Steven C Hackett

20 July 2009

Letter of Support
Freshwater Tissue Company

I am writing to support the effort to capitalize Freshwater Tissue Company (FTC). I am an economist with 20 years of experience in the fields of industrial organization and natural resource-based industries.

The Samoa mill is the only bleached kraft pulp mill in North America to utilize totally chlorine free bleaching and associated closed-cycle technologies. Other important improvements have been made to the Samoa mill’s air emissions. Despite these substantial environmental improvements, a succession of owners has been unsuccessful as a pulp supplier. The problem has been the lack of a market capable of paying a premium for pulp with superior environmental attributes. Pulp manufactured in the US is at a considerable cost disadvantage relative to its international competition. US pulp manufacturing entails higher costs due to more rigorous forestry regulations, higher unit labor costs, and more costly manufacturing process standards to protect health and the environment.

As noted in the business plan, the business model for conventional US tissue producers has been to dispose of domestic manufacturing assets and serve as converters, branders, and marketers of low-cost tissue produced outside of the US. This business model allows US tissue companies to effectively export jobs and industrial pollution to lower-income countries. Economists refer to this process as regulatory leakage.

Leakage can be stemmed by modifying domestic or international regulations, with border tax adjustments, or by the creation of niche “green” markets in which consumers are willing to pay a price premium for goods made using socially and environmentally superior methods. In fact the latter has developed due to the failure to establish higher global standards, and due to trade agreements frowning on restrictions based on production and process methods.

FTC’s Samoa mill is already well-positioned to participate in the green niche tissue market due to the documented superior environmental attributes of its manufacturing process relative to the least-cost methods employed nternationally. FTC’s business plan also calls for pulp chip supplies to derive from a relatively environmentally benign virgin source – overstocked tanoak harvested to enhance FSC-certified local redwood timberlands. While not all timberlands in the region are FSC-certified, one of the largest industrial timberland owners – Humboldt Redwood Company – became certified in November 2008. FTC’s requirement for certified tanoak will also provide an economic incentive for landowners to become FSC certified. FTC can also claim to be more socially responsible than conventional tissue by paying relatively high wages and salaries to its US workforce.

In addition to attracting capital financing, the other key challenge for FTC will be successful penetration of the environmentally friendly bathroom tissue market. This will require marketing to introduce the product and establish brand recognition, and favorable access to large grocery and large-format retailer networks. Perhaps most importantly, FTC will need credible third-party verification of its superior environmental attributes. The environmentally friendly bathroom tissue niche market features a number of bathroom tissue products produced with high recycled content. FTC will need to argue that its use of a totally chlorine-free manufacturing process and its FSC-certified virgin pulp source offer comparable or better environmental attributes relative to recycled-source bathroom tissue. This does not seem an insurmountable hurdle, given the documented wastes linked to manufacturing bathroom tissue from recycled sources.

Additionally, it appears that FTC may have a product quality advantage over its recycled content rivals. In their business plan FTC documents a report in the May 2009 Consumer Reports magazine stating that in a comparative test, the bathroom tissue made of recycled fiber was not as soft or strong as national and store brands. “Green still involves some sacrifices,” the article concludes. I read the Consumer Reports analysis myself, and it goes on to report that “softness and strength was only middling” for bathroom tissue made from high recycled content. Consequently, product labeling indicating totally chlorine free manufacturing using FSC certified pulp chips, together with an inherently higher quality product than its niche rivals, suggests that FTC has a solid prospect for success.

FTC has many challenges to overcome, but I think that the green products market is likely growing sufficiently to accommodate entry by FTC. I strongly support what they are trying to accomplish.

Best wishes,

Dr. Steven C. Hackett
Professor of Economics