Supplying woody biomass for generation of electricity, heat, bio-fuels or even selling carbon credits could create new markets for forest products and could provide opportunities for forest landowners to reap benefits both financially and silviculturally. Northwest Management, Inc. is currently involved in several projects dealing with the woody biomass utilization as well as providing expertise and services in the carbon market. Both the carbon market and the woody biomass markets are relatively new and will evolve over time as the industry and markets mature. Northwest Management, Inc. will continue to be involved in these markets to provide opportunities and assistance to forest landowners.

By: Chuck Roady, F.H. Stoltze Land & Lumber Company

F.H. Stoltze Land & Lumber Co. (Stoltze) has completed the feasibility analysis of constructing a 12 to 18 megawatt woody biomass fueled combined heat and power (CHP) plant at its sawmill site in Columbia Falls, Montana. The facility would produce clean renewable electric power to be used in the Inland Northwest and steam to be used for industrial applications at the sawmill site. The plant is designed to operate 24 hours a day, 7 days a week, for a minimum of 350 days per year.

The plant would burn a combination of mill residuals and woods direct biomass. Approximately 30,000 to 90,000 green tons (1,000-3000 truckloads) of woody biomass would be sourced directly from forest management activities both in the form of roundwood and in-woods grindings from slash and sub-merchantable material. Developing a viable local market for woody biomass will provide opportunities and improved economics for local landowners dealing with forest health and fuels reduction objectives. Utilizing this forest biomass in the controlled combustion of a CHP high technology burner will result in an overall reduction in greenhouse gas emissions and haze causing particulate matter over the option of open burning, natural decomposition, and the increasing wildfires we experience each year.

Considered a “Carbon Neutral” form of energy generation, the Stoltze CHP wood-fired co-gen project would help bring diversification and stabilization to forest dependent communities and the forest products industry in northwestern Montana. The facility will require 12-13 personnel to operate and create about 8-9 new jobs, as well as additional contract logging, grinding, and trucking opportunities in the area.

Stoltze managers hope to make a decision as soon as possible on the viability of the project and to hopefully reach an agreement with a local utility to buy the generated power within the next couple months. It is estimated to take between 18 and 26 months to complete construction to put the plant into full operation.

By: Bill Stanke, CPA

An investor or owner of timberland is faced with a number of tax planning opportunities that are unique to the owning of timberland. A few of the more common areas are as follows:

Reforestation costs. The current Internal Revenue Code allows taxpayers to expense the first $10,000 of qualified reforestation costs each year. Expenditures in excess of $10,000 per year are capitalized and amortized (written off) over 84 months. It is important to make the election (under Internal Revenue Code Section 194) properly. If the election is not made, the reforestation costs must be capitalized. If the costs are capitalized, the cost can only be recovered (in the form of depletion) when the timber is harvested.

Capital gains for timber sales. A timber owner who holds timber “primarily for sale to customers in the ordinary course of business” can qualify the timber sale under Section 631(b) of the Internal Revenue Code. This allows the seller of timber to receive capital gain treatment on the sale. It is important that contract of sale be drafted properly, but both “pay-as-cut” as well as lump sum contracts can qualify for IRC Section 631(b) treatment. Timber located in the State of Idaho that has been owned for more than twenty-four months will also qualify for special Idaho capital gains tax treatment.

Timber Depletion. A purchaser of timberland needs to determine (at the time of purchase) the value of standing timber purchased, as well as the value of the bare timber land. It is important for the timber cruise to determine the volume and species of timber on the property being acquired, as well as the associated harvest and transportation costs that the landowner would incur. When timber is later harvested, it would be possible to compute a depletion allowance, based on the volume and species of timber harvested. Copies of the scale reports are invaluable in determining the volume of timber harvested.

Summary. These are a just a few of the areas that demonstrate the unique tax opportunities (and pitfalls) associated with an investment in timberland. It is important that the timber owner have a forester, attorney and tax advisor who can work together to maximize the benefits available to timberland owners. It also underscores the necessity to maintain detailed and accurate records over the entire life of the investment, from acquisition to sale.

Bill Stanke is a partner in the accounting firm of Mann & Stanke, CPA (P.A.).  He and his partner, Greg Mann started the business in 1994, and currently have offices in Moscow and Kendrick, Idaho.  They primarily specialize in accounting and tax services for individuals, trusts and small businesses.  They can be reached at (208) 883-5555 or (800) 680-1999.

By: John Erixson, Northwest Management, Inc.

In our 2nd Quarter 2008 Market Report Newsletter Keith Balter, Senior Economist, Forest Capital Partners, LLC stated “Over the past year, timberland owners in the Inland West have seen sawtimber prices retreat as lumber producers sharply curtailed production at mills across the region.” This year the same sentence applies, as we have actually seen some and maybe even most area mills suspend their purchasing of logs altogether. For the first time in the 25 year history of Northwest Management, Inc. the mills have actually stopped purchasing logs.

Some would say we have the perfect storm. Housing starts are way down and foreclosures are way up leaving home inventories high. On top of this the falling home prices which leads to fewer new home purchasers and you end up with a really tough market for wood products. Not to mention, due to less consumer spending the demand for world wide pulp and paper products is down as well.

So there you have it…the bad news. The real question is where we are going from here? This is especially of interest if you are a landowner with timber and even more of interest if you were or are planning on harvesting within the next year. So let’s analyze this “Perfect Storm” a little further.

First, it is not likely that we will see a significant increase in housing starts during the remainder of 2009. Currently 18.6 million homes in America are sitting empty (Source: CNNMoney.com). The existing home inventories, or “used homes” shall we say, are at about a 10 month level. Meaning there is an excess in “used homes” that covers the demand for the rest of the year. Add to this the 3% of US mortgages that are 3 months or more behind in payments and new housing starts may be delayed into next year.

Second, lending remains tight. Keith Balter again stated “Access to mortgages for first-time and marginally qualified buyers has been severely restricted in the wake of the sub-prime mortgage crisis. Lenders have increased their requirements for home buyers regarding income and credit ratings, and have increased vigilance in verifying financial information and assessing property values.” Again this statement is applicable for the current year. The good news here is that interest rates are near all time lows and are projected to drop a little more. This may lead to qualified buyers moving into the rental income markets as housing prices moderate and the mortgage expenses decline.

With housing starts down, the demand for the lumber produced by the mills is down. The mills are stuck in the middle with high inventories of logs; demand is low for lumber and they have high inventories of lumber. It is going to take a little time for this to correct itself once housing starts improve.

Butch Bernhardt from the Western Wood Products Association predicts that there will be a sustained recovery in wood products in mid to late 2009 or early 2010. As a landowner, if you are considering harvesting, if you can, waiting this recession out may be your best strategy as long as our industry is able to survive this decline. If you can’t wait this recession out, there are some strategies that can help maximize your returns. Marketing becomes increasingly important. You can hit spot markets and specialty markets even today that provide reasonable returns. Some non-traditional markets can include house and specialty logs, firewood, and individual species and products that some mills are still purchasing.

If you don’t need to harvest, what can you do? Like all markets the log and lumber markets are cyclic and there may be a better day to harvest logs and sell forest products down the road. So in the mean time, managing your forest for the future is a good approach. In other words, set yourself up to be ready when the markets improve. If you can afford to, invest in the future of your stand. Do pre-commercial thinning or plant trees. There are some cost share programs that are currently available and some new programs coming down the pike that will provide additional cost share opportunities. Now is a good time to take advantage of these opportunities and prepare for opportunities that will come in the future.

Deputy Secretary Merrigan Announces First National Sign-up for New Conservation Stewardship Program

The first scheduled sign-up for the new Conservation Stewardship Program was on August 10 with the first period cutoff on September 30. Applications will be accepted after that date as the second cutoff date is January 14, 2010. The annual acreage enrollment is capped at 12,769,000 acres for each fiscal year nationwide. Conservation Stewardship Program (CSP) is a voluntary program that encourages agricultural and forestry producers to maintain existing conservation activities and adopt additional ones on their operations.

“This program will help the Nation’s agricultural and forestry producers reach greater levels of conservation performance, which will help protect our land and water,” Merrigan said. “The conservation benefits derived from maintaining and enhancing natural resources will improve the quality of soil and water, assist in addressing global climate change, and encourage environmentally responsible energy production.”

To apply for the newly revamped CSP, potential participants will be encouraged to use a self-screening checklist first to determine whether the new program is suitable for them or their operation. It will be available on NRCS Web sites and at NRCS field offices. After self-screening, the producer’s current and proposed conservation practices are entered in the conservation measurement tool (CMT). This tool estimates the level of environmental performance to be achieved by a producer implementing and maintaining conservation activity. The conservation performance estimated by the CMT will be used to rank applications.

For information on this program contact www.nrcs.usda.gov/new_csp or contact Northwest Management, Inc. 208 883-4488.

By Gary Ellingson, Northwest Management, Inc.

Over the past 3-4 years forest landowners in central and southwestern Montana have faced the largest known Mountain Pine Beetle (MPB) epidemic on record. The results have been devastating for those directly affected. Lodgepole pine stands with average diameters greater than 6 inches have suffered greater than 90% mortality. Ponderosa pine stands in many areas have 90% of trees greater than 8 inches dead or infested. Elsewhere ponderosa stands typically have 40-70% mortality. Viewed from local highways many mountain sides in the area are a vast sea of red-needled dead trees.

To make matters worse an extensive western spruce budworm infestation is impacting Douglas-fir, sub alpine fir and spruce forests throughout the region. Maintaining the health of these tree species is even more important in mixed stands where all pine species are either dead or infested with MPB.

At the same time landowners are faced with an economic recession and the weakest log market in decades. These are the toughest of times for landowners and Northwest Management, Inc. (NMI) foresters with decades of experience. However, there have been some successful outcomes as the result of applied forest management. Here are some of the observations NMI foresters have made.

In regards to Mountain Pine Beetle:

• Ponderosa pine stands maintained at a basal area of less than 80 sq. feet per acre are suffering significantly less mortality from MPB than non-treated or dense stands.
• Pro-active management such as sanitation and salvage of dead and green beetle infested trees prior to the next years beetle flight (late June or early July) is reducing mortality rates the following year in ponderosa pine stands.
• Proper application of certified insecticides during late spring-early summer by a qualified contractor to non-infested pine trees works well as a preventative action. Cost averages about $25 per tree. Trees must be sprayed to the point the bark is saturated on all sides to a height of 45 feet. This takes proper equipment, a good applicator, and the correct insecticide. Beware of individuals marketing products that can save infested trees, its simply not possible.
• Proper placement of verbenone pouches will reduce infestation rates in many pine stands. The NMI office in Helena distributed over 11,000 verbenone pouches to area landowners. Cost is about $18 per tree or $325 per acre.
• Proper utilization and marketing of wood products is especially important to minimize costs and increase potential returns resulting from sanitation/salvage harvests. Beware that markets are especially volatile at this time.
• Landowners with infested forests, who waited too long, missed potential opportunities to market higher value sawlogs. Much of this material must know be marketed as pulpwood as a result of blue stain and decreased log quality.
• Slash management is a key issue and must be thoroughly addressed in all harvest operations.
• Planning for post infestation activities such as reforestation, weed control and erosion control should occur as early as possible.
• Wildfire hazard mitigation work takes on added significance in beetle killed pine stands especially near home sites, driveways, and public roads.

In regards to western spruce budworm:

• Aerial application of Bt (bacillus thuringensis) had worked extremely well to control western spruce budworm damage. NMI coordinated spraying on over 4,000 acres of private forest land in Montana this year and has witnessed excellent results.
• Proper timing is critical to the success of aerial spraying programs.
• Maintaining an open forest stand structure helps to lessen the impacts of western spruce budworm.

The impacts of these infestations have impacted landowners in so many different ways. However, there is plenty of evidence that proper forest management can lessen damage associated with forest insect infestations. Professional foresters can assist in even the direst circumstances by designing environmentally sound treatments that are conducted in the most cost effective manner possible. Good planning and coordination is especially important during these difficult times.

Eastside Forest health Convention: Challenges and Solutions, Spokane, WA

The Northwest Environmental Forum strives to address regional environmental and natural resource issues. The School of Forest Resources is pivotal in helping regional policy makers reach decisions about sustaining natural resource productivity. Other University colleges and centers – Ocean and Fisheries Sciences, Arts and Sciences, Public Policy, Architecture and Urban Planning, Engineering, Information Sciences, Atmosphere and Oceans, Law, Business and Marine Affairs – are integral to the Forum goal.

(This Part I Summary highlights the “Imperatives for Action” as discussed by the Forum Keynote Speakers. Our next issue will highlight “Findings” from the Forum.)

Forest structure and composition have changed significantly in dry forests of eastern Washington. High densities of dead and moisture-stressed trees increase potentials for the spread and intensity of fire, disease, and insect outbreaks, leading to massive environmental degradation, higher costs of management and greater atmospheric pollution.

An invited group of 60 federal, state, tribal and private forestland managers, in conjunction with government and conservation representatives addressed an actionable strategy to restore and maintain the ecosystem services of the eastside dry forests. Resilient eastside forests protect the basic ecosystem services – wood and fiber, water and medicinal resources; environmental services – carbon sequestration, biodiversity, wildlife habitat, erosion control and pollination; and cultural services – community stability, recreation, tourism, educational and spiritual.

Imperatives for Action—A summary of comments by the Forum Keynote Speakers

Mary Wagner, Regional Forester, US Forest Service Region 6

The Imperative is the Land, the People and the Promise. Secretary of Agriculture Vilsack’s new broad vision for American Forests has at its heart an “all lands” approach. All USDA agencies are working together to sustain the entire matrix of federal, tribal state, municipal and private forests. The Forest Service is committed to restoring the resilience of our forests and improve watershed health, sustained water flow quality and quantity, shelter for wildlife, richness of biodiversity, rural prosperity, and our ability to meet a shared vision of healthy, resilient forests.

This Forum is a place to strengthen relationships; expand knowledge, imagine what is next, and grow the capacity to address these challenges.

Peter Goldmark, Washington State Commissioner of Public Lands

Imperative #1-Changed Forest Conditions
The worsening forest health pandemic in the eastern Washington landscape is like a slow moving forest fire. It’s destructive, difficult to tackle, incremental change is hard to see and it’s difficult to drive home the enormity of the issue. How to convince others of the enormity? We must respond. The forest health problem knows no boundaries and it is getting worse.

Imperative #2-Take the Next Step
Build on 2007 Legislature’s bill SB 6141 “Forest Health Law.” Coordinate action across landscapes by many landowners. We need to figure out new ways for cooperation.
Imperative #3-Possible Outcomes and Solutions

• Support implementation and funding for strategies in place.
• Colville, WA area-build on collaborative success. Retain infrastructure.
• Lack of infrastructure for restoration; cost of restoration has to be borne by products extracted.

Steps by WA DNR: DNR bio-mass initiative, with 30 applications for partnerships; DNR supports restoration and bio-mass for renewable fuels. Materials will come from forests at risk as well as from normal logging activities.

Billy Frank, Jr., Chairman, Northwest Indian Fisheries Commission

Some people (organizations) are against harvesting. Tribes want foresters to harvest. We need a strong industry. We want you to stay. Tribes are committed to forest health. Tribal infrastructure is in place and needs to be utilized.

(Complete presentations and dialogues of the Northwest Environmental Forum, School of Forest Resources, University of Washington, College of the Environment can be viewed at www.nwenvironmentallforum.org.)