Sustainable Production in a Globalized Market

1. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 Sustainable Production in a Globalized Market Art Harwood Harwood Forest Products June 29th, 2004 Briceland CA

2. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 About Harwood Forest Products • Family owned • Established in 1950 • 240 employees • One of the largest private employers in Mendocino County. • Largest lumber producer in Mendocino County • 5th largest Redwood producer in the world.

3. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 GLOBAL MARKETPLACE • ISF State of Sustainability Report is accurate summary • Wood coming from all over the world • Result of the Spotted Owl / Spike in lumber prices. • Global infrastructure: • Opened the door for wood to come from all over the world.

4. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 NEW REGIONS • Russia / 23% of wood fiber on earth • China • Do not think of China as a wood supplier • Dominating Siberia. • Vast plantations coming on • South Africa • Eastern Europe • Fall of the Iron Curtain • Cheap labor • Other Third world countries • Brazil – Hardwoods / FSC certified competing with Redwood

5. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 PLANTATION FORESTRY • South America • Brazil, Chile, Argentina. • Freight up the Mississippi River from Brazil cheaper / Western • New Zealand • Aggressively pursuing offshore markets at our expense. • Japan, Korea. • Israel, the United Kingdom, China and others. • Have been and are planting forests. • Significant impact on global market share and Wood Value.

6. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 EXPANDING PRODUCTION • North America • US and Canadian sawmills expanding production. • Labor costs down to compete globally. • Record lumber production the past few years. • Less sawmills. • Europe • Austria a net exporter. • Japan, Germany and the UK increasing domestic production. • Scandinavia • Expanding Wood Supply. • Being pushed out of Europe. • Increasing Market Share in Japan. • Backhauls on empty freighters. • Selling wood in the US.

7. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 LONG and SHORT TERM:OVER SUPPLY OF BUILDING PRODUCTS. • Substitutes another issue that add to the problem • Steel, • LVL, • Glue-lams, • Composites, • STRAW

8. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 SHORT TERM / SILVER LINING • US $ weakness • Making US producers more competitive. • The weak dollar is making the ability to import wood into the US tougher. • This along with the tariff on Canadian lumber is helping to put a floor under lumber prices. • Freight • But, this will not last forever. • Pricing has already peaked. • Price levels are artificial due to the $, tariff, freight • Longer term, pricing will stable to down.

9. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 OTHER OBSTACLES • All make it difficult for California producers to compete globally: • Cost of regulatory compliance • Energy Costs • Work-mans Compensation Insurance Costs • Fuel Cost • Taxation • Labor

10. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 KEYS TO SURVIVAL? • Pay Attention • Global Marketplace / Influences every decision that we make. • Watch Timber Supply Trends & Pricing. • Watch Lumber Demand & Pricing. • It all impacts our business and what happens on the ground. • You need to run an efficient operation, but that is not enough • Emphasis on Marketing. • Harwood Market Niche / Timbers • Differentiating ourselves through Product Line / Quality / Service • Stay away from competing with commodity producers. • Harwood has: higher costs / higher $ return • It does set us apart from other lumber producers. • It works.

11. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 ANOTHER MARKETING OPPORTUNITY? Certification / A California Niche For all CA producers? • Cal Poly SLO Study • CA regulatory process / THP system broken / Prescriptive • Needs to be replaced with a broader landscape approach. • SFI, or FSC Certification would suffice. • Either SFI, or FSC would benefit CA producers on the regulatory cost end. • Need legislative / environmental support. • FSC only at this time • Only FSC could give CA producers a market advantage. • CA / FPA makes most CA producers close to being FSC certified. • Major environmental groups may do our marketing for us? • Would the economics dictate CA going down the FSC path? • Companies need to seriously look at this issue. • My guess is YES.

12. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 WWPA ECONOMIC FORCAST • Increased Capacity in Europe & Russia – announced through 2004 • Should keep lumber prices low / reasonable • Easing in home construction in 04 and 05 will impact demand for Lumber. • 56.7 bbf / 2003 Record • 55.7 bbf / 2004 • 53.9 bbf / 2005 5% (2.8 bbf) decrease from 2003 • Somebody will sell less into the market • 2.8 bbf reduction in lumber demand = 22 sawmills the size of HP.

13. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 WWPA ECONOMIC FORCAST (cont.) • 4 bbf total / Equivalent of 32 sawmills the size of Harwood Products. • 54 sawmills the size of HP may have to close to balance global supply & demand. • High cost sawmills will disappear first. • US and especially California producers are high cost. • Ironic / In an era of record demand for lumber: • US sawmills have been and will continue to disappear at a record rate.

14. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 WWPA ECONOMIC FORCAST (cont.) Wild cards are housing and the trade dispute. • Housing should remain strong through 2004 • US Presidential Election / Low interest rates • Look out in 2005 as interest rates rise. • Trade Dispute • Cap on imports will put a floor under pricing. • No settlement will mean more production / lower lumber pricing.

15. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 THE REDWOOD FOREST FOUNDATION (RFFI) ANOTHER PART OF THE SOLUTION HISTORY Convened by Charles Peterson December 1997 • Diverse group of people including: • Activists, industry, resource politicians and financial professionals. • Dream to purchase LP timberland • Concept developed by USFC • Non-profit owner • Community Forestry Bonds

16. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 RFFI ADDRESSES ISSUES SUCH AS: • Economics of Forest Products • Niche Marketing • Regulatory Relief • Stable supply of forest / /timber products • Environmental Conservation • Principles of sustainability • Protect broad landscapes • Long-term vision • Social Fabric of the Community • In a world where it seems that we have no control the RFFI model brings local control to issues that affect our livelihoods and sense of community.

17. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 TIMING IS RIGHT FOR THE RFFI MODEL Millions of acres of timberland on the market • 500,000 sold in Mendocino County the past six years • Much of this timberland is cut over / Adds to the high cost of timber production • The highest value may be sub-division • This will lead to the loss of jobs • The loss of bio-diversity • The loss of rural character on the North Coast • Fewer public and private $’s available for preservation • Conservation is the most cost effective way to protect fragile eco-systems

18. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 TIMING IS RIGHT FOR THE RFFI MODEL • RFFI / Community Forestry Bonds • Leverage small amounts of $’s • Protect large acreages • Stabilize local economies • RFFI model is right on target and is one of the solutions to making the North Coast and California competitive in the global forest products industry.

19. Redwood and Douglas Fir Lumber Products A Proud Family Tradition Since 1950 CAN CALIFORNIA PRODUCERS SURVIVE IN THE FUTURE? • Not if we continue down our present path. • Yes, if we PAY ATTENTION to the issues that are coming at us. • And we PROACTIVELY position ourselves to meet these CHALLENGES.