US Forest Growth Far Exceeds US Wood Demand

The 1970 movie “Sometimes a Great Notion”, based on the novel by Ken Kesey, centers on an independent logger in Wakonda, Oregon, and a battle between the local logging union and a lumber conglomerate.  The patriarch of the logging family, played by Henry Fonda, says to his rebellious, long-haired, youngest son, played by Michael Sarrazin, “where did you get all that hair?”  And the son replies, “it grows.”

Trees grow, too.  All of the time.  Regardless market conditions.  And in the United States, we are REALLY good at growing trees and managing for volume.  In fact, total growing stock – forest inventory – from all forest owners and species increased 51% from 24.6 billion tons in 1953 to 37.3 billion tons in 2007. Despite increases in wood use from all forest products sectors over this time period (pulp and paper and wood products), especially in the 1990s through 2005, the overall volume in the forest in the United States has increased.

In addition, this growth has far exceeded forest harvesting and removal activity, which proxies wood demand in the United States.  While forest growth net of removals has been positive, it has varied by region over time. The West had the lowest net growth in 1976 of 7.6 million tons. Net growth in the West increased over time as forest industry activity in the region weakened. The South had the lowest net growth in 1996 of 21.1 million tons

US South Pine Sawtimber Prices Expected to Decline in 2012, Recover in 2013-2014

Over the past three months, Dr. Tim Sydor, Forisk’s Director of Economic Analysis and Forecasting, has led our mid-year update of Forisk’s 2011-2020 timber forecast for the US South and Pacific Northwest.  The results show sawtimber prices for the US South weakening 2.7% in 2012 and then strengthening 2.9% into 2013.  Key factors include weak expectations for housing starts and low utilization rates at sawmills.  While sawtimber prices can increase temporarily from artificial shortages related to weather and logging capacity, long-term strengthening of sawtimber prices requires sawmill utilization to exceed 76%.  For 2012, Georgia, Louisiana, Mississippi and Texas are the only states with forecasted sawtimber stumpage prices exceeding $27/ton.  Alternately, delivered prices for Douglas-fir and hemlock in Oregon and Washington look to increase 6% and 4.9% in 2012 thanks to continued exports to China.

This research emphasizes the critical importance of assessing the relationship between timber prices and wood demand locally.  Forisk tracks 3,191 wood-using facilities in the United States.  This includes every open, closed and idled forest industry mill, and 462 operating and announced wood bioenergy projects.  The bottoms-up, market-specific approach proved effective in 2010; Forisk’s pine sawtimber forecast was within 4% of actual prices, and within $1.00 per ton at the state level.

For more information on Forisk’s forecasting in the South and Pacific Northwest, visit www.foriskstore.com and click “Stumpage Price Forecasts.” 

Rayonier to Increase Timberland Ownership >10%; Timber REITs Lead All REIT Index YTD

Last Friday (September 16, 2011), Rayonier (RYN) announced its intent to acquire 250,000 acres of timberlands in the US South for $330 million.  Expected to close in the fourth quarter of this year, the deal would bring Rayonier’s timberland ownership to 2.7 million acres and increase its US footprint from nine states to ten, in addition to lands in New Zealand.

• Current RYN states (9):  AL, AR, FL, GA, LA, NY, OK, TX, WA
• States of announced 250,000 acre acquisition (4):  AL, LA, MS, OK
• New states for RYN (1): MS

Year-to-day, RYN has led all timber REITs with a return of 16.21%.  As a sector, the FTR Index of publicly-traded timber REITs has outperformed the public REIT sector (see table).

Strong performance from the timber REITs this past week, as well as the S&P 500, put the sector back into the black for 2011.

Timber REITs: Isn’t All Income “Good”? No.

If you invest, isn’t all income “good”?  Not according to the IRS when it comes to real estate investment trusts (REITs).  Generally, 95% of a REIT’s gross income must be derived from rents from real property, aka “good income.”  For timberland-owning REITs, the selling of timber qualifies as good income.  What else qualifies?

One area of interest from clients has been mineral income. Timber REITs actively manage mineral, oil and gas leases on their land. Mineral royalty income is considered qualified REIT income for the 95% income test.  Timber REITs must still earn 75% of its income from real estate, including sales of timber and timberland, rents of real property and mortgage interest from secured property.

How big are the dollars?  Weyerhaeuser (WY) owns 7.1 million net mineral acres; revenue from mineral, oil and gas totaled $60 million during FY 2010.

Wood Bioenergy Update: Project Count Up; Viable Wood Volume Down

According to the August edition of Wood Bioenergy US, the number of announced and operating wood-consuming bioenergy projects in the United States increased from 457 in July to 462 in August.  However, the volume of total wood use that passed Forisk project screening fell from 53% to 52%.  Highlights as of August 30, 2011 include:

• In total, these projects represent potential, incremental wood use of 133.9 million green tons/year by 2021.
• Based on Forisk analysis, projects representing only 69.1 million tons/year pass basic viability screening.
• Enviva announced plans for a new 400,000 ton pellet facility in Northampton County, NC.
• Fram Renewable Fuels and Telfair Forest Products will build a 125,000 ton pellet plant in Lumber City, GA.
• Green Power Solutions, a partnership between Beasley Forest Products and Land Care Services, plans to build a 56 MW biomass cogeneration plant in Laurens County, GA.
• The $75 million federal loan guarantee for INEOS New Planet BioEnergy was finalized in August. The firm is building an 8 million gallon per year cellulosic ethanol plant in Vero Beach, FL.
• Envergent Technologies, a Honeywell Company, began construction of a demonstration scale plant to convert cellulosic material into transportation fuels in Kapolei, HI.

To download the complete free August summary of Wood Bioenergy US, click here.

To purchase the subscription version of Wood Bioenergy US, including the full project list, please click here to visit the Forisk Store.

How Creditworthy are the Public Timber REITs? A Rating Agency Update

Last week, Fitch Ratings raised its outlook on Weyerhaeuser (WY) from “negative” to “stable” and affirmed its rating at “BB+”.  Fitch justified the action primarily on WY’s Pulp business and core Timberland operations, though the rating agency recognized that the company’s financial performance continues to suffer from depressed housing markets via its Wood Products and Real Estate businesses.  Given the Fitch action, we take this as an opportunity to revisit the current ratings across the firms we track in the timber REIT space.

The table summarizes current ratings for the publicly-traded timberland-owning REITs by the three major credit rating agencies: Standard & Poor’s (S&P), Moody’s and Fitch. The rating agencies do not make recommendations about buying or selling securities; rather their ratings are intended to provide independent, objective and informed opinions about the credit worthiness of each company.

In rating long-term debt, the agencies use alphanumeric letter grades, starting from “AAA” (extreme strong capacity to meet financial commitments) and ending at “D” (has been a payment default). Each letter grade has three notches and S&P uses + and – as modifiers. “BBB” and above are considered “Investment” grades and “BB” and below are considered “Speculative” grades. Ratings are subject to revision and the agencies update their outlook on a continuing basis. A “Positive” outlook indicates that the rating may be raised and a “Negative” outlook indicates that the rating may be lowered, while “Stable” indicates a neutral outlook.