Analyzing Timber Markets and Boiling the Ocean

5 08 2012

A successful timber market analysis answers the question “what matters, and what does not, in this timber or wood raw material market?”  While we care about forest inventories and supplies, wood demand and competition, and stumpage prices and forecasts, we do this in order to identify the key variables that let us:

  • Understand historic relationships between prices and flows;
  • Assess future impacts as changes occur; and
  • Make investment decisions based on relationships as we interpret them.

The work for analyzing timber markets builds on three fundamental exercises.

First, understand the local wood market.  Timber markets are uniquely local.  The same tree in two different markets will have two different values.  Understanding the local basket extends beyond mapping all of the mills that might buy your trees.  It includes understanding the logistics and limitations of how you will access these markets.  Will you work through a forestry consultant?  If so, who?  Will you work directly with loggers?  If so, who?  What is the situation with respect to roads, rail, ports and bridges?

Second, question your forest industry data.  In forestry, everything is a sample.  A forest cruise, which estimates the volume and value of the standing forest on a given property, is a sample of what’s out there.  If we use data from the US Forest Service, it’s based on samples.  If we use a timber pricing service, whether public or private, all reported prices are based on samples.  Ask questions about the data.

Third, know what’s knowable with respect to this market and these assets (but avoid “boiling the ocean”).  In your valuation model, confirm what’s left over each year after revenues are generated and bills paid. Be specific about the property taxes for THIS property, the annual management costs for THIS property, and the fees paid to consultants, accountants and lawyers to acquire and manage THIS property.

Analyzing timber markets, while straightforward, requires discipline.  Become familiar with local markets and patiently seek and evaluate timberland investment opportunities.  This approach leads to building solid models with tested assumptions for buying properties.  Then, when the numbers look good, move fast.

For investors and analysts evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on August 15th 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

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