From the desk of Dr. Tim Sydor, Forest Economist:
The 2011 Timberland Investment Conference, hosted last week by the University of Georgia’s (UGA) Center for Forest Business at Lake Oconee, attracted over 350 participants from all aspects of the timberland investment spectrum. Here are my thoughts on select topics covered at the Conference:
The condition of housing markets in the US captured everyone’s attention on the first day. Rightly so. As the final use for numerous timber products, housing explicitly drives wood demand and prices for lumber and logs. I noted in particular two points from presentations by Harvard’s Joint Center for Housing Studies, the Federal Reserve Bank of Dallas and the Terry College of Business at UGA. First, the panel estimated an “overhang” of 3 to 3.5 million housing units. This overbuilt inventory includes foreclosed and soon-to-be foreclosed homes, which could dampen any market recovery. Two, there exists an “overhang” of unrealized demand for housing on the order of 2 to 2.5 million units (also known as pent-up demand) stemming from delayed housing formation due to the recent recession and poor job markets.
Optimistic and pessimistic assessments in the forest industry use these points selectively to support conclusions of why a housing recovery is or is not on the horizon. From my view, the estimates of both “overhangs” are sufficiently close to each other to indicate that modest economic growth and activity is all that is needed for stronger employment and the clearing of excess inventory over the next few years. Also, this same view would discourage any policy that slows the resolution of unhealthy and, where necessary, underwater mortgages.
Export markets to China of logs and lumber shined as one of the bright spots in the industry outlook. Log exports increased 600% since 2008 (wow!). Dr. Jack Lutz put this into context, noting that the associated volume was equivalent to the annual use at a single large sawmill. Hardly a game changer. However, as an economist, I always look to the margin and found the activity encouraging.
What spurred recent Chinese demand? Presentations shared multiple theses. One, the Chinese Government increased plans from building 3 million affordable housing units in 2010 to 10 million units per year until 2015. Two, Chinese log importers felt compelled to react to uncertainty associated with Russian log export taxes (which have been in effect at the same 15 Euro/cubic meter since April 2008).
For me, it remains important to keep this development in perspective. Log exports are increasing to the country (China) where government expenditures keep demand growing for housing. These exports, to some degree, substitute for logs from another country (Russia) whose government chose to curb log exports to support its own lumber industry. Net result? The US, in the short term, increased its role as a Chinese source for wood raw materials.