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Wednesday, March 04, 2015

Anne Nagro

Contributor to PCT Magazine

Features

[Annual Termite Control Issue] A-maze-ing journey

Cover Feature: Annual Termite Control

A reporter’s (not quite intrepid) quest to learn how the industry calculates annual termite damage.

February 26, 2015

Where did the industry get the “$5 billion in annual termite damage” number? PCT digs deep into a maze of research papers, conversations and the backs of envelopes.

When my editors suggested I research the numbers behind the $5 billion annual termite damage estimate that journalists, PMPs and researchers cite on a regular basis, I said, “Sure! That’ll be easy.”

Not quite. After weeks of harassing folks to recall decades old data, getting woefully side-tracked and falling down the occasional rabbit hole, I’m not much closer to knowing the answer than when I started. In fact, I now have more questions and more estimates of termite damage than I ever knew existed.

The industry has been putting dollars to damage for quite some time — $1.5 billion, $2 billion, $5 billion, $7 billion, $8.8 billion, $16.6 billion — and thanks to the permanency of the Internet, most are all still out there. They’re all best guesses and for the most part calculated differently. Some numbers are built on previous estimates, which were then adjusted with more current data of the day. I have a sneaking suspicion that this days-gone-by data is gone for good, and tracking it down impossible.

What’s the big deal? Termites cause damage — often lots of it — and communicating the cost of damage is essential when you’re educating customers on the importance of termite prevention, securing funds to study the cryptic pest or maintaining the integrity of the industry’s leading trade journal. (If we don’t check our source material, who will?)
 

Bon Voyage.

My journey began with the National Pest Management Association (NPMA) and its sister agency, the Professional Pest Management Alliance (PPMA), the consumer-facing organization that promotes our industry to the public.

Termite Outlook 2015

Wet weather and a better housing market could make for a robust termite season in 2015.

A big driver of termite activity is moisture and the National Weather Service’s Climate Prediction Center forecasts above median precipitation amounts for California, the southern plains and the Southeast coast. Below-average temperatures, however, are predicted for the southeastern third of the United States.

Existing-home sales are expected to increase to 5.3 million in 2015 and 5.4 million in 2016, according to Lawrence Yun, chief economist of the National Association of Realtors.

Single-family housing starts also are poised to take off this year due to a growing economy, rising household formations, low mortgage rates and pent-up demand, reported the National Association of Home Builders (NAHB). In an NAHB news release, Moody’s Analytics Chief Economist Mark Zandi said single-family starts could close in on 1 million units by the end of the year and multi-family production could go as high as 500,000 units.

Andy McGinty, COO of LIPCA Insurance in Baton Rouge, La., expects claims for termite damage to increase. “We’re seeing an increase in termite damage claims over the last year or so than we have in the previous five” for houses under contract, he said.

Experts said structures treated with a non-repellent liquid termiticide may require retreatment after 10 years. “The molecule is a gone goose” after a decade in the ground, said Bob Kunst, president of Fischer Environmental Services, Mandeville, La.

In 2006, PPMA asked then-Technical Director Greg Baumann to update the $2 billion damage figure the industry had been using for many years. In fact, the U.S. Department of Agriculture’s Forest Service, the division that researches termites, still uses $2 billion on its website (though I like to think this may change after my phone call). The figure likely comes from an early research paper, but it’s hard to say which one at this point, said USDA Forest Service Public Affairs Specialist Rebecca Wallace. She said Forest Service researchers today use $11, $20 and $22 billion. (More on this later.)

Several people pointed to a 1990 research paper by Nan-Yao Su and Rudolf Scheffrahn of the University of Florida titled Economically Important Termites in the United States and Their Control (Sociobiology 17: 77-94) as the source. If $2 billion was in this paper, I didn’t see it. It tracked damage estimates back to 1967; the most current listed was $1.02 billion (Edwards and Mills, 1986), and that number was based on a report written in 1981 by Larry Pinto, then-technical director of the National Pest Control Association.

Pinto found a copy of his typed (yes, typed) report, called Structural Pest Control Industry: Description and Impact on the Nation. He had calculated the total value of wood assets in the U.S. in terms of home construction and various other figures, but none that singled out termite damage. I was unable to find Edwards and Mills’ paper (1986. Termites in Buildings. Their Biology and Control. Rentokil Ltd. W. Sussex, U.K.) to learn how they used Pinto’s data.

Scheffrahn thought the $2 billion estimate might have originated in a report by J.L. Hamer (1985. Southeastern branch insect detection, evaluation and prediction report 1983. Vol. 8. Entomological Society of America, College Park, Md.). This trail ran cold for me, too.

The Louisiana State University extension website states the annual cost to replace wood damaged by termites in 1993 was $2 billion, according to an estimate from the Wood Protection Council of the National Institute of Building Sciences. Following that lead also failed.
 

Back to the $5 Billion.

But I digress…Baumann was asked to update the age-old $2 billion estimate. And nearly 10 years later, I asked to see his math.

Of course, Baumann no longer works for NPMA — he was vice president of training and technical services at Orkin and now holds a similar position at Nisus Corp. — and didn’t keep his notes. The $5 billion wasn’t part of a published paper, so no public record exists of the calculation. NPMA does not have the “back of the envelope” Baumann used to crunch the numbers, said Jim Fredericks, NPMA’s current technical director.

That said, Baumann did his best to recall for me how he came up with the number; a careful process that took considerable time, he said. (I don’t doubt this considering the number of days it took me to get this far.)

Basically, he used a documented estimate for annual subterranean termite damage — $1.5 or $1.6 billion, perhaps from a paper by Su from the late 1980s or early 1990s, possibly 1986, he said — and applied a typical formula for construction repair work, making adjustments for increases in the cost of building materials and labor through 2006.

Baumann did not adjust the estimate for growth in the number of houses with termite damage. “It was a lot safer to not make any assumptions on that,” he said.

The $5 billion was used in a PPMA press release and since then “it’s become gospel,” said Baumann.

When Fredericks joined NPMA in 2010, he compared the $5 billion figure against other estimates of termite damage. Fredericks told me he looked at:

  • A 2006 U.S. Forest Service bulletin that cited a range of $1 to $7 billion (USDA Forest Service Home and Garden Bulletin 64).
  • A 2002 extension bulletin by Dan Suiter and Brian Forschler of the University of Georgia and Susan Jones, Ohio State University, that mentioned $2 billion in termite treatment and control (Biology of Subterranean Termites in the Eastern United States. 1209).
  • A U.S. Environmental Protection Agency estimate citing termite damage costs $2,500 on average to repair. This number multiplied by the 750,000 to 800,000 termite jobs performed by the industry in 2010 (Fredericks citing industry data) is roughly $2 billion, Fredericks said.
  • A 2002 paper by Su that estimated $8.8 billion in termite damage using a 4:1 repair-to-treatment cost ratio for Formosan termites (Novel Technologies for Subterranean Termite Control. Sociobiology. 40: 95-101). (More on this later.)
     

Considering all this, “we felt our $5 billion number was still a credible, conservative number,” said Fredericks.

In fact, both Fredericks and Baumann say $5 billion is probably a low estimate for termite damage. The original calculation was closer to $7 billion, recalled Baumann, who felt providing a more conservative number was the best approach. Termite damage is “probably 10 times higher than” $5 billion, Baumann said. “You probably only see about 10 percent (of termite damage) and most homeowners only fix what they see,” he noted.
 

Newer, Bigger Estimates.

And bigger estimates of damage are out there. Consider those of Su, who’s been researching termites since the 1980s.

In a 2012 paper (Managing Social Insects of Urban Importance. Annual Review of Entomology 2012. 57:355-375), he estimated the global economic impact of termite pests had increased to $40 billion. The U.S. accounts for half of this, or $20 billion spent for termite control and to repair damage, he said.

Su’s Numbers

$100 million (2010 sales of Dow’s Sentricon)
    ÷ .2 (20 percent of market)
       
   $500 million (2010 total sales of termiticide products)

    ÷ .15 (The typical percent of chemical cost in a termite job)
           
=    $3.3 billion (The amount paid for termite control [termite revenue])
    x 5 (The 5:1 repair-to-control cost ratio)

=     $16.6 billion (Total cost of repairing termite damage in the U.S.)

The calculation was based on 2010 sales of Dow AgroSciences’ Sentricon bait system ($100 million), Su said. If Sentricon accounted for 20 percent of all termite chemical sales, then total termite chemical sales could be calculated by dividing $100 million by 20 percent (or multiplying it by 5) to get $500 million, he said.

Because chemical is 15 percent of the cost of a typical termite job, Su said, he divided $500 million by 15 percent to estimate the amount consumers pay PMPs to control the pests. This number is $3.3 billion.

By the time the consumer calls the pest control company, termite damage may have already occurred in the house and this “turns out to be much more than the amount he’s paying the pest control company,” said Su. In fact, for every $1 paid to pest control companies to treat for termites, he said, $5 was paid out in repair costs.

Now, this 5:1 ratio is based on a 1998 study by Ed Bordes, former director of the New Orleans Mosquito and Termite Control Board. Bordes analyzed the separate termite control and repair budgets of the school board, city and state to quantify the costs of Formosan termites and help secure federal funding for Operation Full Stop, a program that significantly reduced Formosan termite infestations in the French Quarter and helped improve treatment techniques and detection tools over 14 years. (The area was getting pulverized by Formosan termites: A 2001 study [Ring et al.] estimated damage losses of $500 million in Louisiana and $300 million in New Orleans, alone.)

Bordes’ published repair-to-treatment cost ratio was 4:1, but by phone he said this was conservative for Formosan termites in New Orleans in 1998; it was “actually a little higher” like 5:1 or 6:1. And for historic structures requiring custom millwork the ratio climbed to $10 to $12 spent per $1 spent on control, he said.

Based on the 5:1 ratio (5 x $3.3 billion), Su determined the annual cost to repair termite damage is $16.6 billion. He admitted the estimate may be a little high since the ratio is for Formosan termites. “Even if you bring the repair costs down, it’s still quite a large amount,” he said.

Using a similar methodology in 2002 with 1999 insecticide sales data and the 4:1 ratio, Su estimated the total annual economic impact of termites in the U.S. was $11 billion (Sociobiology, volume 40 number 1). This included $2.2 billion for termite control and $8.8 billion to repair damage. He estimated the annual worldwide cost of termite control and repair at $22 billion in 2002.
 

Calculating by Claims.

Those I harassed offered a number of other ways one might calculate annual termite damage. Bob Kunst, president of Fischer Environmental Services in Mandeville, La., suggested multiplying the industry’s termite renewal revenue by 1.5 to 3 percent. It’s a number he’s tracked since 1974 while working for Orkin, Terminix and himself. “No matter what we do with newer chemistries, claims run around between one-and-a-half percent of your renewal base and three percent if something is really wrong,” he said.

Kunst suggested taking the renewal revenue of Orkin and Terminix (which he said do about 30 percent of all termite work in the U.S.), adjusting the number for total industry renewal revenue and then multiplying that figure by 1.5 percent.

A Different Look at the Numbers

$192.3 million (sales of termite baits and termiticides in 2010, per Gary Curl)
÷     .15 (the typical percent that chemical accounts for in a termite job, per Su)

=    $1.3 billion (the amount paid for termite control [termite revenue])
    x 4 (the published 4:1 repair-to-control cost ratio per Ed Bordes)

=     $5.2 billion (total cost of repairing termite damage in the U.S.)

Andy McGinty, COO of LIPCA Insurance in Baton Rouge, La., suggested multiplying Terminix’s annual damage claims by 5 or 6 (he said Terminix accounts for 15-20 percent of all termite treatments in the U.S.) to get an industry-wide estimate.

Orkin and Terminix didn’t want to share their numbers, so I asked Gary Curl, president of Specialty Products Consultants, which annually surveys pest management companies, for help. He said the industry’s 2013 termite renewal revenue was $438.7 million (nearly 34 percent of total termite industry revenue).

Using Kunst’s example above, multiplying this by 1.5 percent got me $6.6 million; multiplying it by 3 percent got me $13.1 million (pretty low numbers).

These numbers only account for structures under termite warranty, and insurance claims don’t give the entire picture. Some pest management companies are self-insured; many settle small claims on their own without reporting them. “There are a zillion of (claims) that are handled directly by the PMP that the insurance company never sees,” says McGinty. Large companies may only report claims more than $10,000; smaller operations may report only those more than $2,000. “They don’t report a whole lot” because you get a couple claims and your premium is definitely affected or they lose their insurance,” he said.

LIPCA has averaged 85 claims annually from 2,750 insureds since 2007 with 80 percent of those claims for termite/wood-destroying organism damage, said McGinty. The average damage claim runs $7,500 to $10,000, he said.

Lawsuits, which can add legal fees and punitive awards, can significantly increase the cost of termite “damage.” Kunst, for instance, offered to pay $9,200 for termite damage to a customer, who refused the offer and sued. The judge awarded the customer $52,000, recalled Kunst.
 

Another Approach.

Using data from Gary Curl, I took a stab at recreating Su’s $16.6 billion damage number, but came up with a much lower figure. (Right here I want to remind people that I was an English major in college. Math is not my friend.)

The Construction Cost Approach

$1.5 billion – the 1986 baseline used for annual termite damage (source undetermined)
-     $300 million (20% profit)

   $1.2 billion

    60% labor = $720 million
    40% materials = 480 million

    % increases from 1986 to 2014
    Labor = 138.2%
    Materials = $83.4%

    $720 million x 138.2% = $1.72 billion
+   
    $480 million x 83.4% = $880.3 million

=     $2.6 billion

+      $520 million (20% profit)     

   $3.12 billion (annual cost of repairing termite damage in the U.S.)

Curl’s data showed manufacturer-level sales of termite baits (including Sentricon) and termiticides in 2010 was $192.3 million, much less than Su’s estimate of $500 million.

Following Su’s methodology, I divided $192.3 million by 15 percent (the typical chemical cost of a termite job, he said) to roughly get $1.3 billion in total termite revenue. (Interestingly, total termite revenue in 2013 was $1.3 billion, reported Curl.)

Before I multiplied that number by the 4:1 or 5:1 damage-to-treatment cost ratio, I asked Bordes for input. He said “it would be hard to extrapolate (the ratio) to Oklahoma or Kansas” where no Formosan pressure exists. “In areas where you just have Reticulitermes termites you’re not going to have that type of damage,” he said. The 4:1 ratio, and the accepted 5:1 and 6:1 ratios, occurred at the “peak of our inabilities to control this termite.” Since then, “the non-repellent termiticides and the baits have made a world of difference” along with better treatment techniques and detection tools, Bordes explained. “I know for a fact that there are less damage repairs,” he said.

Today, Bordes estimates a more conservative 2:1 ratio in New Orleans for general household infestations (higher in the historic French Quarter). Regions with Formosan termites will see peaks in damage until control measures catch up, like they did in New Orleans, he said.

No ratio exists for the entire U.S., where some areas face incredible termite pressure and others barely any. So, I multiplied the $1.3 billion total termite revenue by Bordes’ published 4:1 ratio for $5.2 billion in annual termite damage. Using Bordes’ 2:1 ratio gets us $2.6 billion.
 

And One More Way.

Then I tried updating NPMA’s $5 billion estimate, using the same approach (if not the same methodology) as Baumann.

First, I looked for the source of the $1.5 or $1.6 billion termite damage estimate from the late 1980s/early 1990s on which Baumann based his calculations. I’ll spare you the reporter drama in trying to track this number down. The closest confirmation I found was a 2002 Park Science bulletin (New termite baiting technologies for the preservation of cultural resources: Results of field trials in the National Park System) by Su and Mark Gilberg that mentions $1.5 billion in annual termite damage, but isn’t cited.

Then I talked to Jesse Morado, executive director of the Atlanta chapter of the National Association of the Remodeling Industry and an experienced construction and renovation professional. He said a typical remodeling/repair job is comprised of 60 percent labor/40 percent materials plus a 20 to 60 percent mark-up for profit. (This formula applies to construction companies, not handymen.)

Of the $1.5 billion consumers paid out in damage, I estimated $300 million was profit (at the lower 20 percent mark-up), $720 million was labor and $480 million was materials.

Baumann said the $1.5 billion figure he used may have been from 1986. Labor and material costs have increased since then, so I pulled up some historical indices compiled by Engineering News-Record (ENR), a construction industry trade journal that has been tracking labor and materials prices for 50 years.

From August 1986 to August 2014, the cost of skilled labor increased 138.2 percent and material prices rose 83.4 percent, according to ENR records.

That would bring our labor figure up to $1.72 billion, materials to $880.3 million, and a 20 percent profit to $520 million for a total of roughly $3.12 billion.

Like Baumann, I didn’t account for growth in the termite market.
 

And Then a Clue?

While hunting down data, I came across this statement: Pesticide-based termite treatments prevent “an estimated $900 million in termite structural damage every year in the United States,” according the U.S. Environmental Protection Agency on its web page, Performance Management & Accountability: Achieving Pesticide Program Goals.

Now, just bear with me…if you haven’t stopped reading already, I promise this is almost over. EPA calculated this estimate of damage avoided by multiplying the average termite damage per house — $2,500 — by 3.62 million units receiving termite treatment; then multiplying this number by 10 percent, the estimated percentage of homes that get termite damage without treatment.

Catherine Milbourn, media relations specialist at EPA, explained to me how the agency arrived at the $900 million number, which was last updated in 2009:

The 10 percent of housing units that get termite damage absent treatment comes from an Ipsos-Insight 2005 Survey for Dow AgroSciences, EPA told me.

The 3.62 million homes treated per year was calculated by multiplying 72.4 million owner-occupied housing units in 2003 (U.S. Census Bureau, 2006) by 5 percent, the percentage of homes that received termite treatment in 2001, per a University of Georgia report by Dan Suiter and Brian Forschler (2003. Summary of Losses from Insect Damage and Cost of Control in Georgia 2001. University of Georgia. 106:16-18). (The 5 percent was for homes under termite contract and in Georgia.)

The $2,500 average termite repair cost was calculated by dividing $1.5 billion in annual termite damage to homes by an estimated 600,000 houses sustaining damage each year (an old NPMA figure).

Wait! $1.5 billion in annual termite damage? Could this be the $1.5 billion figure that was the basis for NPMA’s $5 billion estimate?

Milbourn provided a link to the source material, which led to another source: A 1994 paper by Su (Field evaluation of a Hexaflumuron bait for population suppression of subterranean termites. Journal of Economic Entomology 87; 389-397), which in turn cited another Su paper from 1991 (Termites of the World and Their Control. SP World.17:12-15), which I was unable to find online.

But the 1994 paper clearly stated that $1.5 billion was spent yearly on termite control, not repairing damage. EPA said, yes, their calculation used termite control cost in place of termite damage cost. “At the time we had no data to estimate damage, and EPA felt the control cost was the best available estimate at the time, so we went with this value,” replied Milbourn in an email to me.

When I asked Su where he thought NPMA’s $1.5 billion figure came from, he suggested the same 1994 paper that mentioned control costs. Hmmm. If the EPA and possibly the U.S. Park Service swapped control for damage, maybe others did, too.
 

Cautious or Alarmist?

However they’ve been calculated, termite damage estimates out there are being used to justify the industry every day. The question is, are they too conservative or grossly exaggerated? It’s difficult to say.

States don’t track damage caused by termites, and neither does the construction industry. Adding up insurance claims doesn’t give the whole picture because many PMPs settle small claims on their own. It’s impossible to know what clients pay to repair properties not under a termite contract or how many change orders contractors make to fix damage uncovered during remodeling. Quirky construction in some buildings means “you can have a tremendous amount of damage done and it goes unknown,” added Kunst.

Some say the lesser figures woefully underestimate the damage, especially in regions with heavy termite pressure. Termite damage and activity in the South and Southeast are greater than anywhere in the U.S., reminded Suiter. That University of Georgia report by he and Forschler said homeowners in the state spent $10,496,270 fixing termite damage in 2001.

Others, like McGinty of LIPCA Insurance, said he “can’t believe more houses aren’t falling down” if we’re to believe the higher numbers. Curl likewise thought the estimate is high, considering the shift to better construction practices and improved termite control products. He declined to posit an estimate of his own since he doesn’t collect damage information for his annual survey.

I’m a writer, not a PMP or a termite researcher or a construction contractor, and certainly not an economist. I take no offense if you question my calculations and assumptions, and in no way do I want to suggest the estimates of experts are inaccurate.

I can say I’ve learned a few things:

First, any way you add up the numbers, most people in the industry say the cost of termite repair is higher than the cost of termite control.

(Curl estimated the cost of termite control to be $1.3 billion in 2013.)

Second, be careful what you cite. When I suggested to Larry Pinto that his work in 1981 just might be the genesis for a number of termite damage estimates, he laughed out loud. Data can get screwed up, he said. This is “a perfect example” of how data gets institutionalized in the literature by citing and re-citing others’ work.

Third, be very cautious when it comes to accepting future writing assignments.

 


The author, who has a headache, is a frequent contributor to PCT. Email her at anagro@giemedia.com.

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