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Criterion 6 Indicator 41
Rates of return on investment in forests.
Private forest landowners and forest products companies expect to get some financial return on their investments in forest lands, sawmills, pulp mills, and other manufacturing facilities. The rates of return on investment can be compared with other sectors of the economy, as one indicator of the economic health of the forest products industry.

Can This Indicator Be Quantified
There are 90 sawmills and 10 pulp mills in Oregon (Oregon Department of Forestry, 1998). Private forest lands cover a total of 10,872,000 acres in Oregon. Out of this total, 4,438,000 acres are owned by non-industrial private landowners, and 5,954,000 acres are under industrial ownership (Oregon Department of Forestry 1997). These mills and forest lands represent a significant amount of private investment in Oregon’s forest industry.
Rates of return have been calculated from the annual stock reports of publicly traded companies in the forest products industry that have operations in Oregon. Individual rates of return were calculated by dividing each company’s net income by their total assets. These numbers were then aggregated to provide an average measure of the rate of return for the forest products industry as a whole.
The rate of return measures the returns on land, physical capital, and financial holdings, giving a comprehensive gauge of the forest industry’s well-being. However, these companies have diversified holdings in a number of states and regions, and their rate of return may not be representative of the returns received by smaller, privately owned companies within Oregon. Data for the smaller companies are generally not available to the public, making it unfeasible to calculate their rates of return.

Figure 41-1 below shows the average rate of return on investment for the forest industry, using information from the companies listed below. The average rate of return has fluctuated with a spread of about 9 percent since 1987. Variations among individual companies have been even larger, with the lowest individual rate of return at minus 5 percent for one company in 1991, and the highest rate of return at 21 percent for a company in 1989. These variations are most likely due to differences in corporate strategies and diversification of assets and holdings.
The forest industry’s rates of return appear to be strongly correlated with log prices, which are shown in Figure 41-1, with the rate of return climbing or remaining steady as log prices go up, and turning downward as log prices decline. Changes in the rate of return tend to lag one to two years behind changes in log prices, but follow the pattern set by prices.
Companies show the biggest differences in their rates of return during the periods when log prices rise or fall most dramatically. Industry rates of return climbed steadily during the early 1990s, then declined after 1995, and stood at about 4 percent in 1997. Overall, log prices were about two times higher in 1997 than in 1987 (adjusted for inflation in 1982 dollars), and rates of return were slightly lower than in 1987.
Figure 41-1. Rate of return on investment, in the forest industry, 1987-97
Figure 41-2. Oregon Department of Forestry log prices, 1987-97

Data Source and Availability
For log prices, data was used from Oregon Department of Forestry reports. Forest industry rates of return were calculated from annual reports and historical financial data available on the web pages of the companies listed below.
Boise Cascade. Web site address: http://www.shareholder.com/visitors/dynamicdoc/document.cfm?documentid=507&companyid=BCC.
Georgia-Pacific. Web site address: http://www.gp.com/.
Howard, James O., and Franklin R. Ward. 1998. Oregon’s forest products industry. Oregon Department of Forestry, Salem, OR.
Oregon Department of Forestry.
Weyerhaeuser. Web site address: http://www.weyerhaeuser.com/annualreport/ar97/.
Willamette Industries. Web site address: http://www.wii.com/

Reliability of Data
Most data from individual companies had been independently audited and was reliable. However, there may be differences in the variables that each company used to calculate its total assets and net income. A company’s total assets may include real estate, stocks, and bonds, as well as other sources of income not related to the forest products industry. Also, companies may generate income from other enterprises besides forest products, and thus have very different total rates of return. Due to these factors, the rates of return presented may not be completely comparable. Additional information related to each company is available at the web site addresses listed above.
The Oregon Department of Forestry’s resource planning program updates an index of western Oregon log values annually. To make the index useful for analyses of timber management practices and trends, it is adjusted to account for tree species and quality of wood harvested, and also adjusted for inflation. The index is based on average domestic log quotes collected since 1977 by the Department of Forestry’s forest management division. The quotes are for domestically processed logs only and exclude any unreasonably high or low quotes.
To create the annual log value index, the first step is to take all quotes for Douglas-fir and western hemlock in that year, and average them by grade and geographic area. Next, it is estimated what percentage of the total log harvest was contributed by each species. Then individual species are weighted according to their percentage, and a final calculation is made to come up with an average annual western Oregon log value. To adjust for inflation, each year’s average log value is adjusted to the base years of 1982 and the most recent year possible (currently, 1998 is used), by the all-commodity producer’s price index.

Data from financial reports is at the company level, which includes all regions and states where that company operates; companies report their data annually. Log prices are based on statewide data and are available on a yearly basis.

Recommended Action for Data Collection

Rate of return — Net income divided by total assets at year-end.

Selected References
Price Waterhouse Coopers. 1998. Global forest and paper industry survey: 1998 edition.