The above tables show that as the liquidation period is lengthened, and depending upon the sustained-yield earning capacity of the timber, an orderly liquidation period of 25 years to 50 years is needed to make it even remotely possible for a sustained-yield purchaser to successfully compete with liquidation buyers. A liquidation operation should obviously be able to return a higher price to the Indians than a sustained-yield sale. Money is an unusual commodity that is hired, not bought. When you hire it you pay interest. When you want money today for a commodity such as timber that will not be converted to money until the future, buyers will discount what they pay. One who needs money now is thus forced to accept a smaller sum. However, if a man is willing to wait and accept his money when the timber is cut, he is not forced to accept the discount. It is also common practice to made additional discounts for risk, and, again in waiting for money the stumpage owner assumes the risk. He also enjoys any gains that may develop. Basically, the discount for cash, exclusive of risk of ownership, results in the person receiving the same amount of money as though he waited and received a series of payments as the liquidation proceeded. It also should be remembered that if a product is immediately salable in the quantity offered, there is no discount applicable, and thus a buyer who wishes to defer operations is in a disadvantageous position against bidders who will operate the timber at once.

This gives rise to the problems of the sustained-yield buyer. His ability to pay is conditioned by the earning ability of the property rather than its liquidation value. To be sure, he may be able to move over to an orderly liquidation program at any time and may thus enjoy a speculative gain if he succeeds in making his purchase at the sustained-yield rate. Basically his situation is that he cannot compete against the liquidation purchaser on even terms if the situation as to plant, location, and financial resources are equal.

This distinction is most important because the only positive alternative suggested to Federal purchase asks the Congress to first create a set of conditions which rules out the liquidation purchaser, and secondly, would guarantee the higher liquidation income to the Indians by a Government grant. Finally, the vocal Indian spokesmen for immediate liquidation and immediate full cash payment have propagated the idea that a very real discount both for cash and risk will not be experienced if Public Law 587 is let run its course and the timber is dumped in 2 years.

The problem of the sustained-yield buyer is illustrated by the National Lumber Manufacturers Association which sets forth the following profit-and-loss statement for the reservation:

While the statement is used to show that Federal ownership would be unprofitable, it would be equally true if a private purchaser borrowed to invest for

sustained yield at this price and under the income picture cited. Were this operation to be conducted under private ownership, the cost to borrow money might well be 1 percent higher1 and according to Klamath County data the local tax cost to a private owner would be approximately $330,000 annually. Thus the private owner would face higher interest costs and a lesser local tax cost, but his balance sheet would show an annual deficit of $790,000. This would indicate that sustained-yield possibilities at a $50 million borrowing would be even less likely to occur under private ownership. In fact, the only private owner who could undertake sustained yield would be the present Indian owners who own the property and have no debt standing against it.

The figures cited in the analyses above are those of the NLMA. The Management Specialists predict a cut of 90 million board-feet until 1965 at a price averaging more than $43 per thousand board-feet for an anticipated net income of $3,870,000. This is based upon harvest of certain of the virgin timber. Thus presumably the Government could earn about $4 million for debt retirement by 1965. Without reference to the effect of an annually declining debt balance on interest costs by 1965, the debt would be reduced to approximately $46 million, and interest costs about $1,840,000. After 1965 sales are predicted to bring in income at $33 per thousand board-feet for a volume of 75 million board-feet.

1 Includes $50,000 in grazing fees shown in NLMA statement.

2, 720,000

195, 000

A private owner faced with a 5-percent interest charge would be able to reduce his indebtedness to $45 million by 1965 but thereafter his balance sheet would show:

If anything these balance sheets developed from the expected sales information that the Management Specialists have formulated are a more knowledgable basis for computation. If it is valid to assume a higher interest rate for private purchasers their annual deficit would be greater, thus they could not begin to justify a sustained-yield operation if they borrowed $50 million for the property. In addition, private owners would presently appear to make a lesser contribution to the local tax structure than would these lands if in public ownership, but even this compensating factor would not overcome the greater deficit caused by a higher interest rate.

If private purchasers could secure the reservation for $50 million under a 10year liquidation program, the investment would be profitable. The 4 billion board feet would be cut at a rate of 400 million board feet annually, and might bring an average price of $30 per thousand board feet. Annual income of $12 million from the liquidation of stumpage would have assessed against it carrying carges on investment of $2,500,000 the first year, and thereafter the interest cost would be reduced by about 10 percent. Taxes would probably drop from $330,000 annually to about $50,000 at the end of the liquidation period, while sales costs at

1 Recent direct borrowings by Treasury have been at 4 percent. A recent A. T. & T. issue was at 4.94 percent. Informed observers indicate that prime private borrowers generally have to pay 1 percent more than the current cost of money to the Government.

$1 per thousand board feet would average $400,000 a year. Utilizing an unrefined calculation, the prospect is that after interest, sales cost, and taxes, the earnings could average at least $10 million annually for a total of $100 million and a surplus of $50 million on the transaction.

In sum, the National Lumber Manufacturers Association statement helps reveal that the private purchase for a true sustained-yield operation would not be profitable if the purchase price were $50 million; that there would be a smaller deficit to the Federal Government than to a private purchaser committed to sustained yield; and, finally, that a purchaser liquidating over a 10-year period might reasonably be able to pay as much as $80 million for the property as compared to an estimate of $50 million. While Mr. Weyerhaeuser's proposal does not detail this financial advantage, its courageously recognizes this differential in calling to the attention of the committee that if Congress wants sustained yield but prefers private sale to public acquisition, a grant to the Indians will be needed and the deeds must contain a sustained-yield covenant.

The value of the timber is highest for orderly liquidation. Unless the Klamath people can secure as much as the orderly liquidation value of the timber from a private or public purchaser required to operate upon sustained yield, their best "short run" financial interest may be found in orderly liquidation. If rate of return is the consideration rather than bororwing costs it is evident that at $50 million the rate of return for a private purchaser would be lower than the cost of borrowing money.

SUGGESTED SOLUTIONS

1. Extension of the disposal period to permit orderly liquidation

An extension of the disposal period to permit orderly liquidation would be a minimum-type correction. It would assure that the withdrawing Indians ultimately received the best price for their timber although it would delay the realization of the income. The Indians would not be forced to accept a discount for cash now. At least one faction in the tribe would protest this course. Among the advantages of orderly liquidation would be that those Indians who wish to stay in a sustained yield program would not have its success unduly jeopardized by events caused by hasty liquidation. The industry would not suffer a tremendous dislocation neither would local government have other shared revenues heavily affected, nor would the withdrawing Indians be able to dissipate lump-sum payments.

Possible disadvantages are that it would drag out the termination period, prevent the Indians from realizing a lesser lump-sum cash payment so as to make alternative investments now add a cost of interim management and protection during the longer disposal period and the conservation program for those lands would in all probability be destroyed. Orderly liquidation would not provide for continuation of these lands as a producing forest and none of the conservation goals would be assured.

In an operation based on orderly liquidation the most financially advantageous time period can be set by requiring the managers to push offerings onto the market in a series of small sales keeping a close watch on other timber sales experience. When prices dipped beyond averages for check areas or other factors showed a market saturation, they would be authorized to reduce or discontinue sales. Under such a program there would be no need to demand full cash payment in all cases and pay-as-you-cut provisions could be utilized to enhance salability and income. Thus the Indians could escape with the discount for cash and risk. The plan for sales would be most successful if the lower quality timber were offered first and total sale quantities offered were limited to take advantage of the generally short supply of logs in the areas thus forcing the buyers to accept this material. Consideration might be given to retaining some timber over and above that required by the Oregon law and to the protection of young stands but only for the purpose of assuring a better sale price for the cutover land at a later date. As an alternative the land could be sold with the timber if more money could be realized this way. In sum, a hard-headed aggressive sales program designed to extract the last nickel from the property would be called for if the only goal is to satisfy the demands for conversion of the forest to money. Government timber sale or land-disposal programs have not been conducted upon these bases and the carrying out of such a program would leave a black mark on the conservation record of the United States Government that would be so well fixed in the minds of conservationists that it might never be erased.

However, if Public Law 587 is not amended to provide at least for this, the program prescribed under the existing law will probably result in an equally fatal course which will be also marked by a record of failure to achieve for the Klamaths the full amount they might have obtained.

The National Lumber Manufacturers Association offers the opinion that the unrestricted sale of these lands to private owners would "result in the extension of the tree farm movement *** if not immediately in all cases, then in due time."

There should be no mistake about the fact that a tree farm is not synonymous with a sustained-yield operation. There are 488 million acres of commercial forest land in the United States, only one-fourth of which is in public ownership. Virtually all of the federally managed land is in a true sustained yield management program although in some areas cutting is proceeding at less than is permitted. The better managed private lands are primarily the 13 percent of the total forest holdings in the hands of the wood-using industries. A good index of a determined effort toward better management is participation in the tree farm movement but this industry sponsored activity, embracing all classes of private lands, covers only one-ninth of the total private land holdings. It constitutes an acreage equal to only three-fourths of the 62 million acres in industry management. A tree farmer merely agrees to protect his land and to harvest the timber so as to keep the land productive timber growing land. He can completely liquidate the timber so that there is a hiatus of cutting of 50 to 100 years and still qualify as a tree farmer. Thus he agrees to no more than, for example, the Oregon law requires.

While no formal statistics have ever attempted to assess the extent to which private holdings are truly on sustained yield it is probable that amount is less than 10 percent. The extension of Public Law 587 will not even remotely insure that this reservation property as sold will be "in due time" managed under a sustained-yield operation even if it becomes a certified tree farm. An extension of the sale period would, however, insure that the sale of the timber would bring the Indians the best possible return.

2. Sale to private purchasers under a plan requiring sustained-yield operation This is the Weyerhaeuser proposal, and the only concrete alternative to complete public purchase presented to the subcommittee. Under this plan the Secretary of the Interior would set a price for the timber and land based upon his estimate of the value if liquidated in an orderly manner. Presumably, and this is of singular importance, the price set would be identical with the value that would be used for a public purchase bill. It could not be well argued that the total price set under this proposal would be higher or lower than the Government would set it if it were to purchase the property.

The Secretary would offer the tracts for sale with the bidders agreeing to accept a deed containing a sustained-yield covenant. The bidders would offer a price based upon this requirement and the difference between the sustained-yield price and the orderly liquidation value would be paid by the Government to the withdrawing Indians. Any tracts not bought by private purchases would be acquired by the Government at their appraised value.

Two advantages can be attributed to this proposal. It recognizes candidly and courageously that private purchasers dedicated to sustained yield will be at a disadvantage in competing against short-term liquidation buyers. It lays bare the contention implicit, for example, in the National Lumber Manufacturers brief that somehow sustained yield on these lands will emerge from Public Law 587. It demonstrates that the real choice is whether positive steps will be taken to implement sustained yield or whether this property will be sold without regard to conservation principles.

The other advantage is more closely related to the merits of the proposal itself. If adopted the gross outlay by the Federal Government would be reduced to the difference between sustained-yield value and the orderly liquidation value. However, this advantage may be outweighed by the drawbacks to the plan. First and foremost, the Government would be asked to advance a substantial sum in order that private purchasers could secure and operate the tract on a true sustained-yield basis. The sum advanced would constitute a payment and perpetual interest cost which the Government could never hope to recover for it would not own the property and have a chance to enjoy any advance in timber

value that might compensate it for insuring "sustained yield." The fact that the proposal envisions the Government paying this sum to the original timber owner—the Indians—enlarges the problem for it would create a new grant-in-aid device for securing better forest practices on private land.

Second, the size of the Government's contribution would be controlled by the amount private bidders chose to offer for each unit bid upon. Thus the Government would not be able to assess in advance the actual cost it might bear.

Third, the Government would be obligated to buy any units not sold to private bidders. This would mean that the "cats and dogs"-those units with poor quality stands, undesirable species composition, low timber volume or disadvantageous growing site or location-might still have to be purchased by the Government. These units would be scattered and their management and operation would be more costly to the Government. So in addition to the payment of an undefined amount to enable private owners to practice sustained yield in the better lands, the Government would be saddled with the purchase price and more costly operation of the poorer lands.

The inclusion of the sustained-yield covenant envisioned by the proposal would pose at least two major problems. The way in which a satisfactory sale could be made and the preparation of a sustained-yield covenant.

From the standpoint of various private purchasers the several combinations of needs might affect interest in purchasing. A sustained-yield operation, to become immediately effective, must start either with predominately virgin stands or a property with sufficient stocking in the various age classes. The purchase of a large acreage of cutovers still growing toward maturity would delay operations. The earning power of the investment would be deferred and the price subject to a further discount. A firm contemplating entering the area and establishing a plant would probably want to buy a balanced unit so that operation could start at once.

The nearby firms would have to consider how units they might potentially use would fit in with existing holdings. For example, a firm presently holding a large area of cutovers would be more interested in securing uncut units than those on which sustained yield cutting would have to be deferred 10 to 30 years. This is the situation with most of the local firms. A competitive sale would probably thwart the goal of placing the maximum amount of the reservation in private hands under true sustained yield. The best way to secure maximum private sustained yield ownerships would be to utilize a negotiated sale under which potential purchasers submitted a list of the properties they needed and there was an adjudication of overlapping applications.

However, this is private property belonging to the Indians, not Government property subject to disposition on terms and conditions which suit some broad public purpose. Under the proposal, the Government would be drawn in because it would be a party to the pricing arrangement. It would be concerned with the size and makeup of the sustained-yield units and the effect upon the sustainedyield value. The lower the sustained-yield value the greater the payment to the Indians the Government would be called upon to make.

Under a negotiated sale various purchasers might jockey for areas, dissident factions in the tribe might charge or be urged to charge favoritism or others might charge that certain firms were favored. Since the negotiation would have to be conducted with the Government and the Indians the risk of these possibilities mitigates against its utilization.

Secondly, there is a distinct difference between a sustained-yield covenant and the minimum cutting requirements found in a few state statutes which are improperly referred to as sustained-yield laws. For example, the Oregon law merely provides that a minimum number of trees must be left on the assumption that they will reseed the area. The Pierce, Hook, and Anderson bills introduced in Congress were designed to provide only this type of minimum revegetation protection by a Federal law which would become operative only when a State failed to enact a satisfactory model law. The nearest thing to a sustained-yield covenant is in the one cooperative agreement between the Forest Service and the Simpson Logging Co. entered into under title 16 United States Code, section 583. In this agreement the private owner pooled his cutover and uncut lands with national forest lands and agreed in essence to

(a) Let the Forest Service decide any points in controversy;

(b) To utilize the same practices that the Forest Service was currently using;