[Federal Register Volume 71, Number 218 (Monday, November 13, 2006)]
[Notices]
[Pages 66160-66162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19102]


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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: On November 2, 2006, the Deputy Under Secretary of Agriculture 
for Natural Resources and Environment determined there is substantial 
overriding public interest in extending certain National Forest System 
timber sale contracts for up to one year, subject to a maximum total 
contract length of 10 years. Pursuant to the November 2, 2006, finding, 
timber sale contracts awarded prior to January 1, 2006, are eligible 
for extension and deferral of periodic payment due dates for up to one 
year. Contracts that are in breach, have been or are currently eligible 
to be extended under market related contract term addition contract 
provisions, or salvage sale contracts that were sold with the objective 
of harvesting deteriorating timber are not eligible for extension 
pursuant to the November 2, 2006, finding. To receive an extension, 
purchasers must make a written request to the appropriate Contracting 
Officer. Purchasers also must agree to release the Forest Service from 
all claims and liability if a contract extended pursuant to the 
November 2, 2006, finding is suspended, modified or terminated in the 
future.
    The intended effect of the substantial overriding public interest 
finding and contract extensions is to minimize contract defaults, mill 
closures, and company bankruptcies. The Government benefits if 
defaulted timber sale contracts, mill closures, and bankruptcies can be 
avoided by granting extensions. Having numerous, economically viable, 
timber sale 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 Forest Service authorizing legislation. See 
Act of June 4, 1897 (Ch. 2, 30 Stat. 11 as amended, 16 U.S.C. 475) 
(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.

DATES: The determination was made on November 2, 2006, by the Deputy 
Under Secretary of Agriculture for Natural Resources and Environment.

FOR FURTHER INFORMATION CONTACT: Lathrop Smith, Forest Management 
Staff, (202) 205-0858 or Richard Fitzgerald, Forest Management Staff 
(202) 205-1753; 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 a.m. and 8 p.m., Eastern Standard Time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: The Forest Service sells timber and forest 
products from National Forest System lands to individuals or companies 
pursuant to the National Forest Management Act of 1976, 16 U.S.C. 472a 
(NFMA). Each sale is formalized by execution of a contract between the 
purchaser and the Forest Service. The contract sets forth the explicit 
terms and provisions 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, and environmental protection measures to be taken. The 
average contract period is approximately 2-3 years, although a few 
contracts have terms of 5 or more years.
    Rules at 36 CFR 223.52 (Market Related Contract Term Additions) 
permit contract extensions when the Chief of the Forest Service 
determines that adverse wood product market conditions have resulted in 
a drastic decline in wood product prices. Under market-related contract 
addition procedures, the Forest Service refers to the following three 
producer price indices maintained by the Bureau of Labor Statistics: 
Softwood Lumber 0811 and Hardwood Lumber 0812 in the 
Commodity Series, and Wood Chips PCU32113321135 in the 
Industry Series.
    The softwood and hardwood lumber indices indicate a major downturn 
in those markets began about September 2004 and was still on a downward 
trend as of September 2006 with the softwood lumber index decreasing by 
about 31% and the hardwood lumber index decreasing by about 14% during 
this time. While most purchasers holding contracts with those indices 
have received or are eligible to receive market related contract term 
additions, an anomoly in the wood products markets and indices used in 
contracts in the lake States area and some other parts of the country 
has left many purchasers without this remedy.
    Section 472a(c) of NFMA provides that the Secretary of Agriculture 
shall not extend any timber sale contract period with an original term 
of two years or more, unless the purchaser has diligently performed in 
accordance with an approved plan of operations or the ``substantial 
overriding public interest'' justifies the extension. The authority to 
make this determination has been delegated to the Deputy Under 
Secretary of Agriculture for Natural Resources and Environment at 7 CFR 
2.59.
    Accordingly, based on a current study, the Deputy Under Secretary 
has made a finding that there is a substantial overriding public 
interest in extending certain sales for up to one year. This 
determination does not apply to contracts that were previously extended 
or that are currently eligible to be extended under market related 
contract term addition provisions, to salvage sale contracts that were 
sold with the objective of harvesting deteriorating timber, or to 
timber sale contracts that are in breach. In addition to extending 
contracts pursuant to the Deputy Under Secretary's finding, periodic 
payments will be deferred for up to one year on the extended sales. To 
receive an extension and periodic payment deferral, purchasers must 
make a

[[Page 66161]]

written request to the appropriate Contracting Officer. Purchasers must 
also agree to release the Forest Service from all claims and liability 
if a contract is suspended, modified or terminated, after the contract 
is extended pursuant to the Deputy Under Secretary's November 2, 2006 
finding. The text of the finding, as signed by the Deputy Under 
Secretary of Agriculture for Natural Resources and Environment is set 
out at the end of this notice.

    Dated: November 6, 2006.
Frederick Norbury,
Associate Deputy Chief for NFS.

Determination of Substantial Overriding Public Interest for Extending 
Certain Timber Sale Contracts

    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 two years or 
more unless he 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.
    As a result of drastic reductions in forest product prices, 
there is a substantial overriding public interest in extending 
certain timber sale contracts.

Background

    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 the 
timber markets. These procedures, known as Market Related Contract 
Term Additions, authorize extensions of timber sale contracts up to 
one additional year when qualifying market conditions are met. When 
the market related contract term addition 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 are usually indicative of substantial economic dislocation in 
the wood products industry. Such economic distress broadly affects 
community stability, the ability of industry to supply construction 
lumber and other products for public use, and threatens maintaining 
plant capacity necessary to meet future demands for wood products 
from domestic sources. The Department has 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).
    Following promulgation of the rule in 1990, the Forest Service 
began tracking four producer price indices provided by the Bureau of 
Labor Statistics as indicators of a drastic reduction in wood 
product prices. Those indices were the Southern Pine Dressed, 
Douglas-fir Dressed, Other Species Dressed, and Hardwood Lumber. 
Beginning in the first quarter of 1994 through the first quarter of 
1996 government indices indicated a major downturn in the lumber 
markets throughout the country was occurring but only the Douglas-
fir dressed lumber index, used in contracts in Washington and 
Oregon, dropped sufficiently to trigger market related contract term 
additions. Meanwhile, purchasers in other parts of the country were 
facing defaults, mill closures, and bankruptcies, but were not 
eligible for market related contract term additions. To avert these 
problems, the Chief of the Forest Service determined that it was in 
the substantial overriding public interest to extend for a period of 
up to one year certain contracts that had not received any market 
related contract term adjustments. The Forest Service also initiated 
a study of the market related contract term addition procedures and 
indices to determine why they did not appear to perform as expected. 
Findings in that study led the Forest Service to adopt four 
different producer price indices from the Bureau of Labor Statistics 
in May 1998; 1) Hardwood Lumber (SIC 24211), 2) Eastern Softwood 
Lumber (SIC 24213), 3) Western Softwood Lumber (SIC 24214), and 4) 
Wood Chips (SIC 24215). However, after December 2003, the Bureau of 
Labor Statistics discontinued publishing the Western Softwood Lumber 
index (SIC 24214), Eastern Softwood Lumber index (SIC 24213), and 
Hardwood Lumber index (SIC 24211). At the same time the Wood Chips 
index (SIC 24215) was renumbered as PCU32113321135. In January 2006, 
the Forest Service published a notice in the Federal Register (71 FR 
3409) adopting the softwood lumber index 0811 and the hardwood 
lumber index 0812 to replace the 3 indices that were no longer 
supported by the Bureau of Labor Statistics. The Forest Service 
continued to rely upon the Wood Chips index, now numbered 
PCU32113321135, to gauge certain market conditions. The three 
indices the Forest Service adopted to gauge most market conditions, 
however, are not able to address market conditions for all forest 
products e.g. biomass. Additionally, because the indices are 
national in scope, they may fail to address drastic declines in 
local markets.

Recent Market Conditions

    The softwood lumber index 0811 began declining after 
September 2004 and with adjustments for inflation has declined 47.9 
points or 31% as of September 2006. There have been five consecutive 
quarters beginning with the third quarter 2005 through the third 
quarter 2006 where the quarterly declines have been large enough to 
trigger market related contract term additions. This is a 
substantially larger decline than the one in the period between 
1994-1996 when the index declined about 38 points or 21%. The 1994-
1996 period also was the last time there were 5 consecutive 
qualifying quarters for market related contract term additions.
    The hardwood lumber index 0812 also began declining 
after September 2004, and with adjustments for inflation has 
declined 18.6 points or 14% as of September 2006. There were 3 
consecutive quarters beginning with the third quarter 2005 through 
the first quarter 2006 where the quarterly declines have been large 
enough to trigger market related contract term additions equal to 
one calendar year plus one normal operating season. The index has 
continued to decline in the second and third quarters of 2006, but 
the decline has not been sufficient to trigger market related 
contract term additions. Consequently, if hardwood prices do not 
begin to recover soon, or if conditions for another market related 
contract term addition do not trigger, some hardwood purchasers may 
begin to face additional hardships as the market related contract 
term addition time they previously obtained expires.
    Between September 2004 and January 2006, the wood chips index 
remained fairly static but has been on a steady rise since then. The 
last time the wood chips index had a qualifying quarter was the 
third quarter of 1997.
    At this time, the market related contract term addition 
procedures on softwood lumber and hardwood lumber sales are 
generally functioning as expected. Additional contract time that has 
been made available, and granted to purchasers who requested it, has 
assisted purchasers by allowing more time to wait for markets to 
recover or to spread out harvesting of high priced sales. But as was 
the case in 1996, there are exceptions.
    For example, in the lake states area, a combination of factors 
has contributed to a more drastic decline in forest product prices 
than is occurring in other parts of the country and/or the producer 
price indices are not triggering market related contract term 
adjustments. The predominant forest products produced in this area 
are wood chips used in pulping for paper and oriented strand board 
(OSB), hardwood lumber, and a limited amount of softwood lumber. The 
pulp and OSB sales use the wood chips index which has not had a 
qualifying quarter for market related contract term additions since 
1997. National Forest System timber sales in the lake states area 
often contain a diverse mix of forest products which attracts strong 
competition leading to relatively high bid rates. Problems began in 
2005, when wood chip prices and demand declined sharply in response 
largely to an increase in cheap imported chips.
    Also, OSB is a building product with prices that tend to follow 
lumber market prices. While lumber market prices have declined 
significantly and the market related contract term addition policy 
has been triggered for contracts tied to the lumber indices, no such 
trigger has occurred for many of the sales in the lake states area. 
That is because most contracts in the lake states area are tied to 
the wood chips index, which has not declined, so those purchasers 
have not been eligible for market related contract term additions. 
Concurrently, lake states area pulp prices have been declining, but 
since national wood chip prices have been stable or increasing, 
those purchasers have not been eligible for market related contract 
term additions. Due to their location along the great lakes and 
Canadian border, competition from cheaper imported wood chips has 
also adversely affected purchasers in this area. As

[[Page 66162]]

a result of these factors, purchasers in the lake states area are 
now faced with high bid prices on their existing contracts, low 
product prices, and no market related contract term addition to 
provide additional time for markets to recover or to mix the higher 
priced timber with lower priced timber for other sources. The market 
related contract term addition procedures do not appear to be 
functioning as expected here.
    In another example the sale of biomass material has been 
increasing in recent years with most of that material utilized for 
generating electricity in co-generation facilities. A reliable index 
for tracking this new product has not been found so most sales of 
biomass material also use the wood chips index. But, energy prices 
can differ substantially in different parts of the country and don't 
necessarily follow the wood chips index. Consequently, in areas 
where energy prices have drastically declined and purchasers are 
holding high price timber sale contracts, they are not currently 
eligible to receive a market related contract term addition because 
the wood chips index has not triggered.

Determination of Substantial Overriding Public Interest

    The Government benefits if defaulted timber sale contracts, mill 
closures, and bankruptcies can be avoided by granting extensions. 
Having numerous, economically viable, timber sale 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.
    Therefore, pursuant to 16 U.S.C. 472a, and the authority 
delegated to me at 7 CFR 2.59, I have determined that it is in the 
substantial overriding public interest to extend for up to one year 
certain National Forest System timber sales that were awarded prior 
to January 1, 2006. This finding does not apply to contracts that 
have been or are currently eligible to be extended under market 
related contract term addition contract provisions, to salvage sale 
contracts that were sold with the objective of harvesting 
deteriorating timber, or to contracts that are in breach. Total 
contract length shall not exceed 10 years as a result of this 
extension. For those contracts extended pursuant to this finding, 
periodic payments due after the date of this determination will also 
be deferred for up to one year. To receive the extension and 
periodic payment deferral, 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.

    Dated: November 2, 2006.
David P. Tenny
Deputy Under Secretary of Agriculture for Natural Resources and 
Environment.
[FR Doc. E6-19102 Filed 11-9-06; 8:45 am]
BILLING CODE 3410-11-P