Sale and Disposal of National Forest Timber; Indices To Determine Market-Related Contract Term Additions

DEPARTMENT OF AGRICULTURE

Forest Service

36 CFR Part 223

RIN 0596-AB41

Sale and Disposal of National Forest Timber; Indices To Determine

Market-Related Contract Term Additions

AGENCY: Forest Service, USDA.

ACTION: Proposed rule; request for comments.

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SUMMARY: The Forest Service proposes to amend current regulations to

require the use of Industry Series Producer Price Indices from the

Bureau of Labor Statistics, rather than the currently required indices

in the Commodity Series. Use of a different Producer Price Index series

requires a change in procedures for determining when market-related

contract term additions are needed. In addition to changing the index

series, the proposed rule makes technical changes including: Applying

the indices on a sale-by-sale basis, based on species and product,

rather than a National Forest basis; precluding market-related contract

term additions on contracts for sales with a primary objective of

harvesting damaged, dead, or dying timber and contracts with provisions

for stumpage rate adjustment; and minor changes to clarify or simplify

procedures for applying the indices. The intended effect is to grant

timber sale contract term additions based on more representative market

criteria.

DATES: Comments must be received in writing by November 20, 1996.

ADDRESSES: Send written comments to Director, Timber Management Staff

(2400), Forest Service, USDA, P.O. Box 96090, Washington, DC 20090-

6090.

The public may inspect comments received on this proposed rule in

the office of the Director, Timber Management Staff, Forest Service,

USDA, Wing 3NW, Auditor's Building, 201 14th Street, S.W., Washington,

DC 20250, between the hours of 8:30 a.m. and 4:30 p.m. Those wishing to

inspect comments are encouraged to call ahead (202-205-0893) to

facilitate entry into the building.

FOR FURTHER INFORMATION CONTACT: Rex Baumback, Timber Management Staff,

Forest Service, USDA, P.O. Box 96090, Washington, DC 20090-6090, (202)

205-0855.

SUPPLEMENTARY INFORMATION: .

Background

On December 7, 1990, the Forest Service published a final rule (55

FR

[[Page 54590]]

50643) to establish procedures at 36 CFR Sec. 223.52 for extending

contract termination dates to prevent contract default or severe

financial loss to the purchaser in response to adverse conditions in

the timber markets. Experience has indicated that the market declines

that would cause a market-related contract term addition generally

coincide with substantial economic dislocation in the wood products

industry. Such economic distress broadly affects community stability,

the ability of the wood products industry to supply construction lumber

and other wood products from domestic sources, and threatens the

existence of wood manufacturing plants needed to meet future demands

for wood products. Accordingly, the 1990 rule provides that if there is

a drastic decline in wood product prices sufficient to trigger the

market-related contract term addition, there would be a corollary

substantial overriding public interest to extend the term of existing

timber sale contracts, as required by the National Forest Management

Act of 1976 (16 U.S.C. 472a(c)) and existing regulations at 36 CFR

223.115(b).

The 1990 rule requires the use of various wood product Producer

Price Indices, prepared by the Department of Labor, Bureau of Labor

Statistics, to determine whether a drastic reduction in wood product

prices has occurred. Since adoption of the rule, a drastic reduction

occurred for Douglas-fir, Dressed Index, during the first quarter of

1991 and, most recently, in the second quarter of 1995. As a result,

the Forest Service notified purchasers and, upon the purchasers'

written request, added an additional year to timber sale contract terms

for qualifying contracts.

Appearing before the House Appropriations Subcommittee on Interior

and Related Agencies, on April 28, 1992 (Testimony Report number, T-

RCED-92-58), the General Accounting Office (GAO) testified that the

Forest Service's timber sale contract extension rule was inconsistent

with the way other governmental agencies have addressed the impact of

declining markets on timber purchasers. GAO also testified that, in

implementing the regulation in 1991, the Forest Service used a formula

with inappropriate data to reach a determination that prices for wood

products from the Pacific Northwest had drastically declined.

Specifically, GAO testified that the Forest Service used a formula

developed with data that were not adjusted to account for seasonal

fluctuations. GAO noted that if the Forest Service had used the Bureau

of Labor Statistics' seasonally adjusted data, the formula would not

have indicated a drastic price reduction and would not have triggered

contract extensions on the west side of the Pacific Northwest.

GAO further testified that the Bureau of Labor Statistics advises

use of seasonally adjusted data which are designed to eliminate the

effects of normal market fluctuations that occur at about the same

time, and in about the same magnitude, each year, such as price

movements resulting from normal weather patterns and regular production

and marketing cycles. GAO recommended that the Secretary of Agriculture

direct the Chief of the Forest Service to: (1) stop using the Bureau of

Labor Statistics' unadjusted indices in reaching determinations that

wood product prices have drastically declined, and (2) make eligible

only those contracts that do not already reflect falling prices.

The Secretary of Agriculture agreed to re-examine the use of the

Bureau of Labor Statistics' unadjusted Producer Price Indices to

determine whether wood product prices showed a drastic decline and

whether to make eligible only those contracts that do not already

reflect falling prices. Subsequently, the Forest Service concurred that

seasonally adjusted Producer Price Indices, adjusted to a constant

dollar base, could be used to determine whether a drastic reduction in

wood product prices has occurred and, therefore, whether a market-

related contract term addition should be granted. However, in December

1994, the Bureau of Labor Statistics stopped applying seasonal

adjustments to the related Producer Price Indices, since they found

insufficient statistical evidence to demonstrate a need to continue

adjusting these indices.

The Producer Price Indices currently used by the Forest Service are

from the Commodity Series prepared by the Bureau of Labor Statistics.

However, the Bureau of Labor Statistics has determined that the

Industry Series, rather than the Commodity Series, should be used as

the principal series to measure market changes. The Industry Series

includes indices for Western Softwood, Eastern Softwood, and Hardwood

Lumber and is more representative of the sawmill industry than the

indices used with the Commodity Series. The Industry Series is more

representative because the Industry Series softwood lumber indices

include rough lumber and the Hardwood Lumber Index excludes the

secondary industries of dimension stock and flooring.

In order to utilize or maximize use of all resources with the least

impact on the environment, many sales consist primarily of chipable

material. Current market-related contract term addition procedures do

not use an index to reflect market changes in chipable material;

however, to fill this need, the Forest Service proposes to apply the

Industry Series Wood Chip Index to measure market changes for the price

of chips and to address the volatility of the wood chip market.

A review of other readily available indices representing the same

wood product markets shows that indices comparable to the Producer

Price Indices do not exist. Some regional indices are available;

however, the timing, frequency, and procedure for collection of

information for these indices varies. Some index services or

associations use previous month invoice prices that are provided by

their members, while other services use current month negotiated bid

prices or sale prices. Reliable indices, prepared nationally and

applied consistently, are not available. Therefore, the Forest Service

proposes to codify the use of the following Bureau of Labor Statistics

(BLS) indices from the Industry Series:

------------------------------------------------------------------------

Industry

BLS producer price index code

------------------------------------------------------------------------

Hardwood Lumber.............................................. 2421 #1

Eastern Softwood Lumber...................................... 2421 #3

Western Softwood Lumber...................................... 2421 #4

Wood Chips................................................... 2421 #5

------------------------------------------------------------------------

Each Producer Price Index is adjusted to a constant dollar base by

dividing it by the Producer Price Index for All Commodities, Commodity

Code 00000000. The Forest Service currently monitors the various

indices and determines that a drastic reduction in wood product prices

has occurred when, for 2 or more consecutive quarters after the

contract award, the applicable adjusted price index is less than 80

percent of the average of such adjusted index for the 4 highest of the

8 calendar quarters immediately prior to the qualifying quarter.

Because the Industry Series indices are less species specific, they are

less volatile. Therefore, in order to continue to identify severe

market declines, it is necessary to change the triggering percentage to

85 percent when Industry Series indices are used. The indices and the

adjustment procedures are set forth in proposed paragraphs (b) (1) and

(2).

Other Provisions of the Proposed Rule

Paragraph (a) of Sec. 223.52 is proposed to be revised to clarify

the conditions and provisions for adding contract time

[[Page 54591]]

to timber sale contracts. Proposed paragraph (a)(1) makes minor non-

substantive changes to current paragraph (a) to clarify the conditions

for granting a timber sale contract extension.

Currently, Regional Foresters, for those Regions with more than one

Producer Price Index, determine the index to be used on each National

Forest in that Region. The Forest Service recognizes that applying the

Bureau of Labor Statistics' indices on a National Forest basis may not

reflect actual sale characteristics. Therefore, in proposed paragraph

(a)(2), the Forest Service proposes that Forest Supervisors shall

determine the index to be used for each sale. The selected index would

then reflect the predominant species and product, by volume, included

in the sale area and would be more representative of the species and

products actually in the sale area than applying the indices on a

National Forest level.

Periodically, catastrophic events severely damage timber. The

damaged timber must be harvested within a relatively short time period

to avoid substantial losses in both quantity and quality of timber due

to deterioration. The critical time period available for harvesting

damaged timber and avoiding substantial deterioration varies with the

season of the year, the species of timber, the damaging agent, and the

location of the damaged timber. In most cases, significant

deterioration can be avoided if the damaged timber is harvested within

1 year of the catastrophic event. Accordingly, the proposed rule

provides that when the primary objective of a timber sale contract is

to harvest damaged, dead, or dying timber, a market-related contract

term addition provision will not be included in the contract because

such a provision could delay harvest. Therefore, in proposed paragraph

(a)(3)(i), the Forest Service proposes not to allow market-related

contract term addition on sales that have a primary objective of

harvesting damaged, dead, or dying timber.

In the past, contract lengths were relatively long (4 or more

years). Most current timber sale contracts have a duration of 3 years

or less, and many of the current contracts allow for stumpage rate

adjustment, which provides a stumpage price adjustment for the timber

sale purchaser as the timber markets change. Under current regulations,

the market-related contract term addition provision offers a second and

unnecessary method of addressing adverse market conditions, when

adequate adjustment may already be provided in many contracts through

stumpage rate adjustment. Therefore, in proposed paragraph (a)(3)(ii),

the Forest Service proposes not to allow market-related contract term

addition on sales with stumpage rate adjustment provisions.

To codify the indices available for use in market-related contract

term additions, proposed paragraph (b)(1)(i) of Sec. 223.52 lists the

indices available for use in market-related contract term additions.

The proposed indices use Bureau of Labor Statistics' Industry Series

indices, since the Industry Series is now the principal series

supported by Bureau of Labor Statistics. Species specific indices are

not available from the Industry Series. The Eastern Softwood Lumber and

Western Softwood Lumber Indices reflect the similarity of the markets

in each geographic region. These indices also include rough lumber

which was not included in the indices used previously from the

Commodity Series. The Hardwood Lumber Index now excludes the secondary

industries of dimension stock and flooring. The Wood Chip Index is

added to provide a better measure of market changes for sales that

include primarily chipable material.

The Bureau of Labor Statistics issues preliminary indices and, when

data is finalized, issues final indices. The final indices may indicate

a qualifying quarter when the preliminary data does not indicate a

qualifying quarter or vice versa. The Forest Service wishes to use the

most current data, but does not want to redetermine whether past

quarters are qualifying quarters. Redetermining whether past quarters

are qualifying quarters would sometimes indicate that market-related

contract term additions had been granted when they were not justified

or that they had not been granted when they were justified. Therefore,

in proposed paragraph (b)(1)(ii), the agency proposes to use the most

current data, but not to revise the determination of qualifying

quarters when final Producer Price Index data is available.

The current regulations designate the Regional Forester as the

official who determines when a drastic reduction in wood product prices

has occurred. In practice, the Chief makes this determination;

therefore, proposed paragraph (b)(2) names the Chief as the determining

official.

Paragraph (b)(2) also would be revised to provide that a drastic

reduction in wood product prices occurs when, for 2 or more consecutive

quarters, the applicable adjusted price index is less than 85 percent

of the average of such adjusted index for the 4 highest of the 8

calendar quarters immediately prior to the qualifying quarter. The

percentage was changed from 80 percent because the indices used from

the Industry Series are less species specific and, therefore, less

volatile. A higher percentage better identifies drastic reductions in

wood product prices.

The Forest Service proposes revising paragraph (b)(2) to clarify

that the 8 calendar quarters to be used for calculating market-related

contract term additions are the 8 quarters immediately prior to each

qualifying quarter. This is the method used in the examples of the

operation of the market-related contract term addition published as the

proposed rule on November 6, 1987 (52 FR 43020), and is the process

that has been used since 1990 for calculating the market-related

contract term additions.

Paragraph (c) of Sec. 223.52 would be revised to remove the

reference to the Regional Forester to conform to the change in

paragraph (b)(2) specifying that the Chief of the Forest Service makes

the determination and to make clear that contracts eligible for term

addition are those which have been awarded but are not yet terminated.

The current regulation requires that periodic payment dates be

recalculated based on the revised contract termination date. Current

contract procedures, however, require that the periodic payment dates

be delayed by an amount of time equal to the additional contract time.

The contract procedure delays periodic payments for more time than the

procedure in the current rule allows. Therefore, the Forest Service

proposes to revise paragraph (d) of Sec. 223.52 to provide a delay in

periodic payment dates equal to the amount of additional contract time.

This proposed change will not only make the regulation consistent with

current contract procedures, but will also better provide the

assistance that is needed during market declines.

Regulatory Impact

This proposed rule has been reviewed under USDA procedures and

Executive Order 12866 on Regulatory Planning and Review. It has been

determined that this is not a significant rule. This rule will not have

an annual effect of $100 million or more on the economy nor adversely

affect productivity, competition, jobs, the environment, public health

or safety, nor State or local governments. This rule will not interfere

with an action taken or planned by another agency nor raise new legal

or policy issues. In short, little or no effect on the national economy

will result from this proposed rule change. This action consists of

administrative changes to regulations affecting timber

[[Page 54592]]

sale contract length. The Producer Price Indices selected and revised

procedures better reflect the cyclic nature of lumber markets and help

the agency determine whether a drastic downturn has actually occurred

in these particular markets. Finally, this action will not alter the

budgetary impact of entitlements, grants, user fees, or loan programs

or the rights and obligations of recipients of such programs.

Accordingly, this proposed rule is not subject to OMB review under

Executive Order 12866.

Moreover, this proposed rule has been considered in light of the

Regulatory Flexibility Act (5 U.S.C. 610 et seq.), and it is hereby

certified that this action will not have a significant economic impact

on a substantial number of small entities as defined by that Act.

Failure to adopt these improved procedures for measuring drastic

decline in wood product prices will subject both small purchasers and

large purchasers to increased risk of default in those situations where

current indices are not as valid as indicators of price decline as

those being proposed in this rule. Modifications to timber sale

contracts have the intended effect of allowing purchasers of timber

sales to complete timber sales when adverse conditions have occurred in

the timber market and when no other means of adjustment, such as

stumpage rate adjustment, are available.

Unfunded Mandates Reform

Pursuant to Title II of the Unfunded Mandates Reform Act of 1995,

which the President signed into law on March 22, 1995, the Department

has assessed the effects of this rule on State, local, and tribal

governments and the private sector. This rule does not compel the

expenditure of $100 million or more by any State, local, or tribal

governments or anyone in the private sector. Therefore, a statement

under section 202 of the Act is not required.

Environmental Impact

This proposed rule deals with business practices related to timber

sale contracts and, as such, has no direct effect on the amount,

location, or manner of timber offered for purchase. Section 31.1b of

Forest Service Handbook 1909.15 (57 FR 43180; September 18, 1992)

excludes from documentation in an environmental assessment or impact

statement ``rules, regulations, or policies to establish Service-wide

administrative procedures, program processes, or instructions.'' The

agency's preliminary assessment is that this rule falls within this

category of actions and that no extraordinary circumstances exist which

would require preparation of an environmental assessment or

environmental impact statement. A final determination will be made upon

adoption of the final rule.

Controlling Paperwork Burdens on the Public

This proposed rule does not contain any recordkeeping or reporting

requirements or other information collection requirements as defined in

5 CFR 1320 and, therefore, imposes no paperwork burden on the public.

Accordingly, the review provisions of the Paperwork Reduction Act of

1995 (44 U.S.C. 3501, et seq.) and implementing regulations at 5 CFR

part 1320 do not apply.

Comments Invited

The Forest Service invites comments on this proposal to use

Producer Price Indices from the Industry Series and to change the

operational procedures that apply to market-related contract term

additions on timber sales. Comments received will be considered in the

development of the final rule, which will be published in the Federal

Register.

List of Subjects in 36 CFR Part 223

Administrative practice and procedure, Exports, Forests and forest

products, Government contracts, National forests, Reporting and

recordkeeping requirements.

Therefore, for the reasons set forth in the preamble, it is

proposed to amend Part 223 of Title 36 of the Code of Federal

Regulations as follows:

PART 223--SALE AND DISPOSAL OF NATIONAL FOREST SYSTEM TIMBER

1. The authority citation for Part 223 continues to read as

follows:

Authority: 90 Stat. 92958, 16 U.S.C. 472a; 98 Stat. 2213, 16

U.S.C. 618; unless otherwise noted.

2. Revise Sec. 223.52 to read as follows:

Sec. 223.52 Market-related contract term additions.

(a) Contract provision. (1) Except as provided in paragraph (a)(3)

of this section, each timber sale contract containing periodic payment

requirements shall contain a provision allowing for the addition of

time to the contract term, under the following conditions:

(i) The Chief of the Forest Service has determined that adverse

wood products market conditions have resulted in a drastic reduction in

wood product prices applicable to the sale; and

(ii) The purchaser makes a written request for additional time to

perform the contract.

(2) The contract term addition provision must also specify the

index to be applied to each sale. The Forest Supervisor shall determine

the index to be used for each sale based on the species or product

characteristics, by volume, being harvested on the sale. Only one index

may apply to a given sale. The Forest Supervisor may select only from

the indices listed in paragraph (b) of this section.

(3) A market-related contract term addition provision shall not be

included in contracts if either of the following circumstances exist:

(i) The sale has a primary objective of harvesting damaged, dead,

or dying timber; or

(ii) The contract has a provision for stumpage rate adjustment.

(b) Determination of drastic wood product price reductions. (1) The

Forest Service shall monitor and use Producer Price Indices for wood

products, as prepared by the Department of Labor, Bureau of Labor

Statistics (BLS), adjusted to a constant dollar base, to determine if

market related contract term additions are warranted.

(i) The Forest Service shall monitor and use only the following

indices:

------------------------------------------------------------------------

Industry

BLS producer price index code

------------------------------------------------------------------------

Hardwood Lumber.............................................. 2421#1

Eastern Softwood Lumber...................................... 2421#3

Western Softwood Lumber...................................... 2421#4

Wood Chips................................................... 2421#5

------------------------------------------------------------------------

(ii) When final indices are not available, preliminary indices

shall be used; however, in such event, determination of a qualifying

quarter will not be revised when final indices become available.

(2) The Chief of the Forest Service shall determine that a drastic

reduction in wood product prices has occurred when, for 2 or more

consecutive quarters, the applicable adjusted price index is less than

85 percent of the average of such adjusted index for the 4 highest of

the 8 calendar quarters immediately prior to the qualifying quarter. A

qualifying quarter is a quarter where the applicable adjusted index is

more than 15 percent below the average of such index for the 4 highest

of the previous 8 calendar quarters. Qualifying quarter determinations

will be made using the Producer Price Indices for the months of March,

June, September, and December.

(3) A determination, made pursuant to paragraph (b)(2) of this

section, that a drastic reduction in wood product prices has occurred

shall constitute a finding that the substantial overriding

[[Page 54593]]

public interest justifies the contract term addition.

(c) Granting market-related contract term additions. When the Chief

of the Forest Service determines, pursuant to this section, that a

drastic reduction in wood product prices has occurred, the Forest

Service is to notify affected timber sale purchasers. For any contract

which has been awarded and has not been terminated, the Forest Service,

upon a purchaser's written request, will add 1 year to the contract's

term, except as provided in paragraphs (c) (1) through (3) of this

section. This 1-year addition includes time outside of the normal

operating season.

(1) For each additional consecutive quarter, in which a contract

qualifies for a market-related contract term addition, the Forest

Service will, upon the purchaser's written request, add an additional 3

months during the normal operating season to the contract.

(2) No more than twice the original contract length or 3 years,

whichever is less, shall be added to a contract's term by market-

related contract term addition.

(3) In no event shall a revised contract term exceed 10 years as a

result of market-related contract term additions.

(d) Recalculation of periodic payments. Where a contract is

lengthened as a result of market conditions, any subsequent periodic

payment dates shall be delayed 1 month for each month added to the

contract's term.

Dated: October 8, 1996.

J. Kenneth Myers,

Acting Chief.

[FR Doc. 96-26755 Filed 10-18-96; 8:45 am]

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