D. Vertical Integration of the Hardwood Timber Industry

(1) The hardwood timber industry is a fragmented, vertically integrated industry.

An analysis of the industry begins with the landowner. There are three basic types of timberland owners: nonindustrial private, industrial, and government.

(2) Nonindustrial private landowners are primarily individuals who own both the

land and the timber. They normally sell their timber directly to a logger or a mill. In some cases, a consulting forester may be used to value and market the timber for a fee, usually determined by a percentage of the sale or an hourly rate. Industrial forests are owned primarily by companies operating in the timber industry for their own needs or to sell timber to others. Timber Investment Management Organizations (TIMO's) and Real Estate Investment Trusts (REIT's) have become popular forms of ownership for timberlands. Life insurance companies also have begun to purchase timberlands for investment purposes. Finally, state and federal timberlands may be held for public use and still permit some timber sales as a part of an overall timber management strategy.

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(3) Standing timber usually is purchased in one of three ways: outright purchase

of the land and timber, purchase at a specified rate per unit of timber actually cut (pay-as-cut), or purchase for a set total amount or lump sum. These methods and possible tax consequences are discussed in more detail in Section III

(4) For tax purposes, the term timber means wood in standing trees that is

available and suitable for exploitation and use by the forest industries. "Stumpage," a commonly used forestry term, has a similar meaning - the wood expected to be recovered from the forest when trees are harvested.

(5) There are three basic types of loggers: independent loggers, company

loggers, and contract loggers. Independent loggers buy timber, sometimes referred to as stumpage, cut the timber, and market the cut products to sawmills with or without a pre-arranged contract, price, and/or order. Company loggers are logging crews employed by sawmills. However, mills with their own loggers have become rare due to the high overhead of having employees. Contract loggers provide a service. They generally are paid a fee per 1,000 board feet for logs cut from the timber and delivered to the mill.

(6) The harvesting process can vary considerably depending on the site, the

logger and the needs of the timber buyer. In general, access to the logging area from a public road is needed. The buyer or logger may need to obtain a right-of-way easement from an adjacent landowner. In the area being harvested, landing areas, temporary or permanent haul roads, and temporary skid roads may be required. Timber harvesting begins when trees are cut down. This is known as felling. The felled trees are then de-limbed and moved to the landing in a process called skidding. Skidding ordinarily is accomplished by attaching a cable or chain to one end of the log and dragging it by means of a bulldozer or rubber-tired skidder to the landing area that is accessible to trucks. Substantial planning is necessary in logging due to various factors such as topography, size of timber, skidding distance, etc.

(7) At the landing area, the tree-length logs may be cut into shorter logs and may

be graded and sorted by species. This may also take place in the mill yard after delivery. At the point of grading and sorting, decisions will be made whether a log should be separated for export, resale to a veneer manufacturer, or other purchaser.

(8) From the landing, logs are transported by truck to the sawmill. Loading

equipment, such as an end loader or a cherry picker, is needed to load the logs on trucks. There are two basic types of truckers: company truckers and contract truckers. As with loggers, the use of company crews is rare. The trucker is often employed by the logging contractor or may be a different contractor hired by the mill.

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(9) Logging and trucking are negotiated on a site-by-site basis depending upon a

variety of factors, including the distance to the mill, the topography on the parcel being cut, the amount of timber to be cut, the time of year, etc.

(10) Many sawmills tend to specialize in the type of logs that they purchase for

processing (sawing, planning, and/or dry kilning) depending on their customers. Many mills will take orders from customers and cut what a customer has ordered.

(11) The lumber and logs or other products must then be transported from the

sawmill to the customers. There are two primary methods of transportation used: trucking and rail cars. In most cases, trucking is the less costly and the more often used means of transportation.