Extension of Certain Timber Sale: Contracts; Finding of Substantial Overriding Public Interest, 20984-20987 [2020-07973]

Agencies

• DEPARTMENT OF AGRICULTURE
• Forest Service

[Federal Register Volume 85, Number 73 (Wednesday, April 15, 2020)]
[Notices]
[Pages 20984-20987]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07973]



[[Page 20984]]

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DEPARTMENT OF AGRICULTURE

Forest Service


Extension of Certain Timber Sale: Contracts; Finding of 
Substantial Overriding Public Interest

AGENCY: Forest Service, USDA.

ACTION: Notice of contract extensions.

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SUMMARY: The Under Secretary for Natural Resources and Environment, 
Department of Agriculture has determined in accordance with paragraph 
14(c) of the National Forest Management Act of 1976 (NFMA) and Forest 
Service regulations that it is in the substantial overriding public 
interest (SOPI) to extend certain National Forest System timber sales, 
sale of property stewardship contracts, and forest product permits. 
This finding applies to timber sale, sale of property stewardship 
contracts, and forest product permits that were awarded or issued, 
before April 1, 2020, and upon award to sales with a bid opening prior 
to April 1, 2020. Extensions will be granted upon written request of 
the contract or permit holder, unless the Contracting Officer 
determines the wood products are in urgent need of removal due to 
forest health conditions or to mitigate a significant wildfire threat 
to a community, municipal watershed or other critical public resource. 
The Under Secretary finds in accordance with Forest Service regulations 
that better utilization of the various forest resources (consistent 
with the provisions of the Multiple-Use Sustained-Yield Act of 1960) 
will result by extending certain contracts and permits. Therefore, 
contract length may exceed 10 years as a result of this SOPI.

DATES: The SOPI determination was made on April 10, 2020, by the Under 
Secretary for Natural Resources and Environment, Department of 
Agriculture.

FOR FURTHER INFORMATION CONTACT: Carl Maass, Forest Management Staff, 
970-295-5961 or John Gary Church, Forest Management Staff 202-205-1732; 
1400 Independence Ave. SW, Mailstop 1103, Washington, DC 20250-1103. 
Individuals who use telecommunication devices for the deaf (TDD) may 
call the Federal Information Relay Service (FIRS) at 1-800-877-8339 
between 8:00 a.m. and 8:00 p.m., Eastern Standard Time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: Extension of certain contracts and permits 
is necessary due to a combination of factors impacting the national 
economy and the timber market. As one measure of the timber market, 
beginning in the 4th quarter of 2018 the Softwood Lumber Producer Price 
Indices (PPI) declined enough to qualify for some relief for timber 
purchasers under Market Related Contract Term Additions (MRCTA) 
provision of 36 CFR 223.52 (MRCTA). A similar downward trend occurred 
in the Hardwood Lumber PPI in the 2nd Quarter of 2018, but it did not 
qualify for MRCTA. Then, beginning in the 4th Quarter of 2019, trade 
disputes impacted the export of hardwood lumber to Pacific-rim nations. 
US hardwood lumber exports to China were valued in 2018 at 
approximately $2 billion prior to tariffs being imposed. In March of 
2020 indications are that impacts from the general economic slowdown 
attributed to the novel coronavirus pandemic (COVID-19) are adding to 
these economic disruptions, affecting a wide range of the forest 
products industry, including direct effects on timber purchasers and 
contractors across the country. In addition, mill closures and 
curtailment of timber harvests under Forest Service contracts appear to 
be a reflection of market declines over the past 24 months.
    Due to the complex factors involved, recovery is expected to be a 
protracted process. Looking at historically significant downturns in 
timber markets (early 1980's, early 1990's and late 2000's) recovery 
from the current market shocks is expected to be a prolonged process 
over two or more years. By way of illustration, recovery after the 
recession between 2005 and 2009 required substantial improvement in the 
domestic housing market before pre-recession production levels could be 
obtained. See, GTR NRS-P-105, USDA Forest Service Northern Research 
Station from 2012, for detailed information on how recovery proceeded 
after the economic downturn between 2005 and 2009. This SOPI will 
provide time needed for markets to stabilize and for purchasers, and 
contractors to resume operations currently disrupted by these 
unprecedented global conditions.
    Pursuant to this SOPI, and except as discussed herein, most 
contracts may be extended for a maximum of two years, including MRCTA 
time that has previously been provided under 36 CFR 223.52. Based on 
past experience a two-year time period should allow time for 
substantial market adjustments and any broad scale market assessment 
the Forest Service may find necessary to make. Market conditions in 
Alaska are exceptionally disrupted, resulting from its dependence on 
log exports to international markets, so timber sale contracts and 
permits in Alaska may receive up to 3 years of additional time through 
a combination of MRCTA and this SOPI.
    The intent of this SOPI is not to be duplicative of relief 
previously provided, or relief that may be available in the future, 
under contract provisions for MRCTA. In the event MRCTA triggers in the 
future, any MRCTA time added to contracts and permits, will be limited 
to the amount of time that exceeds additional time authorized under 
this SOPI. For example, sales that have previously received 1 year and 
6 months of MRCTA shall only receive an additional 6 months of 
extension under this SOPI, for a total of 24 months of combined MRCTA 
and SOPI, except sales in Alaska will receive up to 3 years of 
additional time through a combination of MRCTA and this SOPI. Thus, 
sales in Alaska that have previously received 1 year and 6 months of 
MRCTA are eligible to receive up to an additional 18 months of 
extension under this SOPI for a combined total of 36 months. If MRCTA 
is triggered in the future, MRCTA time will be reduced by the amount 
time granted under this SOPI. The combination of additional time from 
previous MRCTA and this SOPI will be limited to a maximum of two years, 
except that timber sale contracts and permits in Alaska may receive up 
to 3 years of additional time through a combination of MRCTA and this 
SOPI. International markets for logs exported from Alaska are governed 
by market demand and foreign restrictions largely outside the control 
of US domestic policy. The additional year of extension may be required 
by Alaska producers to resolve international market disruptions without 
requiring additional relief measures.
    Sales where the wood products are in urgent need of removal due to 
forest health conditions or to mitigate a significant wildfire threat 
to a community, municipal watershed, or other critical public resource 
that is determined to be in urgent need of harvest will not be 
extended. The Forest Service will continue to monitor market conditions 
to determine if and when additional time may be needed.
    MRCTA procedures were adopted by the USDA Forest Service in the 
early 1990's to avert contract defaults, mill closures and associated 
impacts to dependent communities when there is a drastic decline in 
wood product prices (36 CFR 223.52). Most Forest Service timber sale 
contracts over 1-year in length include MRCTA procedures. Salvage sales 
and sales of products not covered in a Bureau of Labor Statistics (BLS) 
Producer Price Index (PPI) used to

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determine when MRCTA triggers are examples of contracts that do not 
include a MRCTA provision.
    The effects of international trade disputes and the novel 
coronavirus 2019 (COVID-19) pandemic have not yet been fully accounted 
for in the way the Forest Service uses the PPIs to calculate when MRCTA 
is triggered. As a result, MRCTA is not providing timely or adequate 
relief for many producers that are experiencing the effects of tariffs 
imposed by other countries, particularly China, that affect United 
States exports and the effects of COVID-19 pandemic on domestic and 
global forest products markets. The effects include disruptions in 
international trade and interruptions in domestic production, 
distribution of forest products as well as demand for forest products 
as a result of national and local COVID-19 containment measures such as 
``stay-at-home'' or ``shelter-in-place'' orders.
    A unique combination of world market conditions, the COVID-19 
pandemic and a massive bark beetle epidemic in central Europe has 
created an unprecedented worldwide instability in timber industries and 
associated markets. Data and available information indicate the 
volatility and speed of changes concurrent with the COVID-19 pandemic 
are introducing extreme uncertainty for timber purchasers and 
stewardship contractors regarding investment decisions about current 
and future operations. The number of people seeking unemployment 
benefits in March 2020 shot up to over 10 million in a few weeks, 
providing a great deal of uncertainty for housing starts and the 
mortgage industry. Sawmills in Oregon and elsewhere are curtailing 
operations, halting operations on National Forest timber sales as 
markets for the logs shut down. Impending contract termination dates on 
existing Forest Service timber sales can limit purchasers' options in 
these turbulent and uncertain times. When members of the timber 
industry must decide whether to harvest timber during severely 
depressed markets or risk defaulting contracts, such decisions can and 
previously have led to bankruptcies, loss of infrastructure and loss of 
jobs. This adversely affects stability in rural communities and future 
management of National Forests, as important opportunities for 
accomplishing forest management objectives are lost. Providing 
additional contract time during previous significant downturn market 
conditions has allowed timber purchasers additional flexibility to 
navigate the crisis and sustain long-term business viability, providing 
tools to support Forest Service land management goals and providing 
future employment opportunities.
    The intended effects of this SOPI finding and contract extensions 
are, again, to allow timber purchasers, contractors, and permit holders 
time to navigate through the COVID-19 crisis and other market 
conditions, minimize contract defaults, mill closures, and 
bankruptcies, and sustain employment opportunities. The Government 
benefits if timber sale contract defaults, mill closures, and 
bankruptcies can be avoided by granting extensions. Having numerous 
economically viable, timber purchasers and contractors increases 
competition for National Forest System timber sales, results in higher 
prices paid for such timber, and allows the Forest Service to provide a 
continuous supply of timber to the public in accordance with the Act of 
June 4, 1897 (Ch. 2, 30 Stat. 11, as amended, and 16 U.S.C. 475) 
(Organic Administration Act). Having numerous economically viable 
timber purchasers is also essential as employment and the national 
economy recovers following the COVID-19 pandemic.
    The Forest Service sells timber and forest products from National 
Forest System lands to individuals and companies pursuant to the 
National Forest Management Act of 1976, 16 U.S.C. 472a (NFMA); the 
Stewardship End Result Contracting Projects Act, 16 U.S.C. 6591c; and 
implementing regulations in 36 CFR part 223. Each sale is formalized by 
execution of a contract for the sale of property between the timber 
purchaser or Stewardship Contractor and the Forest Service. The 
contract sets forth the explicit terms of the sale including such 
matters as the estimated volume of timber to be removed, the period for 
removal, price to be paid to the Government, road construction, and 
logging requirements. The average contract period is approximately 2 to 
3 years, although some contracts may have terms up to 10 years. The 
contract term is established by the Forest Service based on the 
estimated time an average prudent timber contractor would need to 
mobilize and complete the timber harvest under the conditions of the 
contract. The National Forest Management Act of 1976 (16 U.S.C. 
472a(c)) provides that the Secretary of Agriculture shall not extend 
any timber sale contract period with an original term of 2 years or 
more unless the Secretary finds that the purchaser has diligently 
performed in accordance with an approved plan of operations, or that 
the ``substantial overriding public interest'' justifies the extension.
    On December 7, 1990, the Forest Service published a final rule (55 
FR 50643) establishing procedures in 36 CFR 223.52 for extending 
contract termination dates in response to adverse conditions in timber 
markets. These procedures, known as Market Related Contract Term 
Additions (MRCTA), authorize extensions of timber sale contracts when 
qualifying market conditions are met. Subsequent amendments have 
provided that the total contract period may be extended up to 10 years 
as the result of MRCTA when specified criteria are met. When the MRCTA 
procedures were established, experience indicated that the type and 
magnitude of lumber market declines that would trigger market related 
contract term additions generally coincide with low numbers of housing 
starts and substantial economic dislocation in the wood products 
industry. Such economic distress broadly affects rural community 
stability, the short-term capacity of the domestic industrial supply 
chain, and threatens long-term industrial capacity needed to meet 
future Forest Service land management objectives and the demand for 
wood products from domestic sources.
    When MRCTA was designed, the focus was on domestic disruptions in 
forest product markets and not the effects of world trade restrictions 
or a global pandemic. In promulgating the MRCTA rule the Department 
determined that a drastic reduction in wood product prices can result 
in a substantial overriding public interest sufficient to justify a 
contract term extension for existing contracts, as authorized by the 
National Forest Management Act of 1976 (16 U.S.C. 472a(c)) and existing 
regulations at 36 CFR 223.115(b).
    The three Bureau of Labor Statistics (BLS) Producer Price Indices 
(PPI) the Forest Service currently uses to gauge most market conditions 
include Hardwood Lumber 0812, Softwood Lumber 0811, and Chips (not 
field chips) PCU32113321135. However, these indices are not able to 
address all forest products and market conditions. For example, biomass 
material, which is a large component of many stewardship contracts, is 
not covered by these indices. Also, because the indices are national in 
scope, they may fail to address drastic declines in local markets or 
products and, more importantly at this time, markets affected by 
tariffs and the evolving COVID-19 pandemic. Furthermore, the indices as 
used in Forest Service contracts are not able to reflect rapidly 
declining market conditions since the formulas used to

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trigger MRCTA require measuring PPI decline over two consecutive 
calendar quarters. Current market conditions are very volatile and will 
not be reflected in the MRCTA formulas for several months.
    The Bureau of Labor Statistics (https://www.bls.gov/ppi/home.htm) 
describes the effects of tariffs on the producer price index in March 
2020, as follows:

    24. ``Does the PPI include tariffs in its estimates of price 
change? The Producer Price Index (PPI) measures the average change 
in prices U.S. producers receive for the sale of their products. 
Since tariffs and taxes are not retained by producers as revenue, 
they are explicitly excluded from the PPI. However, pricing 
decisions producers make in reaction to tariffs are included in the 
PPI. For example, if a domestic producer is manufacturing a product 
that is subject to import competition and tariffs are placed on 
those imports, the domestic producer may increase its own prices in 
order to maximize revenue. In this case, the price increase for the 
domestic producer would be included in the PPI. Similarly, if a 
domestic producer exports products to a foreign country that placed 
tariffs on U.S. products and the domestic producer lowered its 
prices either to better compete in the export market or to sell 
domestically excess inventory that resulted from those tariffs, 
those price decreases would also be reflected in the PPI.''

    The above description provides a general overview that tariffs are 
not captured in the PPI. Only the impact of tariffs on pricing 
decisions of individual firms are recognized through this method.

Hardwood Lumber Markets

    Hardwood industry data suggests that U.S. prices are severely 
depressed by tariffs imposed by China on imports of hardwood lumber and 
logs from the United States. Although tariff relief on hardwoods is 
occurring, an oversupply of logs in China and the effects of containing 
COVID-19 by stopping manufacturing operations in China will delay the 
reopening of the Chinese export market. The Forest Service currently 
has 192 sales awarded that are tied to the Hardwood Lumber PPI, with 55 
of those sales terminating in calendar year 2020, and an additional 51 
sales terminating in 2021. It is estimated that as many as one third of 
these sales may be directly affected. The hardwood lumber market is 
complex with multiple interconnections and relies on demand for 
finished furniture, which ebbs and flows as US tariffs are applied to 
goods imported to the US, and Chinese tariffs applied to hardwood logs 
exported to China. These market disruptions can affect the entire 
market and would have some variable ripple effect on potentially all 
the active sales. Some specifics regarding the variable effects 
observed to date are described below.

Eastern Hardwood Lumber Markets

     Hardwood Review Weekly (https://www.hardwoodreview.com) 
indicates that export volume for all hardwood species is down by 39% 
compared to a year ago.
    [cir] Hardwood total export value is down 42.2% compared to a year 
ago.
    [cir] Product unit values are down by an average of -5%, with 
variation by species from -2.8% Yellow Poplar to -12% for Cherry.
     About \1/3\ of the active timber sales on the National 
Forests of North Carolina (NC), about 34,000 Hundred Cubic Feet (CCF), 
are in jeopardy of default due to poor market conditions. This 
represents about 76% of all timber sale contracts in North Carolina 
with a combined value of nearly $1 million.
     A hardwood sawmill has already closed in Jackson County, 
NC, and there are reports that another one has curtailed production, 
idling around 70 workers.
     A finished furniture mill in Western North Carolina closed 
last fall.
     Local Forest Service officials report that mills are 
struggling in several other locations including Haywood and Graham 
Counties, NC.
     Sales in Tennessee are in danger of default due to:
    [cir] Restrictive delivery quotas;
    [cir] restrictions on certain species of hardwood logs; and
    [cir] newly imposed increases in minimum sawlog sizes are diverting 
some logs to lower quality, lower value products as a result of reduced 
demand.
    During the period of September 2005 through December of 2008 the 
Hardwood Lumber PPI 0812 did not decline enough to authorize MRCTA, 
and, in the absence of triggering MRCTA, qualifying hardwood sales 
received additional time through a SOPI in 2007, the 2008 Farm Bill and 
a 2008 SOPI.
    The hardwood lumber PPI 0812 began declining after May 2018, and 
with adjustments for inflation, has declined 15.2 points or 13% as of 
January 2020. But, similar to the situation during the period between 
September 2005 and December 2008, PPI 0812 declines for two consecutive 
quarters have not been sufficient to trigger MRCTA. Consequently if 
hardwood prices do not begin to recover soon, or if conditions for 
MRCTA do not trigger, some hardwood purchasers are expected to face 
severe hardships and potential defaults as contract termination dates 
approach.
    China began eliminating tariffs on most North American hardwood 
lumber imports for one year beginning February 28, 2020. Despite the 
change in tariffs, reliable information from news reports and industry 
publications indicate that business disruptions related to efforts to 
contain COVID-19 are stalling shipments to China. The effects of the 
COVID-19 pandemic on other export markets is still unclear but has 
potential to become significant.

Softwood Lumber Markets

    The softwood lumber PPI 0811 triggered MRCTA during four 
consecutive quarters including the 4th quarter 2018 through the 3rd 
quarter 2019. Contracts tied to the softwood lumber PPI sold prior to 
the 1st quarter 2019 have been eligible to receive MRCTA time. Sales 
tied to the softwood lumber index sold during the 2nd quarter 2019 and 
later have not been eligible for MRCTA time.
    There is no indication that foreign tariffs on softwood logs and 
lumber exported from the United States will be lifted any time soon. 
Furthermore, China has been severely limiting or rejecting imports of 
softwood lumber and logs due to excess inventory at processing 
facilities. Even before the tariffs and the COVID-19 pandemic, the 
Chinese softwood lumber manufacturers were flooded with inexpensive 
spruce from a major spruce beetle epidemic in central Europe. The 
oversupply situation has been exacerbated by China's response to the 
COVID-19 situation, which led to a general stopping of manufacture and 
related decline in demand for a log supply and further restricted 
imports. This is having a significant impact on Alaska timber producers 
where market conditions are driven by log exports to China. While the 
effects of these conditions are partially mitigated by MRCTA, it is 
apparent that MRCTA alone will not provide adequate time for the Alaska 
export markets to recover before contracts there begin terminating.
    Softwood log exports from Federal lands are limited to areas east 
of the 100th meridian (USFS Regions 8 and 9) and Alaska (USFS Region 
10). Although sales subject to the Softwood Lumber PPI have received 
additional MRCTA time, sales in Alaska may require additional time due 
to the very limited markets available for economically viable softwood 
exports from Alaska.

Alaska Market

     Major exporters of softwood timber from Alaska have 
experienced a loss of

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about 50% of their Freight on Board (FOB) price to China in the last 18 
months.
     Alaskan exporters are estimated to lose $250 per thousand 
board feet (MBF) on all of their National Forest Young Growth (YG) 
sales.
     With the current 20% tariff imposed by China on Alaska 
wood products, exporters stopped shipping to China in August of 2019.
     Large inventories of logs destined for export are awaiting 
resolution of tariffs and market limitations.
    Market demand and tariff conditions are delaying the start of all 
operations in the estimated $100 million dollar forest product industry 
in Alaska (2015 data). As discussed above, purchasers of softwood sales 
throughout the rest of the country are coming under increasing pressure 
from market and manufacturing conditions affected by actions and 
responses to the COVID-19 pandemic and the general slowing of economic 
activity. This situation continues to be very volatile. Providing extra 
time to those sales will provide those purchasers with additional 
flexibility as they adjust to the changing market situation.

Biomass and Wood Chip Markets

    Little information is currently available on the effects of the 
COVID-19 pandemic on biomass and wood chip markets, but as the general 
economy slows down, it is likely that those markets will also be 
affected. The forest products industry is interconnected among 
dimension lumber, pulp, chips and biomass. Each part of the industry 
supports other parts. For example, most biomass and chip sales include 
a component of sawtimber and some of the outputs from sawtimber support 
pulp, chips and biomass. Consequently, contracts where biomass or wood 
chips the primary timber product will also be eligible for an extension 
of up to 2 years under this SOPI determination.
    Determination of Substantial Overriding Public Interest: The 
Government benefits if timber sale contract defaults, mill closures, 
and bankruptcies can be avoided by granting extensions. Having numerous 
economically viable, timber purchasers increases competition for 
National Forest System timber sales, results in higher prices paid for 
such timber, and allows the Forest Service to provide a continuous 
supply of timber to the public in accordance with the Organic 
Administration Act. In addition, by extending contracts and avoiding 
defaults, closures, and bankruptcies, the Government avoids the 
difficult, lengthy, expensive, and sometimes impossible, process of 
collecting default damages. Timber sales play a major role in 
maintaining healthy forests and restoring watersheds that produce clean 
water and are resilent to insects and diseases. Maintaining a healthy 
forest products industry allows the Forest Service to continue this 
vital work while supporting hundreds of thousands of meaningful jobs 
throughout the country.
    By preventing defaults, better utilization of various forest 
resources (consistent with the provisions of the Multiple-Use 
Sustained-Yield Act of 1960) will result if contracts are extended 
beyond 10 years as a result of this finding.
    Therefore, pursuant to 16 U.S.C. 472a, I have determined that it is 
in the substantial overriding public interest to extend up to two years 
certain National Forest System timber sale contracts awarded and timber 
product permits issued before April 1, 2020, and sales with a bid 
opening date of prior to April 1, 2020 that have not yet been awarded, 
subject to the following conditions:
    1. The combination of additional time from previous MRCTA and this 
SOPI will be limited to a maximum of two years. For example, sales that 
have previously received 1 year and 6 months of MRCTA shall only 
receive an additional 6 months of extension, for a total of 24 months 
under this SOPI, except market conditions in Alaska are such that sales 
in Alaska will receive up to 3 years of additional time through a 
combination of MRCTA and this SOPI. For example, sales in Alaska that 
have previously received 1 year and 6 months of MRCTA are eligible to 
receive up to an additional 18 months of extension under this SOPI for 
a combined total of 36 months.
    2. In the event MRCTA triggers in the future, additional time will 
be limited to that exceeding the amounts authorized under this SOPI.
    3. Contracts shall not be extended under this SOPI when the 
Contracting Officer determines the wood products are in urgent need of 
removal due to forest health conditions or to mitigate a significant 
wildfire threat to a community, municipal watershed or other critical 
public resource.
    4. Notwithstanding the preceding conditions, contracts or portions 
of contracts that are in breach are not eligible for extension under 
this SOPI determination until such breach is remedied.
    5. This SOPI does not apply to stewardship contracts determined to 
be for the procurement of services under 36 CFR 223.300(b)(1) or (3)--
Stewardship Agreements.
    6. Forest Product Permits shall be extended for up to 2 years upon 
request when product removal limits shown on the permit have not been 
met.
    Total contract length may exceed 10 years as a result of receiving 
a SOPI extension under this determination.
    Any periodic payment due dates that have not been reached as of the 
date the Contracting Officer receives a request for a SOPI extension 
shall be adjusted one day for each additional day of contract time 
granted. Periodic Payments with determination dates from March 1, 2020 
to the date this SOPI is published shall be adjusted by adding one day 
for each additional day of contract time granted, when the request for 
SOPI extension is received within 30 days of publication of the SOPI.
    To receive an extension and periodic payment deferral pursuant to 
this SOPI, purchasers must make written request and agree to release 
the Forest Service from all claims and liability if a contract extended 
pursuant to this finding is suspended, modified or terminated in the 
future.
    The Forest Service shall continue to monitor market conditions to 
determine if additional relief measures may be needed in the future.

James E. Hubbard,
Under Secretary, Natural Resources and Environment.
[FR Doc. 2020-07973 Filed 4-14-20; 8:45 am]
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