Executive Summary

The University of Missouri Center for Agroforestry conducted an analysis of the eastern redcedar market.

Research objectives

The redcedar market research study has two major objectives. The first objective is to develop a basic understanding of the eastern redcedar market (who are the participants in the market, what kind of products are currently being marketed, what are the general trends for supply and demand). The second objective is to use Porter's Five Forces Model to analyze the competitive forces that coordinate and control the market and to identify the resources and relationships needed to be successful in the eastern redcedar market. The results of the research, together with an updated directory of companies in the redcedar market, are designed to benefit those already in the market and others who are considering entry into redcedar industry.

To achieve our objectives, we analyzed the competitive forces that coordinate and control the market using Porter's Five Forces Model.

Participants in the research

Through a mail survey, followed by more in depth phone interviews, we surveyed eastern redcedar businesses from 16 states, predominantly primary manufacturers, ranging from small operations with less than $10,000 per year gross annual sales to large firms with gross annual sales over $16 million. Based on all feedback, it is estimated that the US redcedar market generates nearly $60 million per year in gross sales and is growing.

We surveyed the value chain from raw material producers (private landowners, loggers and timber brokers) and primary manufacturers (sawmills, shavings or mulch producers) to secondary manufacturers (parts manufacturers, novelty producers, essential oil producers), wholesalers and retail outlets. Along the value chain, most of the participants are involved in both supplying and buying eastern redcedar products. Some of the companies are vertically integrated being involved in two or more steps in product conversion.

Redcedar products

Companies surveyed buy a large variety of products ranging from standing timber to logs, posts, cants, lumber or by-products. The products sold included logs, cants, lumber, fence posts, tongue and groove paneling, furniture, cedar-wood oil, novelties, mulch and shavings. A characteristic unique to redcedar is that every by-product and every fiber of the tree can be marketed. Manufacturing by-products that are not used as cants, fence posts or dimensional lumber can be used as flakes for pressboard, mulch, shavings, cedar balls or can be processed for extracting cedar-wood oil. The residue after extraction can be used as boiler fuel.

Forces that drive competition in the eastern redcedar market

Threat of new entrants (Barriers to entry)
Our survey respondents identified the following barriers to entry in the redcedar industry:

• Capital requirements - 28% noted this as a barrier,
• Lack of knowledge and experience (20%),
• Access to inputs (16%),
• Access to markets (16%),
• Labor intensity (12%),
• Economies of scale (12%).

The more difficult the barriers are to overcome by those trying to enter the market, the better they protect the companies already in the market from potential new entrants.

Bargaining power of suppliers and buyers
Characteristics of the value chain based on survey results:

• Suppliers in the value chain are relatively small companies in terms of annual sales
• Some of the companies surveyed have their suppliers deliver to them while other companies find it necessary to travel more than 150 miles to obtain their raw material supply
• Transactions take place mostly on the spot market
• The largest segment of the buyers' chain is represented by resellers
• The majority of the companies surveyed sell their products locally

Trends in supply and demand
Based on survey results, the supply of all quality levels of redcedar materials is likely to stay the same in the next 10 years. However, it is possible that a shortage of good quality redcedar material and an increase in poor quality material will occur in the next 10 years

However, based on the information obtained from US Forest Service, Forest Inventory and Analysis (FIA) data, there is abundant redcedar available in four states (Arkansas, Tennessee, Kentucky, and Missouri). FIA data indicates that the useable redcedar resource will slowly increase in quantity for the next three decades.

Survey results also indicate that demand for redcedar materials will remain the same or increase in the next 10 years. More specifically, demand for good quality cedar will increase, demand for average quality will stay the same, and demand for poor quality will decrease. This trend was expected as the redcedar industry continues to upgrade its standards to produce higher quality products.

Based on survey results, minimal bargaining power is exerted along the value chain. Bargaining power on the supply side is felt at the primary manufacturing level. From the buyers' perspective, there seems to be little to no bargaining power. Out of the companies surveyed, there doesn't appear to be any single buyer that purchases large volumes of redcedar material.

Threat of substitute products
Different uses of eastern redcedar have different potential substitutes. For example, western redcedar, redwood or treated lumber could be used as substitutes for eastern redcedar in home construction or dimensional lumber. Mulch can be obtained from different species of hard wood and pine shavings. Rice hulls or saw dust can also be used as pet bedding.

That said, because of its distinctive properties: reddish/brawn color, unique fragrance, natural rot resistance and insect repellent qualities all derived naturally, eastern redcedar is perceived to be in a niche by itself, with very few close substitutes.

Rivalry among existing firms
Based on the surveys, the level of rivalry in the eastern redcedar market is perceived as non-competitive to moderately competitive.

Survey feedback indicates that the number of competitors will either stay the same or decrease in the next 10 years.

Competitors are attracted to the eastern redcedar market not only by the perceived profit and the independence that a private business offers but also by the full utilization of redcedar material, availability of redcedar raw material, and the fact that redcedar is a growing niche market.

In response to new competitors that may enter the market, the majority of the companies surveyed did not indicate that they had a special strategy or reaction.

Their approach to competition is to keep producing their products, focusing on quality and service.

Governmental policies
The policies that were recognized by the survey respondents to have influence over the redcedar industry included:

• The EPA ban on CCA treated lumber
• The implementation of sustainable forestry certification for suppliers to Lowe's and Home Depot
• Management practices adopted by state natural resource agencies determined to eradicate redcedar

In practical terms, none of these policies were found to have a significant impact on the redcedar marketplace.

Next steps:
For the collective benefit of the redcedar industry, it is suggested that industry participants join their efforts to identify and pursue actions to grow the overall market. Actions to be taken in the near future might include:

• Creation of a redcedar marketing board to increase awareness of market opportunities.
• Developing an infrastructure by working with federal/state agencies to facilitate the flow of goods and information through the market.
• Linking industry participants with research institutions to develop new market opportunities by exploring alternative uses for eastern redcedar wood, oil, and products.
• Encourage private landowners to manage redcedar stands and foresters to learn more about how to manage it.