstruction projects. This was done in conjunctionwith the Minnesota Chamber of Commerce and theTaconite Industry Cost Reduction Initiative.

17


6. Journal of Forest Economics 2002, Vol. 8, pp 167-168.

Most of Minnesota's pulp and paper mills are ownedby multinational companies and therefore competefor capital with mills in other parts of the world. Oneof the factors a multinational company considerswhen deciding where to invest capital is the cost,predictability and time involved to gainenvironmental permits. In Scotland, it is possible fora paper mill to obtain construction permits for ageneric (before detailed engineering design) facilityexpansion and to keep these permits in placeindefinitely by renewing the permit every five years.A mill in Scotland has a large competitive advantageover its sister mill in Minnesota whenever investmentdecisions come before the company board ofdirectors.

Other overseas examples illustrate the processes andstandards that apply in key competing regions.European competitors are important for many of thekey products manufactured in Minnesota and,consequently, the permitting environment in Finlandand Sweden is relevant to Minnesota producers.Finnish and Swedish processes changed in 2000 tobring them into line with the European Union (EU)Integrated Pollution Prevention and Control directive.This change has led to some new uncertainty in theprocesses as the companies and agencies come toterms with how the new regulations will beimplemented.

Finland, when making the changes to bring domesticlegislation into line with the EU directive, modifiedthe Finnish Environmental Protection Act tointroduce a single permit for both air and waterdischarges. Finland also defined the process to obtainthe permits and prerequisites more explicitly andrequired all mills to re-apply under the new act priorto 2004. This is expected to make the process morestraightforward and focused. Finland also hasimplemented the EU Directives on EnvironmentalImpact Assessment (EIA). The directives requireEIAs for specified categories of investments. Theregulatory authorities can also require EIAs for otherdevelopments at their discretion.

Sweden has similar requirements and has recentlypermitted substantial increases in a pulp mill'scapacity without requiring an EIA because the overalllevel of emissions did not rise significantly as aconsequence of new investments in more efficienttechnology and other mitigations. However, despitethese areas of cooperation, there are also areas whereindustry and the Swedish authorities disagree,especially regarding what emission limits aretechnically and economically feasible.

Brazil is a major competitor in hardwood pulp andcertain grades of paper. Like the United States, Brazilhandles permits at a state level. The Brazilianauthorities tend to follow the U.S. EnvironmentalProtection Agency (EPA) guidelines when settinglimits on discharges for pulp and paper mills. Thelimits for both water and gaseous emissions arerelatively strict. However, countries such asIndonesia and other developing countries haveemissions standards that are relatively lenientcompared with those in most U.S. jurisdictions. Thisadds credence to the perspective that if U.S.jurisdictions become too hostile for new forestproducts industry investments, environmentalimpacts are likely to be exported to countries withless sustainable practices.

For Minnesota, state government should encouragean MPCA initiative to continue to develop andimplement a streamlined process that protects theenvironment but allows for improvement inMinnesota's overall competitiveness.

Factor 3: TransportationTransport costs are also factors state government caninfluence. Transport accounts for 20 to 30 percent ofwood's cost, called “delivered cost.” Transport alsoadds to the cost of obtaining other raw materials andgetting finished products to market. When comparedwith competing regions, Minnesota has severaldisadvantages (Appendix 1, Factor 3 table, page 27).The state has relatively low gross vehicle weightlimits for road transport that directly increasedelivered wood prices. In addition, the state hasrelatively high rail costs, and a relatively low level ofcompetition in rail rates when compared with otherregions.

Minnesota's allowable gross vehicle weight is lowerthan most other states (Table 4). While Minnesotaallows 10 percent overweight loads during frozenconditions (similar to Wisconsin) when logging istraditionally conducted, this is lower than load limitsin most competing states. Because Minnesota is veryreliant on truck transportation, the allowable grossvehicle weight significantly affects cost of productionand competitiveness.

Minnesota does not have as good access tocompetitively priced rail transportation as competingstates because northern Minnesota is primarilyserviced by a single railroad company. Thislimitation, along with Minnesota's limited access tointermodal7 shipping options, puts Minnesota'stransportation network at a competitive disadvantage.


18

7. "Intermodal" refers to the shipment of containerized cargo using more than one type of transportation, with or without an ocean-going link.

19


Table 4. Comparison of AllowableGross Vehicle Weights


About the Sameas Minnesota

Source: Federal Highway Administration, 2000Highway Statistics Reportwww.fhwa.dot.gov/ohim/hs00/psi.htm

Allowab

le Gro

ss

Vehicl

e W

eight

(thou

sand

pou

nds)

90Wisconsin

160Michigan

100Alabama

100Georgia

99Maine

90Texas

80Oregon

Washington

Finland

Brazil

United States

80Minnesota

140Canada

Sweden

Chile

Finished product prices at the mill gate aredetermined by sales price less transport andhandling cost. Consequently, Minnesotamills with higher transport costs are left withlower returns and profitability. AlthoughMinnesota is able to serve the relativelyclose Midwestern markets, highertransportation costs put Minnesota producersat a disadvantage when serving the largecoastal and export markets, because thesupplier absorbs the transportation cost.

Minnesota producers have few transportalternatives, all of which are higher cost thanthose in competing states and countries.Limited rail service, conservative load limitsand limited intermodal access all contributeto a higher cost and less competitiveenvironment.

The potential for an intermodal freightterminal in the Duluth Harbor

Intermodal truck and rail service combines the speed anddependability of trucking with the low cost of rail, with theadded bonus of rate competition among rail lines. ButMinnesota mills are not able to take advantage of those benefitsbecause the two nearest intermodal terminals — the onlyones in the state — are hundreds of miles away in the TwinCities. In contrast, Wisconsin mills in Fox River Valley usetwo nearby terminals at Neenah and Green Bay.

A recent feasibility study* for a terminal in the Twin Ports ofDuluth/Superior benchmarked successful small intermodalfacilities, including the Port of Montana, built in 1988 (andexpanded in 1994) to serve Montana's forest products, mining,and farming industries. Financed by federal, state, and localagencies, the Port has given area industries a boost. PortTraffic Manager Bill Fogarty says, “One of the lumber companiessaved over $1 million in freight bills, helping to ensure itssurvivability.” Area producers now call multiple carriers forrates and service, and 300 people have jobs in the terminal.The Duluth/Superior study concluded that a small, focusedintermodal facility in the Twin Ports could work as well.

In many ways, the Minnesota's Duluth Twin Ports showgreater potential for intermodal development than the Portof Montana did:

• Unlike the Port of Montana, the Twin Ports have wateraccess, opening up the entire Great Lakes basin to logprocurement.

• Much of the infrastructure already is in place: four Class1 carriers** — Burlington Northern — Santa Fe, CanadianNational, Central Pacific, and UP Railroad - and four feasiblesites for terminals that could serve them.

• All Class 1 carriers connect to Chicago, which with 26terminals is the third-largest intermodal hub in the world.

• The Canadian National's Winnipeg/ Chicago direct intermodalline runs through the port already, so a terminal in Duluth wouldonly tap into Canadian National's system, not extend it.

• Duluth ships bulk commodities, but because some ore, grain,and coal shipments now are going intermodal, the port willneed to begin handling containers to remain competitive.

• Small regional terminals fare best when they serve shippersof raw materials and manufactured goods, like Minnesota mills,not receivers of consumer goods.

• Shippers in the region already generate enough cargo to justifya terminal.

• Duluth Port Authority Director, Adolph Ojard, a strong proponentof an intermodal terminal, says that the port can assist infinancing it.

* Richard Stewart, University of Wisconsin-Superior, "Twin Ports IntermodalFreight Terminal Study." sponsored by the U.S. Department ofTransportation, Wisconsin DOT, MnDOT, and the Metropolitan InterstateCommittee.

** A "class 1 carrier" is the largest class of carrier, and is a national ratherthan a regional carrier.

Other FactorsThere is one factor, in addition to the original tenfactors, that was identified during informationgathering and deemed important: forest certification.

Forest CertificationForest certification has become an increasinglyimportant factor in distinguishing commodity productfrom one source versus the next. Forest certificationis a means of affirming responsible forestry practicesthat enhance and protect environmental values offorests. Forest certification provides an independentthird-party assurance that a forestry operation meetsstandards set by a certification program. Companiesand landowners apply voluntarily.

Forest certification is intended to influencepurchasing decisions by assuring consumers thatcertified products are sourced from sustainably-managed forests. The development of markets inEurope and North America has been led by buyersgroups of forest product retailers and traders. Themost significant members of such buyers groups arethe retail home improvement chains. Home Depotrecently joined the largest of these buyers groups. Inaddition, Time Warner recently set purchasingstandards that 40 percent of purchased paper will bethird-party certified by 2004, and 80 percent by 2006.These buyers have announced policies to givepreference to certified products.

The certification process is reliant on forest ownersand managers submitting their timberlands andmanagement plans to a third-party audit process. Itwill be an increasing advantage to industry to operatefrom states or countries with high proportions ofcertified land base. As seen in Table 5, the proportionof certified timberland in Minnesota is quite largerelative to most other U.S. states, but is low relativeto foreign competitors. To meet anticipated demandfor certified wood, Maine, Wisconsin, and Michiganare beginning the process of certification for all state-owned forestland. Canada is already significantlyahead of the Minnesota in certifying its lands. Themarket demand for certified wood products is currentlystrongest in western Europe and the United States.

Although certification is a market-based initiative,government can play a role in encouragingparticipation in certification. The DNR and AitkinCounty voluntarily chose to certify all county andDNR-managed lands in Aitkin County, in an effort tocapture markets for certified products. Minnesotashould follow Maine's, Michigan's, and Wisconsin'slead in pursuing certification of all state-ownedforestland, and in encouraging certification of privatelands. By aggressively pursuing certification offorestland, Minnesota can sustain its existingadvantage in domestic markets.


20

Table 5. Comparison of Third-partyCertified Forestland Acres


Better thanMinnesota

Sources: Numbers include cumulative acres enrolled in thefollowing: Forest Stewardship Council (FSC),Sustainable Forestry Initiative (SFI), and Pan-EuropeanForest Certification (PEFC).

Acres

of T

hird

Party

Certifi

ed F

ores

tland

(thou

sand

s unle

ss

note

d ot

herw

ise)

367Wisconsin

155Michigan

Alabama

Georgia

6,684Maine

Texas

17Oregon

127Washington

54MFinland

3MBrazil

54MUnited States

1,336Minnesota

40MCanada

30MSweden

873Chile

Factor 4: Energy CostsMinnesota's industrial energy rates are below theaverage for the U.S., and fare well relative to mostother states and nations with significant forestproducts industries (Appendix 1, Factor 4 table, page27.) Since energy costs are a significant portion ofoperating costs for this industry, this is an importantmeasure of competitiveness. However, the rates listedhere may not reflect actual costs to a particular firm,because electricity rates are often negotiated for eachplant individually, and those rates are confidential. Itappears that industrial energy rates in Minnesotaplace the forest products industry at a slightcompetitive advantage, but there may be individualfacilities that have higher than normal energyintensity rates.

Energy intensity, a measure of how much energy isused to produce a unit of output, is the most criticalfactor in energy costs. Energy intensity is onlymeaningfully assessed on a plant-by-plant basisrather than by geographic or political boundaries. Inthe mechanical pulping and paper sector, however,energy costs comprise 15 to 30 percent of the finalproduct cost.

Self-generation of energy, called co-generation, is acost-effective method to provide fuel for theoperation of wood production machinery. In the U.S.overall, the forest products industry generates 63percent of its own energy, using its wood wasteproducts and other renewable sources of fuel. Theindustry self-generates more electricity than anyother U.S. manufacturing group. Using bark,trimmings, and sawdust to fire boilers contributes 20to 72 percent of energy needs at individual plants8.There could be considerably more co-generation inMinnesota if the environmental permitting processencouraged use of waste wood and bark as a biomasssource. Canada is actively exploring the technical andeconomic potential of co-generation. Minnesotacould benefit from increasing use of this cost-effective and environmentally sound energyproduction technology.

Factor 5: Wood and Fiber QualityWood and fiber quality is an importantcompetitiveness factor for primary wood industries.Quality factors such as amount of decay, size, andform of trees all have an impact on usable woodsupply and processing costs (Appendix 1, Factor 5table, page 28). Minnesota currently has equal orsomewhat lower quality wood fiber than itscompetitors and has one of the highest annualmortality to growth ratios in the U.S. Minnesota'srelatively old forest generally results in high levels ofdecay and defect. If current forest managementefforts are maintained or even increased (stablemarkets for wood are crucial to this effort), thequality picture can be radically improved in the next20 years and beyond.

Wood quality is also affected by forest growth andmortality. Mortality differs by administrator due inlarge part to varying levels of forest management. InMinnesota, the diversity of ownership can beadvantageous. Figure 6 illustrates how growth andmortality vary by ownership9. Specifically, privatelandowners have fewer losses to mortality due mainlyto more intensive management activities. In total,however, Minnesota is losing significant timbervolume to mortality relative to other competingstates. This volume loss could be reduced greatly bymore intensive forest management, with resultingbenefits to forest health and Minnesota's economy.

21


Figure 6. Minnesota Timberlands Net Total Annual Growth and Mortality by Administrator*

CordsPer Year

(thousands)

Net Annual Growth on Timberland

Annual Mortality on Timberland

0

500

1,000

1,500

2,000

2,500

Federal and NativeAmerican Land

StateLand

CountyLand

PrivateLand

847 810 846

2,162

528 524 512

1,218

* Note that differing acres of forestland in combination with differing site quality produces the annual growth. The key point of thisgraph is to show that private lands have a relatively lower proportional loss to mortality. Loss to mortality was 56 percent for privateland, versus 61 percent for county land, 62 percent for federal and Native American land, and 65 percent for state land.

Source: Forest Inventory and Analysis (FIA) - U.S. Forest Service, 1990.

8. Minnesota Forest Industries.9. Minnesota has a high percentage owned by counties, unlike most other states.

Factor 6: TaxationTaxes are difficult to compare across states, andparticularly difficult to measure against competingnations. Since taxation is not one of the highestpriority competitive factors for this assessment, andthe timeframe to conduct the assessment was short,the data and conclusions are general. Also, becausetax treatment is complex and varies for individualforest products businesses, the observations will begeneral.

The data (Appendix 1, Factor 6 table, page 29)indicate that Minnesota's state corporate income taxrate is higher than most of the states in thecomparison group. However, Minnesota has anadvantageous apportionment formula (better than allbut two other states) that benefits businesses thathave most of their sales outside the state. Due to thisadvantage and the lack of a capital value tax,corporate income taxes paid by Minnesota forestproducts businesses may be competitive with thosepaid by firms in many of the states in the comparisongroup. In addition, Minnesota's property tax reform in2001 improved industrial property taxes paid bybusinesses. As a result, companies in Minnesota'sforest products industries may find property taxes tobe more competitive than expected.

The U.S. has a tax system that is heavily based oncorporate and personal income taxes, but the U.S.does not have a national sales tax. In addition tocorporate and personal income taxes, however, othercountries rely heavily on value-added taxes, whichare similar to sales taxes. As a result, the U.S. hashigher corporate income and capital gains tax ratesthan many other countries in the comparison, buttotal tax revenue as a percent of GDP is lower than orcompetitive with nearly all countries in thecomparison group.

One area where Minnesota fares poorly relative toother competing states is in rebating rather thanexempting sales and use tax on capital equipment.Most competing states do not collect sales and usetax on qualifying capital equipment purchases.Minnesota firms must pay the taxes, then apply forthe rebate.

Factor 7: Labor and Construction CostsMinnesota's average wage paid is slightly higher thanmost states, except Washington and Oregon(Appendix 1, Factor 7 table, page 30). Economictheory suggests that, other things being equal, thisreduces the industry's ability to pay for the rawmaterial or other inputs.

The measurement of value added per $1 indicates theefficiency of labor to produce profits. In the paperand pulp sector, Minnesota clearly lags behind mostother states in value added from labor. In theOSB/engineered wood sector, Minnesota clearly hasa competitive advantage. In the lumber sector,Minnesota compares favorably to half of thecomparison states.

Overall, Minnesota's workers' compensation systemhas improved substantially over recent years,declining in cost while still meeting the needs ofemployers and workers. Average costs for themanufacturing industry compare well to thecomparison group, while premiums in some specificoccupations related to forest product industries varywith relation to the other states in the comparisongroup.

Minnesota's unemployment insurance system has anaverage cost to businesses that is roughly in themiddle of the comparison group. Minnesota has ahigher taxable wage base due to higher averagewages. This higher wage base results in a loweraverage tax rate.

In terms of total employment costs, Minnesota farespoorly against other competing states, and againstforeign competitors. In fact, the worldwide forestryconsulting firm Jaakko Pöyry Consulting hasdetermined that personnel costs per ton of productionfor some paper grades are highest in North Americarelative to the rest of the world10.

Industrial building construction costs in the U.S areoften 15 to 20 percent higher than in Europe11, evenfactoring in exchange rates. The depreciating value ofthe dollar has caused the U.S. to fall from the top 10most expensive countries in terms of constructioncosts to build. Large international companies usethese data, as well as other data and analyses, todecide where to locate plants. One international firmstated that “construction costs in the U.S. aregenerally considered to be 40 percent to 50 percenthigher than in Scandinavia and Western Europe."


22

10. Cited in State of Wisconsin's Paper Industry, Part 1 report. Original information was presented to the North Carolina State University Pulpand Paper Foundation.

11. Jaakko Pöyry Consulting.

Factor 8: Education and ResearchMinnesota has a comparatively strong labor force interms of forest-industry work skills and overall levelof education. While labor unit costs are relativelyhigh, the quality of the workforce partially mitigatesthe total labor cost in finished product versuscompeting states and nations.

In general, greater availability of educationalopportunities leads to higher levels of educationalattainment in Minnesota versus other locations(Appendix 1, Factor 8 table, page 31). This in turnshould translate to a more effective and innovativework force and a superior business environment.Importantly, Minnesota has a comparative advantageover most other states in terms of educationalattainment as measured by literacy rates andpercentages of high school and college graduates.Both overall levels of education and high levels offorest industry-specific skills provide Minnesota witha comparatively strong labor force. Such levels are adefinite advantage to increasingly high tech forestproducts firms seeking computer skills as well asforesters and forest products professionals. TheUniversity of Minnesota also has the top rankedundergraduate forestry program in the U.S. and a firstrate wood and paper science program. At the graduatelevel, which is heavily oriented to research,Minnesota has the sixth ranked forestry/forestproducts graduate program. In terms of researchinvestments in forestry and forest products, asurrogate measure12 suggests Minnesota lags behindsouthern and western competitors.

By maintaining high-quality educational institutionsthat produce skilled workers for the increasinglyhigh-technology forest industry, Minnesota canmaintain this comparative advantage. Additionaltargeted forestry and forest products researchinvestments would help improve the forest industry'scompetitive position.

Factor 9: Forestland ProductivityMinnesota has almost 17 million acres of forestland.With the limited intensity of forest managementrelative to countries such as Finland and Sweden,however, growth rates are low. Substantial potentialproductivity gains could be derived from moreintensive management. For example, growth ratescould be increased if tree mortality could be capturedthrough increased thinning. The Appendix 1, Factor 9table (page 32) suggests there is much room forimprovement if investments in intensive forestmanagement are made on a continuing basis. Suchinvestments could also reduce the risk of catastrophicfire and improve other aspects of forest health such assusceptibility of forests to insect and diseaseoutbreaks.

Factor 10: TechnologyTechnology is twofold: it is both a factor itself and abarometer of competitiveness relative to the othernine factors. In other words, technology is more anoutcome than the other factors. If a state's standingrelative to other factors is positive, technologyinvestments are more likely to be made; and ifnegative, there will be less investment. This isimportant because continued investment intechnology leads to higher productivity, whichincreases the attractiveness of additional investment.Periods of little or no investment can lead to adownward spiral.

Investment in technology in the pulp and paper sectordiffers by country13. Minnesota's technology appearsmarginally better than technology used in Wisconsin,Maine, and Canada. The trend has been for lowerlevels of investment in new pulp and paper mills inNorth America relative to the major competingregions in Finland and Sweden (Appendix 1, Factor10 table, page 32). The North American asset basehas been rebuilt rather than replaced. Consequently,the average technical age of mills in the United Statesand Canada is higher than the equivalent value for theNordic countries. Lack of investments has reducedthe competitiveness of the North American sectoroverall. Older machines are typically smaller, slower,and incompatible with the latest innovations inprocess controls and manufacturing processes. In acommodity-oriented sector, these differences aresignificant. Investments have gone to the Nordiccountries, and regions such as Indonesia, Brazil, andChile, where abundant, cheap wood and low laborcosts have motivated industry to develop the capacityto serve international markets.

23


12. Ranking in federal formula research program allocations to states that involves consideration of the state match.13. Note that this report does not address technology investment patterns in OSB and sawlog sectors.

The investment in capital for wood productsmanufacturing in the United States overall fell in2000 from 1999 by just under one percent. Thisfollowed an 11 percent increase in investmentbetween 1998 and 1999.

Capital investment in the paper manufacturingindustry in the United States was 14 percent higher in2000 than in 1999, following a dramatic decrease of17 percent between 1998 and 199914. The industry-wide return on capital in the pulp and paper industryalso lags behind a comparable industry: chemical andallied products. Importantly, energy capital assetsconsume 20 to 30 percent of capital spending in theprimary forest products industry and comprise asignificant portion of the existing asset base. Theequipment is aging, so the need for significantinvestment in infrastructure improvements andreplacement takes increasingly scarce capital awayfrom the core pulp and paper making processes.

ConclusionMinnesota's primary forest products industry is a vitalpart of the state's economy and has been so for morethan a century. In fact, Minnesota provided much ofthe lumber that built the Midwest. Currently, the statehas many of the world's major forest productscompanies operating within it. However, some of theunderlying attributes that first attracted thesecompanies have changed over time. As a result ofthese changes, Minnesota has become non-competitive as a place for primary manufacturers todo business.

Despite the current situation, this analysis indicates anumber of opportunities for the state to improve itscompetitive position. The recommendations section(pages 9-10) presents suggestions from the AdvisoryTask Force to the Governor to pursue theseopportunities. There is an urgent need for theGovernor to implement the task force'srecommendations. The future of Minnesota's primaryforest products industry depends on timely, proactiveleadership by the Governor and the Legislature.


24

14. U.S. Census Bureau 2002.

.09 I 18 431 177 31 6 Y68Wisconsin

Stum

page

: Oak

Sawtim

ber($

/cord

)**

Stum

page

: Sof

twoo

d

Pulpwoo

d($/

cord

)

Stum

page

: Asp

en

Pulpwoo

d($/

cord

)

Net I/

E* of I

ndus

trial

Pulpwoo

d (m

illion

cord

s)

Stum

page

: Jac

k Pine

Sawtim

ber($

/cord

)

Plantat

ion F

ores

t Acre

age

as %

of F

ores

tland

% F

ores

tland

***

Privat

ely O

wned

Specia

l Tax

Tre

atmen

t for

Private

Fores

tland

(Yes

, No)

Appendix 1This set of tables and a system of red, yellow, and green rankings shows at-a-glance how Minnesota compares withother benchmarked states and countries. A red shading indicates that Minnesota is at a competitive disadvantagecompared with the other locations in terms of that particular measure. Yellow indicates a state or country is about thesame as Minnesota. Green shading indicates that Minnesota has a competitive advantage relative to that location.White shading indicates insufficient data for an overall rating. Each of the factors is presented in priority order.

Factor 1: Wood and Fiber Availability and Price

25


.14 I 37 271 131 49 4 Y43Minnesota

.05 I 20 231 144 45 7 Y62Michigan

1.50 I 172 105 1272 25 N94Alabama

.27 I 27 Y90Georgia

.58 I 9 211 90 2 Y95Maine

17 152 1062 10 Y95Texas

Y45Oregon

Y25Washington

.02 E 151 1Brazil

.78 E 13Chile

6.80 E 58United States

1.10 E 3 4 81Canada****

4.90 E 25Sweden

4.50 I 83Finland

Better than Minnesota About the Same as Minnesota Worse than Minnesota

* I = imports, E = exports

** These values are averages that include varying quality of wood. For example, in northern Minnesota the quality is lower than insouthern Minnesota, resulting in price differences within the state. In addition, these numbers include veneer that is significantly moreexpensive than sawtimber.

*** Forestland in FIA is defined as land at least 16.7% stocked by forest cover of any size, or formerly having had such tree cover, notcurrently developed for non-forest use.

**** Caution: Canadian timber prices are notoriously difficult to compare to U.S. prices because the systems of selling timber differ somuch between the two countries. Values are from Ontario.

1 Spruce-fir

2 Southern pine

Sources: Net imports/exports: U.S. Forest Service State Pulpwood Mill Surveys 2000 (except Alabama, Georgia) and FAO Data Base 2000.

Stumpage costs: George Banzhaf & Company, Regional Comparison of Timber Prices (for Minnesota Forest Industries), May 2003.

Plantation acreage: Forest Inventory and Analysis (FIA), U.S. Forest Service; Alabama 2000, Georgia 1997, Maine 2001, Michigan2000, Minnesota 2001, Texas 1992, Washington 1991 (plantation data unavailable), Wisconsin 2000. Plantation acreage (U.S.): FAO Database, 2000.

% Forestland privately owned: FIA Inventory - U.S. Forest Service; Alabama 2000, Georgia 1997, Maine 2001, Michigan 2000,Minnesota 2001, Wisconsin 2000.

Special tax treatment: Hibbard, Kilgore, Ellefson, Property Tax Programs Focused on Forest Resources: A Review and Analysis,January 2001.

Stringency of Permit/ Regulatory Requirementsfor Water and Air Quality*

Timeframe to Complete Process*

Consistency in Application of

Permitting Process*

ConsistentAvg: 8-12 months Max:<24 months

Consistent

Lacks consistency

Consistent

OSB: 2 months

16 months

Lacks consistency>24 months

Factor 2: Permitting and Environmental Review


26

* Limited data are available on all three measures and for permitting and environmental review processes in other states and countries.These data are based on knowledge and conclusions provided by Jaakko Pöyry Consulting.

Source: Jaakko Pöyry Consulting.

US EPA standardsAlabama

Stricter than US EPA standardsFinland

US EPA standardsBrazil

Stricter than US EPA standardsMinnesota

Canada

Stricter than US EPA standardsSweden

Chile


Logis

tics E

fficien

cy*

(B=

bette

r tha

n M

N)

Allowab

le Gro

ss

Vehicl

e W

eight

(thou

sand

pou

nds)

Avera

ge In

dustr

ial

Rates

for E

lectri

city

(cen

ts pe

r kW

h)

Chile

* Logistics efficiency refers to access to rail, and watertransport and how close mills are to these transportationnetworks.

** Canada value is for Ontario only.

Sources: Allowable gross vehicle weights: Federal HighwayAdministration, 2000 Highway Statistics Reportwww.fhwa.dot.gov/ohim/hs00/psi.htm.

Logistics efficiency: This qualitative assessment resultsfrom a conversation among task force staff and DougParsonson, Jaakko Pöyry Consulting, on June 24, 2003.

B

B

B

B

B

B

Low

B

B

Factor 3: Transportation

27


90Wisconsin

160Michigan

100Alabama

100Georgia

99Maine

90Texas

80Oregon

Washington

Finland

Brazil

United States

80Minnesota

140Canada**

Sweden

* Wisconsin provides a credit for sales taxes paid onfuel and electricity used in manufacturing which lowers net cost.

** Canada no longer reports industrial energy rates. Ratesare confidential.

Sources: Electricity (U.S.): Typical Bills and Average RatesReport, Winter 2003, Edison Electric Institute.

Electricity (International): International EnergyAgency.

4.5Wisconsin*

5.3Michigan

3.7Alabama

3.9Georgia

7.7Maine

4.1Texas

5.0Oregon

5.1Washington

5.0Finland

5.7Brazil

4.9United States

4.1Minnesota

Canada**

3.1Sweden

5.0Chile

Factor 4: Energy Costs


LUM

BER SECTOR:

Grade

1 a

nd 2

*** a

s

% o

f Tot

al Volu

me

Mor

tality

as %

of A

nnua

l Gro

wth

Acres

of T

hird

Party

Certifi

ed F

ores

tland

(thou

sand

s unle

ss

note

d ot

herw

ise)

17 58

54M

3M

54M

1,366

40M

30M

873

17

28

31

39

26

26

19

19

56

13

27

31

155

6,684

17

127

20 39 367

* Definition of rough trees: Live trees of commercial species that do not contain at least one merchantable 12 foot sawlog or twosawlogs eight feet or longer now or prospectively, and/or do not meet regional specifications for freedom from defect primarily due toroughness or poor form, and all live trees of noncommercial species. The measure is not applied perfectly consistently across allstates.

** Definition of rotten trees: Live trees of commercial species that do not contain at least one merchantable 12 foot sawlog or twosawlogs eight feet or longer now or prospectively and/or do not meet regional specifications for freedom from defect primarily due torot (that is, when more than 50 percent of the cull volume in a tree is rotten.)

*** Tree Grade: Tree grade 1 is highest quality, followed by grade 2 and grade 3. Trees below grade 3 are lowest quality for solid wood(lumber) use.

Sources: Rough and Rotten, Grade 1 and 2: Forest Inventory and Analysis (FIA), U.S. Forest Service; Alabama 2000, Georgia 1997, Maine2001, Michigan 2000, Minnesota 2001, Oregon 1999 cycle 4 (National Forest System land not included Texas 1992 cycle 1) (Cycle 1Eastern Texas only), Washington 1991 cycle 1 (National Forest System land not included), Wisconsin 2000.

Mortality: Forest Inventory and Analysis (FIA), U.S. Forest Service, Wisconsin 1996, Washington 1991, Texas 1992 (Eastern Texasonly), Michigan 1993, Minnesota 1990, Maine 1995, Georgia 1997, Alabama 2000, Oregon 1992.

Certified Forestland: various sources. Numbers include cumulative acres enrolled in the following: Forest Stewardship Council (FSC),Sustainable Forestry Initiative (SFI), and Pan-European Forest Certification (PEFC).

Factor 5: Wood and Fiber Quality


28

“Rou

gh* a

nd R

otten

**”

Woo

d as

% o

f

Total

Volum

e

12Wisconsin

6Michigan

10Alabama

6Georgia

6Maine

9Texas

2Oregon

1Washington

Finland

Brazil

United States

8Minnesota

Canada

Sweden

Chile


16

29

15

13

28

15

8.9% max

E50/25/25 Y Y 12Georgia

50/25/25 N Y E 31Maine

6.0%

Capita

l Valu

e Tax

***

(Y=Y

es, N

=Non

e)

NSta

te C

orpo

rate

Inco

me

Tax R

ate*

(% o

f bus

iness

inco

me)

singlebusiness tax

9.8%

4.5%

6.6%

businessand

ocupationtax

7.9%

Factor 6: Taxation

29


50/25/25 N Y E 19Wisconsin

Resea

rch

and

Dev.

Credit

(Y=Y

es, N

=Non

e)

Appor

tionm

ent

Form

ula**

(sales

/prop

erty/

payro

ll)

Tax R

even

ue a

s a

% o

f GDP***

**

Sales a

nd U

se T

ax o

n

Capital

Equip

ment (E

=Exe

mpt)

Indus

trial P

rope

rty

Tax (r

ank)*

***

Capita

l Gain

s Tax

(%)

75/12.5/12.5 Y rebated 9Minnesota

90/5/5 N N E 5Michigan

33/33/33 Y N reducedrate 38Alabama

Y Y E 2Texas

80/10/10 N N 17Oregon

N E 32Washington

20%Brazil

19%Chile

20%United States

20%Canada

35%Sweden

27%Finland


* Michigan's single business tax rate is 1.8% and it applies to total compensation and income, with adjustments and offsets; Texas'franchise tax is .25% of taxable capital or 4.5% of net taxable earned surplus, whichever is higher; and Washington's Business andOccupation Tax is .138% of the value of manufactured products.

** Apportionment formulas that have higher sales factor (the first of the three numbers) benefits those companies that have a highproportion of sales out-of-state because that income is excluded.

*** A capital value tax is a recurrent annual tax on the value of a company's "capital" as defined by each state.

**** Smaller ranking number indicates higher costs. Also note that total industrial property taxes payable for $25 million in real propertyand $25 million in personal property is calculated for Minnesota and other states in rural areas. Rankings are for 2002.

***** Includes tax revenue of central government only. Excludes fees and other non-tax revenues.

Sources: Corporate income tax: 2003 All States Tax Handbook, Research Institute of America. 2003 State Tax Handbook, CCH Incorporated.

Tax revenue: Organization for Economic Cooperation and Development. Worldwide Corporate Tax Guide, Ernst & Young. WorldDevelopment Indicators 2002, The World Bank.

Apportionment formula, capital value tax, Research and Development credit: 2003 All States Tax Handbook, Research Institute ofAmerica. 2003 State Tax Handbook, CCH Incorporated.

Sales and Use Taxes on capital equipment: 2003 All States Tax Handbook, Research Institute of America.2003 State Tax Handbook, CCH Incorporated. 2002 United States Master Sales and Use Tax Guide, CCH Incorporated.

Industrial property taxes: Minnesota Taxpayers' Association, 2003. Assumes 80% of total value is personal property

Capital gains tax: Organization for Economic Cooperation and Development. Worldwide Corporate Tax Guide, Ernst & Young.World Development Indicators 2002, The World Bank.

6.5%

35

Avera

ge U

nem

ploym

ent

Insu

ranc

e Cos

t (ra

nk**)

24

12

37

50

17

36

3

1

Factor 7: Labor and Construction Costs


30

11 4.6 3.3 2.9 36 6 10.75.4Wisconsin

LUM

BER: Valu

e

Added

per

$1

OSB: Valu

e

Added

per

$1

PAPER: Valu

e

Added

per

$1

Avera

ge W

age

Cost f

or

Mill

Wor

kers

($ p

er

2000

Pre

mium

-

Logg

ing/L

umbe

ring

2000

Pre

mium

-

Lum

berya

rd: O

ther

2000

Pre

mium

-

Planing

/Mold

ing M

ill

2000

Pre

mium

-

Saw M

ills

12 4.5 4.3 3.1* 33 6 21.75.8Minnesota

11 5.1 4.0 3.2 32 5 14.19.9Michigan

11 5.7 2.2 2.9 19 7 12.45.8Alabama

11 6.8 3.9 3.2 30 7 8.05.8Georgia

12 5.1 3.5 32 4 9.64.9Maine

11 5.3 3.6 3.0 16 9 11.15.4Texas

16 6.3 2.6 2.9 22 4 7.16.8Oregon

17 4.3 3.4 3.2 24 3 7.86.5Washington

Pulp/p

aper

mill

cons

tructi

on co

st ra

ting*

*

(S=s

ame a

s MN, B

=bett

er)

Indu

strial

buil

ding

cons

tructi

on co

sts (in

dices

relat

ive to

U.S

. = 1

00)*

S

S

B

B

S

B

S

S

B

B

B

B

97Wisconsin

97Michigan

82Alabama

81Georgia

88Maine

77Texas

104Oregon

103Washington

123Finland

41Brazil

100United States

99Minnesota

77Canada

114Sweden


About the Same as Minnesota


* 1998 data

** Smaller ranking numberindicates higher costs.

Sources: Wages: Occupational Employment statistics 2001, U. S. Department of Labor, Bureau of Labor Statistics

Value added: Annual Survey of Manufacturers 2000, U. S. Census Bureau.

Workers compensation: Workers' Compensation State Rankings, 2002 Edition, Actuarial and Technical Solutions, Inc.; OregonWorkers' Compensation Premium Rate Ranking Calendar Year 2000, Oregon Department of Consumer and Business Services; Unemployment insurance: U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Service.

* Smaller ranking number indicates lower costs. Index includes both material and labor components of construction costs.

** This reflects total investment cost that involves both purchase and construction of the facility and equipment.

Sources: Industrial building construction costs (U.S.): R.S. Means Building Construction Cost Data, 60th Annual Edition

Industrial building construction costs (International): Atkins Means Report, April 2003.

Construction cost rating: Based on Jaakko Pöyry Consulting's experience.

Worker’s Compensation

Fores

try E

duca

tion

Progr

am R

ankin

g -

Under

grad

uate

Have C

omple

ted C

olleg

e

Degre

e or

Mor

e (%

)

Fores

try/F

ores

t

Produ

cts R

esea

rch

Suppo

rt Ran

k**

Fores

try/fo

rest

Produ

cts

Educa

tion

Progr

am

Rankin

g - G

radu

ate

6

10

15

11

22

16

8

7

1

22

22

19

24

23

23

25

28

24

27

25

18

7

3

1

11

8

2

4

15

16

23

17

3

5

25

2

1

6

Factor 8: Education and Research

31


High S

choo

l

Gradu

ates

(%)

Liter

acy R

ate

(Lev

el 1/

Leve

l 2*)

(%)

Chile

* The U. S. considers literacy more broadly than just the ability to read: it is an individual's ability to read, write, speak in English,compute and solve problems at levels of proficiency necessary to function on the job, in the family of the individual and in society.There are five levels of literacy; individuals at Levels 1 and 2 lack a sufficient foundation of basic skills to function successfully insociety. In Minnesota, 13 percent of the population is rated as Level 1, and 35 percent at Level 2. The total is 48 percent, which islower than all the other states shown.

** National rank among states.

Sources: Literacy rate - U.S.: U. S. Census Bureau, American Fact Finder, 2003 (http://factfinder.census.gov/).

Literacy rate - International: CIA World Factbook, 2001.

High school graduates: 2000 U. S. Census Bureau, American Fact Finder, 2003 (http://factfinder.census.gov/). Canadian statisticsfrom provincial websites.

Completed college degree (U.S. States): 2000 U. S. Census Bureau

Forestry undergraduate program ranking: Gourman Report, 1998.

Forestry graduate program ranking: Gourman Report, 1997.

Research support: McIntire-Stennis Cooperative Forestry Research Program funding distribution rank. U.S. Department of AgricultureCooperative State Research, Education, and Extension Service, 2001.

85

89

83

79

85

76

85

87

80

88

14/39Wisconsin

18/44Michigan

25/57Alabama

23/54Georgia

23/51Maine

18/47Texas

14/42Oregon

15/38Washington

Finland

95Brazil

97+United States

13/35Minnesota

97+Canada

99+Sweden

83


Washington

United States

% o

f Pot

entia

l

Produ

ctivit

y Ach

ieved

Curre

nt P

rodu

ctivit

y of

Availa

ble F

ores

tland

(cor

ds/a

cre/

year

)

35

50

50

40

50

.51

.71

.81

.30

.93

Factor 9: Forest Land Productivity Factor 10: Technology


32

30

50

70

70

40

30

30

70

60Chile

.39

1.08

.63

High

.63

.32

.33

.73

High

Fores

tland

Are

a

(milli

on a

cres

)

16Wisconsin

19Michigan

22Alabama

24Georgia

18Maine

18Texas

30Oregon

22Washington

54Finland

1,343Brazil

747United States

17Minnesota

604Canada

67Sweden

38

Avera

ge T

echn

ical

Age o

f Equ

ipmen

t*

(yea

rs)

* These values are capacity-weighted Paper MachineTechnical Age, which serves as a proxy measurefor the paper machine technology differencesbetween states and countries. Paper machineTechnical Age is a value computed by JaakkoPöyry Consulting to estimate the asset quality ofeach machine. The age of the machine is modifiedby taking into account improvements throughrebuilds. A lower value (e.g. Finland) indicatesmore modern, technologically advancedmachinery, and the converse is true.

Sources: Jaakko Pöyry Consulting.

21.1Wisconsin

Michigan

16.6Alabama

Georgia

19.3Maine

Texas

Oregon

12.8Finland

Brazil

16.9Minnesota

19.0Canada

13.6Sweden

Chile


Sources: Forestland area (U.S.): U. S. Forest Service, 1997Resources Planning Act (RPA) Assessment, FinalStatistics, July 2000.

Forestland area (International): Food and AgricultureOrganization website.

Productivity statistics: Calculated using data from UN FAO website; Alan Ek, Personal Communication;UN-ECE/FAO 2000 Forest Resources of Europe, CIS,North America, Australia, Japan and New Zealand:Smith, Vissage, Darr and Sheffield, Forest Resources ofthe United States, 2001 Forest Inventory and Analysis(FIA), U.S. Forest Service.

Appendix 2Acknowledgements

The following organizations and individuals have contributed to this report and their contributions should beacknowledged. This report represents the combined views of Advisory Task Force members only.

Jaakko Pöyry Management Consulting provided considerable data and text for this report and conducted a detailedtechnical review. Doug Parsonson, Principal, coordinated Jaakko Pöyry's contributions.

Working group:Dentley Haugesag - Department of Employment and Economic DevelopmentPatti Blom - Department of Natural ResourcesKeith Jacobson - Department of Natural ResourcesBrad Moore - Department of Natural Resources (Chair)Jenna Fletcher - Minnesota Forest Resources CouncilDave Zumeta - Minnesota Forest Resources CouncilMike Kilgore - University of MinnesotaAlan Ek - University of Minnesota

Experts providing information:Linda Limback - Department of CommerceBob Isaacson - Department of Employment and Economic DevelopmentScott Moore - Department of Employment and Economic Development Neal Young - Department of Employment and Economic DevelopmentBill Johnson - Department of Natural ResourcesSteve Vongroven - Department of Natural ResourcesRobert Gale - Department of TransportationAbbie McKenzie - Department of Transportation Allan Vogel - Department of TransportationSteve Leib - Frantschach Inncoat USAKatie Fernholz - Institute for Agriculture and Trade PolicyWayne Brandt - Minnesota Forest Industries/Minnesota Timber Producers AssociationTim O'Hara - Minnesota Forest Industries/Minnesota Timber Producers AssociationLynn Reed - Minnesota Taxpayers AssociationRon Dvorak - Missota PaperAnn Foss - Pollution Control AgencyAdolph Ojard - Port of Duluth Peter Ince - U.S. Forest Service Forest Products LaboratoryHenry Spelter - U.S. Forest Service Forest Products LaboratoryU.S. Forest Service Forest Inventory Analysis Unit - North Central Research StationJim Bowyer - University of MinnesotaJoe Massey - University of MinnesotaLee Munnich - University of Minnesota, Hubert H. Humphrey Institute of Public AffairsTodd Powell - University of Minnesota Rubin Shmulsky - University of Minnesota

Report Layout:Jerry Steinworth - Department of Employment and Economic DevelopmentLaura Winge - Department of Employment and Economic Development

Editorial Assistance:Kathleen Weflen - Department of Natural Resources

Photo Credits:Don BrenemanMinnesota Agricultural Experiment StationMinnesota Forest Industries, and Holm Logging and Trucking Incorporated

33


Pulp and Paper Mill Managers surveyed:Joe Maher - Blandin PaperRobert Anderson, Gene Foster, Jack Strongman, Terry Worthman - Boise Cascade CorporationJodi Jostock, Leroy Kibbel - International PaperArchie Chelseth, Tom Collins - Sappi Fine PaperPatrick Moore - Stora Enso Duluth Paper MillKaren Turnboom - Stora Enso De-inking Mill

Lumber Mill Managers surveyed:Carl Lundberg, Rick Pomroy - Altrista (Formerly Diamond Brands)Dave Goetz, Jay Hauner - Cass Lake Forest Products Howard Hedstrom - Hedstrom LumberSteve Hill, Randy Rosandich - Hill Forest ProductsTim Olson - Northern Lights Timber and Lumber Pete Aube - Potlatch Lumber MillJohn Rajala - Rajala Lumber Company

Composite Wood Products managers surveyed:Kris Krag - International BildriteEd Gudowicz, Dick Hanson - Louisiana PacificJim Hafner, Jack Wallingford - Norbord Industries, IncKent Jacobson, Ron Salisbury, Todd Smrekar, Mike Wagner - Potlatch John Chaussee, Grant Kistler, Jeff Schommer - Trus Joist - A Weyerhaeuser Company

Loggers surveyed:Gary Carlson - Gary Carlson Logging Carlson Timber Products, Inc.Fjeran Forest Products Barry Hasbargen, Clarence Johnson - C. O. Johnson LoggingKelly Kimball - Kimball Sawmill and Logging, Inc. Tom McCabe - McCabe Forest Products, Inc. Mark Bowman - Northern Logging, Inc.Don Wagner - Wagner Forest ProductsMike Zauhar - Zauhar Logging


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