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: Final rule.

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SUMMARY: This final rule amends current regulations providing for

Market-Related Contract Term Additions, by requiring the use of

Industry Series Producer Price Indices from the Bureau of Labor

Statistics, rather than the previously required indices in the

Commodity Series. Use of a different Producer Price Index series

requires a concomitant change in procedures for determining when

market-related contract term additions

[[Page 24111]]

are needed. In addition to changing the index series, the final rule

makes a number of technical changes. The intended affect is to grant

timber sale contract term additions based on market criteria that are

more representative than those currently used.

DATES: This rule is effective June 1, 1998.

FOR FURTHER INFORMATION CONTACT:

Rex Baumback, Timber Management Staff, MAIL STOP 1105, Forest Service,

USDA, P.O. Box 96090, Washington, DC 20090-1105, (202) 205-0855.

SUPPLEMENTARY INFORMATION:

Background

Experience indicates that the lumber market declines that would

justify a market-related timber sale 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, on December 7, 1990, the Department

published a final rule (55 FR 50643) to establish procedures at 36 CFR

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 lumber markets. The rule, which has remained

in effect until now, provides that if there is a drastic decline in

wood product prices a market-related contract term addition would be

triggered.

The rule also requires the use of various wood product Producer

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

Statistics (BLS), 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.

In order to address timber sale purchaser concerns and technical

issues related to implementation of this regulation, the Forest Service

proposed a revision to this rule and requested public comment on

October 21, 1996 (61 FR 54589). The deadline for receiving comments was

January 21, 1997.

Response to Comments Received

Nineteen respondents provided responses to the proposed rule.

Comments were received from 14 timber sale purchasers, four timber

industry associations, and one consulting forester. A summary of the

comments and the Department's response to them follow.

General Comments

Comment. One respondent requested that efforts to implement changes

to Market-Related Contract Term Additions (MRCTA) be delayed until a

formal revision of the timber sale contract could be completed.

Response. The Department realizes that it would be desirable to

consider all possible contract changes at one time. However, while a

comprehensive revision of the timber sale contract is being considered,

the timeframe for the completion of this revision is undetermined.

Furthermore, there will always be a need for periodic revisions of

portions of the timber sale contract to meet new situations. The

revision of MRCTA procedures will allow the timber sale contract to be

more responsive to changing economic conditions; therefore, the

Department sees no benefit to delaying amendment of the MRCTA

regulations.

Comment. One respondent expressed a need for a procedure to address

a slow lumber market decline, as well as a rapid lumber market decline.

Response. Major softwood lumber market declines during the past 50

years have occurred within a period of 30 months or less. Both the

current MRCTA procedures and this final rule evaluate the significance

of market changes over a period of 27 months. Data indicate that nearly

50 percent of the total volume sold is contained in contracts shorter

than 3 years in length and nearly 80 percent of all timber sale

contracts are shorter than 3 years in length. Average contract length

has been declining steadily in recent years. A lumber market decline

over a period of more than 30 months is unlikely, based on historic

trends, and most contracts would not be adversely affected if such a

lumber market decline were to occur. Thus, the Department does not

agree that there is a need to establish a new procedure to address the

unlikely possibility of a slow lumber market decline.

Availability of MRCTA

Section 223.52(a) of the proposed rule provided that contracts that

contain periodic payment requirements will contain a MRCTA provision.

Comment. Thirteen respondents stated that since lumber markets are

so volatile, MRCTA should be available for all timber sales over 1 year

in length or for any sale that is extended beyond 1 year in length for

reasons beyond the control of the purchaser.

Response. It appears that some of these respondents misinterpreted

the proposed rule by concluding that MRCTA would apply only to

contracts over 2 years in length. Both the current procedure and the

proposed rule provide for MRCTA for any contract that contains periodic

payment provisions. Periodic payment provisions are included in

contracts that are longer than one full normal operating season. Under

current procedures, when contracts are awarded during the normal

operating season, the length of the contract could exceed 1 year and

not include MRCTA provisions. The Department agrees to change

procedures and include MRCTA procedures in timber sale contracts that

exceed 1 year in length, regardless of whether or not the contract

contains periodic payment provisions, except as provided in

Sec. 223.52(a)(3), harvesting rapidly deteriorating timber.

However, the Department does not agree with the request to modify

timber sale contracts to include MRCTA if those contracts are extended

beyond 1 year in length for reasons beyond the control of the

purchaser. Since contracts currently contain provisions for

compensating purchasers if their contracts are suspended, providing for

MRCTA for the few contracts that may be extended beyond 1 year is an

additional unnecessary compensation.

Selection of Index

Section 223.52(a)(2) of the proposed rule provided that the Forest

Supervisor would select the price index for contracts. This paragraph

in the proposed rule also provides that only one price index may be

used in contracts.

Comment. Fourteen respondents remarked that purchasers should be

allowed to choose the price index when the contract is awarded, based

on their assessment of the lumber market and their intended use of the

wood from that sale. Some of these respondents said they were concerned

about the burden of the Forest Supervisor in choosing an index.

Eight respondents said that if purchasers choose the index, the

contract could be modified later to change the index if the sale was

[[Page 24112]]

extended beyond 4 years or was transferred to another party.

Response. The index is based on the species and products being

sold. It is not a burden on the Forest Supervisor to choose the index,

nor are there valid reasons to change the index after the sale is bid.

Therefore, the Department declines to change this section of the

regulation, based on this comment.

Comment. Seventeen respondents proposed using the Wood Chip Index

with all qualifying sales, since all sales have a significant chip

component and many sales have a mixture of sawtimber and chipable

material. Therefore, contract relief would be granted if either the

lumber or the wood chip index showed a drastic decline in market price.

Response. The Department thinks that the volume of chip by-products

produced with a sawlog timber sale is not enough to justify the MRCTA

extension, based solely on a drastic decline in the Wood Chip Index.

Further, it is the Department's view that inclusion of more than one

index in a given timber sale would not meet the ``substantial

overriding public interest'' standard required by the National Forest

Management Act (16 U.S.C. 472a(c)). Substantial overriding public

interest has been determined to exist when the criteria in the

regulation have been met. When the criteria in the regulation have been

met, there is a disruption of the economy that may result in loss of

industry and jobs. If more than one index is used for granting

extensions on timber sale contracts, it is unlikely that this criteria

for substantial overriding public interest would be met.

Harvesting Objective

Section 223.52(a)(3)(i) of the proposed rule provided that MRCTA

will not be used in timber sales with a primary objective of harvesting

damaged, dead, or dying timber.

Comment. Nine respondents said that only those sales with

accelerated harvest provisions should be exempt from MRCTA and, once

the accelerated harvest is completed, the contract should be modified

to include MRCTA. These respondents pointed out that many sales

containing damaged, dead, or dying timber or salvage are not in need of

urgent harvest because the material is not deteriorating rapidly.

Response. The Department agrees that some sales containing damaged,

dead, or dying timber or salvage are not in need of urgent harvest

because the material is not deteriorating rapidly. Therefore, this

paragraph has been modified in the final rule to preclude use of MRCTA

only when the sale is subject to rapid deterioration. Furthermore, an

additional paragraph has been added to state that completion dates

specified in such contracts will not be extended, based on MRCTA.

Completion dates specified in timber sale contracts usually provide for

shorter time periods for the rapid harvest of deteriorating timber or

specific timeframes when road construction is required.

Stumpage Rate Adjustment

Section 223.52(a)(3)(ii) of the proposed rule provided that

contracts that contain stumpage rate adjustment provisions will not

include MRCTA provisions.

Comment. Seventeen respondents indicated that MRCTA and stumpage

rate adjustment provisions fulfill separate and distinct functions in

the timber sale contract and that both are needed.

Response. Market-related contract term addition provides additional

time during a significant lumber market decline for purchasers to

perform contracts and to avoid a situation requiring administrative

intervention. Thus, the MRCTA procedure allows time for the market to

improve and provides an opportunity to harvest a mixture of high and

low priced sales. Conversely, the stumpage rate adjustment provisions

allow the Government and purchaser to share the risk and reward of

market fluctuations, protecting the agency's ability to provide an even

flow of products in both good and bad markets. The stumpage rate

adjustment procedure provides assistance by allowing a reduced price

during lumber market declines. Stumpage rate adjustment and market-

related contract term addition respond to different problems associated

with lumber market declines and both procedures serve useful functions.

Therefore, this paragraph is eliminated from the regulation.

Price Indices

Section 223.52(b)(1)(i) of the proposed rule provided that Bureau

of Labor Statistics Producer Price Indices for Hardwood Lumber, Eastern

Softwood Lumber, Western Softwood Lumber, and Wood Chips be used in

MRCTA provisions.

Comment. Eight respondents expressed a need for a separate index

for western hardwood sales.

Response. There is no index available that represents only western

hardwood lumber, since the amount of hardwood lumber produced in the

West is too small to provide a meaningful index. The amount of hardwood

harvested from Forest Service land in the West is also very small. In

addition, the available Hardwood Index is representative of most

hardwood markets, including those in the West; therefore, no change is

being made from the list of indices from what was proposed.

Comment. Eight respondents stated that the Wood Chip Index is based

primarily on data on eastern markets (60 percent). They desired more

data on western wood chip markets in this index in order to reflect

market conditions as closely as possible.

Response. Data available for the producer price wood chip index is

limited. Using the two lower level indices for short tons (eastern wood

chips) and standard units (western wood chips) would weaken the

reliability of both indices. Analysis has indicated little difference

between the two indices in their ability to identify a severe chip

market decline; therefore, the Department will continue using only one

national Wood Chip Index in MRCTA.

Use of Preliminary Indices

Section 223.52(b)(1)(ii) of the proposed rule provided that

preliminary index values will be revised when final index values are

available, but that the identification of qualifying quarters will not

be changed, based on the final index values.

Comment. Eight respondents indicated that to simplify recordkeeping

and reduce the chance of error, the Forest Service should utilize

preliminary indices and not revise indices when final data becomes

available.

Response. The Department believes that the best available data

should be used for determining qualifying quarters for MRCTA and that

the chance of an undetected clerical error is slight. Therefore,

preliminary indices must be updated as final data becomes available.

However, as stated in Sec. 223.52(b)(1)(ii) of the final rule, the

determination of qualifying quarters, although based partially on

preliminary data, will not be revised when final data becomes

available.

Significant Market Decline

Section 223.52(b)(2) of the proposed rule provided that a

significant market decline has occurred when, for 2 or more consecutive

quarters, the index is 15 percent below the average index for the four

highest of the previous 8 quarters. On average, this criteria indicates

an approximate 25 percent decline in price over a 2-year period.

[[Page 24113]]

Comment. Five respondents stated that the preamble of the proposed

rule makes an arbitrary, subjective, and unsupported claim that a

significant lumber market decline is defined as a 25 percent decline

over a 2-year period. These respondents proposed that the procedures be

adjusted to ensure that a market similar to the 1991 lumber market

decline trigger an MRCTA for all indices.

Response. Between June 1989 and December 1990, the inflation

adjusted Softwood Lumber Index declined 16 percent, while the Douglas

Fir Dressed lumber index declined 25 percent. Indices, based on a

single species, are more volatile. One of the objectives of this MRCTA

regulation is to base the drastic wood price determination on indices

that are broader-based than a single species. The Department is

satisfied with how indices are triggered using the new procedures and

no change from the proposed MRCTA triggering procedures is being made.

Normal Operating Season

Section 223.52(c)(1) of the proposed rule provided that, after the

first year of contract time is granted, additional time will be added

during the ``normal operating season.''

Comment. Sixteen respondents stated that the term ``normal

operating season'' should be redefined for this regulation, so that it

includes only time periods which actually allow operations to occur. If

the definition of normal operating season is not changed, these

respondents suggested that additional time could be added day-for-day

to the contract during periods when there are no restrictions on

logging.

Response. The purpose of a normal operating season is to identify a

period of time where additional contract operating time can be granted

when the timber sale purchaser is delayed by weather or other reasons.

The normal operating season should identify periods of time when the

weather is likely to allow logging and operations are not restricted

for other reasons. The Department does not believe that a different

definition of normal operating season or new criteria for additional

contract time is needed for the purposes of this rule.

Conclusion

The MRCTA rule provides additional contract time on timber sale

contracts when severe market declines occur. This final rule revises

the current rule to use indices that are more representative of the

lumber market and to make technical improvements to procedures.

Regulatory Impact

This final 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 final rule. This action consists of

administrative changes to regulations affecting timber sale contract

length. The Producer Price Indices selected and revised procedures

better reflect the cyclical 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 final rule is not subject to OMB review under

Executive Order 12866.

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

Regulatory Flexibility Act (5 U.S.C. 601 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 in this final 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 lumber market

and when no other means of granting additional contract time are

available.

Unfunded Mandates Reform

Pursuant to Title II of the Unfunded Mandates Reform Act of 1995 (2

U.S.C. 1531-1538), 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 final 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 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.

No Takings Implications

This rule has been analyzed in accordance with the principles and

criteria contained in Executive Order 12630, and it has been determined

that the rule does not pose the risk of a taking of Constitutionally-

protected private property. There are no Constitutionally-protected

private property rights to be affected, since the contract provisions

that implement this rule will only be used in new contracts or with

contract modifications that are made at the request of the timber sale

purchaser.

Civil Justice Reform Act

This final rule has been reviewed under Executive Order 12988,

Civil Justice Reform. This final rule (1) preempts all State and local

laws and regulations that are in conflict or which would impede its

full implementation; (2) has no retroactive effect; and (3) does not

require administrative proceedings before parties may file suit in

court challenging its provisions.

Controlling Paperwork Burdens on the Public

This final 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.

List of Subjects in 36 CFR Part 223

Administrative practice and procedure, Exports, Forests and forest

[[Page 24114]]

products, Government contracts, National forests, Reporting

requirements, Timber sales.

Therefore, for the reasons set forth in the preamble, Part 223 of

Title 36 of the Code of Federal Regulations is amended, as follows:

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

1. The authority citation for part 223 continues to read:

Authority: 90 Stat. 2958, 16 U.S.C. 472a; 98 Stat. 2213, 16

U.S.C. 618, 104 Stat. 714-726, 16 U.S.C. 620-620j, 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 exceeding 1 year in length

shall contain a provision 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 of the contract must

specify the index to be applied to each sale. The Forest Supervisor

shall determine, and select from paragraph (b) of this section, the

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

characteristics, by volume, being harvested on the sale. The index

specified shall represent more than one-half of the advertised volume.

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

included in contracts where the sale has a primary objective of

harvesting timber subject to rapid deterioration.

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

Forest Service shall monitor and use Producer Price Indices, 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

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

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

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

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

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(ii) Preliminary index values will be revised when final index

values become available, however, determination of a qualifying quarter

will not be revised when final index values 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 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

terms, except as provided in paragraphs (c)(1) through (4) of this

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

operating season.

(1) Additional contract time may not be granted for those portions

of the contract which have a required completion date or for those

portions of the contract where the Forest Service determines that the

timber is in need of urgent removal or that timber deterioration or

resource damage will result from delay.

(2) 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.

(3) 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.

(4) 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: April 27, 1998.

Brian Eliot Burke,

Deputy Under Secretary, Natural Resources and Environment.

[FR Doc. 98-11626 Filed 4-30-98; 8:45 am]

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