Data Sources for Analyzing Timber Markets in the U.S.

If a tree falls in the woods, will someone buy it?  Who?  What will they use it for?  How much will they pay for it?  How many other trees will they need this year?  Next year?  A rigorous timber market analysis (TMA) process helps prioritize questions, aggregate data, conduct analysis and communicate results and recommendations.  Much of the data required for TMA in the United States is readily available.  The following list includes a sample of free and fee-based data sources for supply, demand and price data:

Forest Inventory and Analysis (FIA) data from the U.S. Forest Service.  The FIA Program includes a “continuous forest census” to help project how U.S. forests are likely to change over the next 10 to 50 years. Specific data from the FIA Program includes, for example, inventory, growth and removal data for hardwood and pine. The USDA Forest Service manages the FIA Program in cooperation with state and private forestry organizations. The McSweeney-McNary Forest Research Act of 1928 created the FIA Program, which initiated the first forest inventories in 1930.

• http://www.fia.fs.fed.us/

Timber Product Output (TPO) data from the U.S. Forest Service. The TPO Database includes a standard set of consistently coded data variables for each U.S. state and county related to forest harvesting and tree removals.  Specific data includes, for example, the volume of roundwood products harvested, logging residues left behind, and the wood and bark residues generated by primary wood-using mills. The latest data available from the TPO Database is dated 2009. When using TPO data, Forisk often projects the base numbers to the current year by applying annual changes in wood demand.

• http://srsfia2.fs.fed.us/php/tpo_2009/tpo_rpa_int1.php

Wood Demand data from the Center for Forest Business at the University of Georgia.  The Wood Demand Research Program collects wood use data from participating mills on a quarterly basis. In addition, the Program publishes Forest Industry Shapefiles that track all forest industry facilities.  These shapefiles are updated two times per year and can be used with GIS/map-making software.

• http://www.ugacfb.com/research/wdrp/

Timberland owner data from Forisk Consulting. Forisk tracks hundreds of the largest private timberland owners and managers in the United States that own 10,000 acres or more. This is part of Forisk’s ongoing research program of timberland investment vehicles and is updated annually.

• http://www.foriskstore.com/servlet/the-41/2013-Forisk-Timberland-Owner/Detail

Wood bioenergy project data from Wood Bioenergy US. Forisk analyzes the U.S. wood bioenergy sector through tracking and screening all announced and operating wood-using bioenergy projects in the United States. In addition, WBUS tracks and analyzes project development over time. This is part of Forisk’s ongoing wood bioenergy research program and the WBUS database is updated every two months.  The project lists provide a means for evaluating the relevance and implications for wood bioenergy to specific timber and wood markets.

• http://www.foriskstore.com/servlet/the-31/Wood-Bioenergy-US/Detail

Several organizations provide regional and local stumpage and delivered price information.  State forestry and natural resource departments sometimes track sales from public and/or private lands.  A good example is the Oregon Department of Forestry.  One source specific to the U.S. South is Timber Mart-South.  Managed by the independent, non-profit Frank W. Norris Foundation located at the Warnell School of Forest Resources at the University of Georgia, Timber Mart-South publishes quarterly and annual reports of stumpage and delivered prices in the US South. Timber Mart-South has surveyed and reported timber prices since 1976.

Timber markets are uniquely local.  Decision-supporting analysis of timber markets depends on a process of systematically evaluating and tracking local wood raw material markets for investing in and managing timberlands and wood-using facilities.

Forisk will cover these and other data sources during “Timber Market Analysis” on August 12^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here. 

Wood Supply Agreements, Part II: Basic Principles for Transfer Price Calculations

This is the second in a two-part series related to wood supply agreements and their relevance to analyzing timber markets.

Part I of this series on wood supply agreements introduced basic pricing mechanisms often used in supply agreements and associated concerns raised by parties to these agreements.  Bioenergy firms new to local wood markets, in particular, focus on potential conflicts of interest associated with price indices or pricing mechanisms implemented by the same firm that collects and reports the underlying price data.  They ask “how reliable and independent are these data sources and indices?”

As a general rule, we find it helpful to avoid swimming in the toilet or peeing in the pool.  Clear, verifiable methodologies for collecting data and reporting changes over time facilitate strong wood supply relationships.  In specifying these methods, parties in a long-term wood supply agreement may rely on a set of working principles.

We believe the following three criteria for establishing an independent pricing mechanism include the proper principles while maintaining the practical necessities of an operational transfer price in a real world forest products or bioenergy supply agreement:

• Reflects market prices: The log or wood transfer price should approximate an “arms-length”, market based price. While the transfer price may deviate from the market price for a given month, the prices paid by the mill or bioenergy plant for raw matieral over time should minimize the perceived and actual missed opportunities of bypassing other customers and markets.  This criterion passes the fairness test and retains the benefits of operating in a market environment.
• Easy to implement and to use: The model should be easy to understand, easy to explain, and easy to use.  Complex transfer pricing methods do not create value for business owners; simple transfer pricing models allow managers to focus time and resources on operating the business.
• Retains flexibility:  At times, the two parties may feel the transfer price requires an adjustment.  Rather than disregard the model to make an adjustment, an approach should be determined in advance for adjusting the model or revising the price. As such, the option would exist for both parties to agree to periodically review and revise, if necessary, the transfer price based on new information or on a region-wide log price index.

Situations exist when both parties want to revisit prices and how they were calculated, and accounting for this in advance based on clear principles can minimize unnecessary costs, friction and arbitration.

For investors and analysts evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on August 12^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here. 

Wood Supply Agreements, Part I: Pricing Mechanisms and Market Analyses

This is the first in a two-part series related to wood supply agreements and their relevance to analyzing timber markets.

In his 1989 book Liar’s Poker, Michael Lewis wrote, “Risk, I learned, was a commodity.  Risk could be canned and sold like tomatoes.”  This represented a prevailing view among the sophisticates of Wall Street prior to the mortgage bubble and collapse of AIG.  Though the view of risk “as a commodity” varies over time, it remains critically important to managers and investors exposed to timberlands and wood-using assets.  One tool employed to mitigate risk in timber-related industries is a wood supply agreement.

Forest industry managers and bioenergy project developers sometimes use wood supply agreements to manage the costs and flows of logs and other woody raw materials to manufacturing facilities and bioenergy plants.  Integrated forest products firms also used them to work through the operational impacts of timberland divestitures.  A typical agreement comprises a contractual obligation by a supplier to provide agreed-to volumes of wood to a buyer, who commits to purchase this raw material at the contract price.

Most agreements reflect a tradeoff between security and flexibility.  In guaranteeing volumes, the supply agreement secures supply for the mill and a market for the timberland manager.  The aspects subject to negotiation include product, volume, timing, and price.  Product specifies the species and “specs” of the product to be delivered.  Pine pulpwood or hardwood logs?  Volume specifies the amount of wood covered under the agreement, whether it is fixed or a range.  Timing specifies the timeframe covered, and the time periods for actually delivering the wood.  Price specifies the method and manner for pricing the wood delivered, and the process of updating and communicating this price.

The “pricing mechanisms” built into wood supply agreements are of central importance.  They have influenced many a bonus, ulcer and sleepless night.  How can fair prices be calculated over time that account for actual market activity while minimizing the “penalties” for being locked into a set marketing arrangement?  Existing supply agreements attempt to balance two competing aspects of pricing wood based on available data.  The first asks the question, “How does the market price this wood?”  The second asks, “What is the value of this wood in the market?”  The first is the question of the wood buyer, and the second is the question of the stumpage seller.

Common approaches include rolling averages, indexing, and blended indexing.  Rolling (moving) averages are used within the forest products industry, and in other heavy industry settings, to calculate transfer prices and for raw material supply agreements. One advantage of a moving average is that it reduces the peaks and valleys associated with changes in log prices.  One disadvantage is that, for any given month, the transfer price lags the actual market price, though this should balance over time.

Recent issues related to supply agreements have focused on reduced confidence in the data underlying a supply agreement and concerns about conflicts of interest associated with pricing mechanisms or indices provided by the same firm that collects and reports the underlying price data.  These issues become relevant when conducting due diligence on timber markets or wood baskets as they can affect the ranking and risk assessments associated with potential or existing wood procurement strategies.

For investors and analysts evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on August 12^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here. 

2013 Forisk Timber Price Forecast: Assessing Forest Supplies and Price Elasticities

This is the sixth in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

When housing crashed in the United States, forest owners and timberland investors deferred harvesting sawtimber, the logs needed to manufacture lumber.  In 2012, Forisk added a “forest supply module” to its forecasting of pine stumpage prices to estimate potential supply effects on timber prices.  Today, the theory that pine grade accumulated, possibly to excess, on the stump in the U.S. South is holding water. Historical research and quantitative relationships reinforced the notion that (1) stumpage prices would lag increased demand and pricing for softwood lumber and (2) excess forest inventories could further dampen pine sawtimber price recovery.

Quantitative evidence confirms that pine grade stumpage prices lagged increases in softwood lumber prices.  And the slow recovery of pine grade prices in 2012 showed greater dampening than estimated by the Forisk Forecast. South-wide, actual 2012 pine sawtimber prices in the South were 1.6% lower than Forisk’s estimate.  At the state level, pine sawtimber prices were, on average, $0.21 per ton lower than forecasted by Forisk.  While we cannot claim or confirm causality – we cannot prove that oversupplies produced slower growth in pine grade prices –we can establish the relative consistency in the story of demand-versus-supply across states.

States with the most severe pine grade “oversupplies” showed material decreases in their price-to-demand relationships over the past five years.  In other words, stumpage prices became less sensitive to increases in demand in those states for which a quantitative basis exists for significant excess inventories.  This includes states, for example, such as Georgia and Mississippi.  While these estimates do not specify the situation in any given wood basket or for any given timberland property, they do support the evidence that supplies have affected stumpage markets selectively.

In 2013, our research into the effects of forest supplies on stumpage prices focus on distinguishing “supply effects” from “demand effects.”  Why?  The key is to avoid double-counting the impact of excess supplies.  If prices temporarily become less responsive to demand in a given state or market, we can “plausibly” attribute this, in part, to the supply situation.

To learn more about the 2013 Forisk Forecast or Forisk’s market-specific stumpage forecasts tailored to individual wood-using facilities or timberland ownerships, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447. 

2013 Forisk Timber Price Forecast: Framing the Outlook

This is the fifth in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

In the 2013 Forisk Forecast published in March, four key themes frame the outlook for the next ten years:

• Timber price performance:  how did timber markets perform in 2012 relative to Forisk’s expectations for 2012?  A detailed self-assessment provides a necessary testing of key assumptions.
• Capital investment:  where have forest industry firms decided to allocate capital for 2013 and moving forward?  Since timber forecasts are applied locally, capital flows reinforce which states will have the “iron in the ground” to satisfy growing demand.
• Forest supplies: what have we learned about the relative supplies of pine grade and pulpwood and their actual or perceived impacts on stumpage markets?  In the past two years, we observed an eroding of the price-to-demand response in states that corresponded with excess pine grade inventories.
• Demographics: how do current demographic trends in the U.S. compare to our historic understanding of how population changes relative to wood demand and housing?  At the end of the day, we must confirm the expectation of fundamental demand for wood products.

In the South, the Forisk Forecast includes state-by-state, year-by-year prices for 11 Southern states for pine sawtimber, chip-n-saw and pulpwood. In the Northwest, the Forisk Forecast includes Douglas-fir and Western Hemlock prices for Oregon and Washington. Select expectations include:

• Lumber Production: while the U.S. South lost lumber production market share to the Pacific Northwest in 2012 on a relative basis, capital flows continue to indicate that long-term trends for capacity and production will grow faster in the South.
• Demand from Pulp/Paper, OSB and Bioenergy: by 2023, the pulp/paper sector will account for less than 80% of pulpwood/chips demand, while bioenergy and OSB use 11% and 10% in Forisk’s Base Case.
• Log Exports: the Pacific Northwest remains the colossus among U.S. regions; the U.S. South managed to nudge its share from 2.5% in 2011 to 2.9% in 2012. (Hold the champagne.)
• US South, Pine Sawtimber: South-wide prices are forecasted to increase 7% in 2013 and 34% by 2023.  Alabama, Florida and Louisiana lead Southern states across the $30 per ton benchmark in 2014 and 2015 based on state-wide pricing.
• Pacific Northwest, Douglas-fir: in the Base Case, delivered #2 domestic sawlogs are forecasted to increase 3% in 2013 and 23% in Coastal Oregon and 20% in Washington through 2023.  Oregon average annual prices maintain a $41/MBF spread over Washington.

To learn more about the 2013 Forisk Forecast or Forisk’s market-specific stumpage forecasts tailored to individual wood-using facilities or timberland ownerships, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447. 

Forisk Forecast Scorecard: 2012 versus Actuals

This is the fourth in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

How did Forisk’s Forecast perform in 2012?  For pine stumpage prices in the U.S. South, the Forisk Forecast was within 2% regionally across all products.  Analyses of eleven state-by-state forecasts relative to Timber Mart-South shows that Forisk was, on average, $0.21 per ton lower than the actual pine sawtimber prices and $0.33 per ton higher than the actual pine chip-n-saw prices.  For pine pulpwood, Forisk’s estimates for eleven state-level prices for 2012 had, on average, $0.00 per ton difference from the actuals, with seven states realizing slightly higher prices than forecasted by Forisk and four states realizing lower prices than forecasted by Forisk.

For delivered softwood prices in the Pacific Northwest relative to those reported by Wood Resources International and the Oregon Department of Forestry, the Forisk Forecast was within 1% for three out of four state-product forecasts for 2012, and within 2% for the fourth state-product. Across categories in Oregon and Washington, Forisk underestimated the actuals for 2012 by, on average, $4.41 per MBF or 0.8%.

To learn more about the 2013 Forisk Forecast or Forisk’s market-specific stumpage forecasts tailored to individual wood-using facilities or timberland ownerships, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447. 

2013 US Timberland Ownership: Descriptive Statistics

According to Forisk tracking of timberland ownership in the United States, 117 firms currently own or manage in excess of 100,000 acres of timberland. These firms feature the following descriptive statistics:

• As a group, they own/manage 86.2 million acres of timberland.
• On average, they own/manage 736,589 acres of timberland.
• The median ownership is 312,000 acres.

Assuming an average per acre value of $1,500, each firm owns or manages on average $1.1 billion in timberland assets.

Analysis of private timberland in the U.S. affirms the concentrated nature of large ownerships.  While U.S. Forest Service research by Brett Butler concludes that 10 million family forest owners account for 264 million acres (35%) of U.S. forestland, Forisk research indicates that the 286 largest owners alone account for 92.1 million acres.  Each of the top ten own or manage in excess of 2 million acres.

The top 10 timberland owners as of January 2013 include:

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.

Thomas Jefferson and Timberland Ownership in the United States

Through executing the Louisiana Purchase in 1803, President Thomas Jefferson proved himself, among other things, the preeminent timberland acquisition professional.  In this bold embrace, he more than doubled the size of the United States by acquiring 820,000 square miles of land west of the Mississippi from France for $15 million dollars.  That equals 524.8 million acres at 2.9 cents per acre (or just over 50 cents per acre in today’s dollars).

[Picture an excerpt from Jefferson’s resume:  Experienced negotiator and real estate professional.  Acquired over half a billion acres of fertile soil and natural resources. Includes land in 14 states such as Arkansas, Colorado, Iowa, Texas, the Dakotas (both) and Wyoming.  Creator of the swivel chair.]

The Louisiana Purchase was opportunistic.  U.S. negotiators wanted to buy New Orleans, but Napoleon needed financing to wage war on England.  So he rejected the New Orleans proposal and countered with a deal to sell all of France’s North American land holdings.  The U.S. team, led by Secretary of State James Madison, took the offer and closed the transaction.  Bada bing, bada boom.

Forisk’s ongoing research of timberland investment vehicles highlights how private timberland owners and ownership have changed over time since the days of powdered wigs.  Today, timberland investment professionals scour the landscape and courthouse documents for the next purchase in Louisiana or in Arkansas or in Texas.  As of 2013, Forisk counts 217 owners that each own and manage 25,000 acres or more for a total of ~91 million acres of private timberlands.  Of these acres, 18% are owned by the four public timber REITs (Plum Creek, Potlatch, Rayonier and Weyerhaeuser).

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.

Forest Finance: What is Timber “Depletion”?

Money does grow on trees.  Unfortunately, it grows in small denominations.  So we care deeply about managing costs and minimizing taxes.  Which brings us to a category of questions I get each tax season:  timber depletion.  What is it?

Depletion, like depreciation and amortization, is a cost recovery method for natural resources.  It comprises the costs we have in the timber we own and harvest.  We subtract depletion from timber stumpage revenues to arrive at taxable income.  (Therefore, we want depletion rates as high as possible!)

There are two general methods for calculating depletion: tax depletion and financial depletion.  Tax depletion is based on the actual cost of the timber, adjusted annually for additions (acquisitions), removals (harvests), annual net growth, and capitalized reforestation costs.  The depletion “rate” for a corporation is capitalized silviculture dollars divided by the merchantable forest inventory

Financial depletion, also called “normalized” depletion, sums all capitalized silviculture expenses plus merchantable timber accounts and divides this by the beginning inventory plus all growth over the rotation.  The idea is that this should represent the initial cost of the timber plus all ongoing capitalized silviculture expenditures (all capitalized costs associated with wood production) and all the wood that is grown.  This approach provides an “average rate” over the rotation rather than a rate that can change drastically over one rotation.  You will find this method in financial reporting by publicly-trade entities. Private entities (S-Corps, LLCs, Partnerships) generally do not keep a set of financial reporting books.

In summary, depletion reduces the taxes we pay on revenues produced from harvesting and marketing timber.  Publicly-traded firms generally report both tax depletion and financial depletion.  At the end of the day, the objective is to MINIMIZE taxes paid within IRS guidelines….

Forisk Forecast: Expanding the Panama Canal

This is the third in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

One of the best books I read in 2012 was David McCullough’s The Path Between the Seas about the building of the Panama Canal.  Early in the book, McCullough summarizes the prognosticating efforts of those studying and considering in the 1800s alternatives for slicing a path through the isthmus of Central America at Nicaragua or Panama to connect the seas.  McCullough notes that:

….all the canal projects proposed, every cost estimated, irrespective of the individual or individuals responsible, were hopelessly unrealistic if not preposterous.  Every supposed canal survey made by mid-century was patently flawed by bad assumptions or absurdly inadequate data.  Assertions that the task would be simple were written by fools or by men who either had no appropriate competence or who, if they did, had never laid eyes on a rain forest.

While McCullough falls (just) short of crucifying the analysts and pitchmen of the day, his language quickened my pulse and reminds us all to confirm assumptions on the ground, check data and respect context.  In the end, we must take a position on what’s “doable.”

In December, I visited the Panama Canal.  The largest ships began outgrowing the Canal in the 1980s. In 2007, Panama officially started an expansion project that will add a third lane to the Canal.  Scheduled for completion in 2015, the Panama Canal expansion will allow significantly larger container ships to short-cut the trip from Asia to the East Coast in the U.S. and elsewhere.  A critical limiting issue remains.  Tom Heagle at ASF Logistics highlights how most East Coast ports currently lack the necessary depth and/or maneuvering space and/or suitable cranes and/or docks to handle the enormous ships.

In studying and tracking log and lumber export markets, we model potential implications from the Panama Canal.  In practical terms, 2013 will not be the year the Canal Expansion influences stumpage (or lumber) prices in the United States.  Neither will 2014.  For U.S. stumpage and log forecasts, keys include competitively priced supplies – influenced through imports and exports that may or may not change due to the Expansion – relative to U.S. demand.  The economics of utilizing an expanded Panama Canal fail to qualify as a “no-brainer”; it simply opens a trade-off between total time and total cost.

To learn more about the 2013 Forisk Forecast and its assessment of the economics of the Panama Canal, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447.