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

9 04 2013

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. 

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2013 Forisk Timber Price Forecast: Framing the Outlook

5 04 2013

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 performancehow 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

27 03 2013

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.

20130327 Forisk Forecast Scorecard

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. 





Forisk Forecast: Expanding the Panama Canal

26 02 2013

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. 





Forisk Forecast: US Housing Starts Outlook

20 02 2013

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

Herman Chapman, in his 1935 book Forest Finance, wrote:

Forestry is an empirical art and not a mathematical science.  The two major premises upon which it rests, namely, human needs expressed in consumption of forest products, and the vital forces of tree life in their reaction to the composite factors of site including climate and soil, can be measured and predicted with only approximate accuracy. 

In this quote, I hear lessons echoed by friends and colleagues in the forest and timberland industries who remind us to maintain perspective and prioritize the most important factors.  Timberland investment pioneer Forrest Kellogg teaches, “It’s all about the soil!”  Timber buyer and procurement forester Fred Voyles reminds us, “You’re not doing your job if you stay in the truck!” Even professional gambler Amarillo Slim – neither friend nor colleague – advised, “You can shear a sheep a hundred times, but you can skin it only once.”

While I might not talk to Slim when it comes to future prices – or anything related to money, unless I want to lose some – we acknowledge that timber forecasts depend on appraisals of the future that we develop with “approximate accuracy.”  In this process, we do the best can to account for the strengths and weaknesses of the data available and the objectives across participants in forest industry markets.

From the macroeconomic perspective, housing starts critically affect timber forecasts.   Increased home building leads to periods of strengthening stumpage prices through growing demand for lumber and other building products.  The buying and building of new homes also fuels spending on wood products such as cabinets, furniture and hardwood floors.   Ultimately, however, our primary interest is the movement of stumpage prices in each local market as it plays out its role in satisfying national and export markets for forest products and wood bioenergy.

Every six months, Forisk builds a composite housing starts outlook based on publicly-available, independent forecasts from professionals in the housing industry.  These include Fannie Mae, Freddie Mac, Mesirow Financial and the National Association of Home Builders (NAHB), as well as long-term assumptions from the Energy Information Administration’s (EIA) model of the US economy (Figure 1).

20130220 Forisk Forecast_Housing

Our 2013 Base Case peaks at 1.75 million housing starts in 2018.  For comparison, our Mid-Year 2012 Base Case peaked at 1.78 million housing starts in 2017.  Overall, housing has recovered a bit quicker than forecasted in 2012 with the expectation of a slightly flatter, long-term trend.  In this Composite Outlook, the primary source of sensitivity with respect to lumber demand is the assumed single-to-multi-family housing mix.

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. 





Thoughts on Forecasting Timber Prices

17 02 2013

Forecasting timber (stumpage) prices and wood demand relies primarily on the manipulation of historical data and relationships to assess future scenarios and prices.  While the statistical techniques are somewhat agnostic, the development and application of relevant forecasts requires judgment.  How? Context and experience help determine which data may or may not be relevant, what scenarios may or may not reflect reality on the ground, and on what critical assumptions we depend to realize or negate our view of the future.  In sum, stumpage forecasts combine statistics with the smell of sawdust.

Generally, a purely data-driven, “built-in-a-vacuum” forecast that relies solely on historical information assumes a future that reflects the past and differs only by the specific variables of interest.  It sets aside data inconsistencies, technology shifts, demographic preferences and emerging markets.  However, the world of timber prices evolves, adapts and swerves.

For example, in our forecast of pine pulpwood stumpage prices in the U.S. South, we rely heavily on historic macro and micro factors to establish the baselines by state and region.  However, wood bioenergy markets lack the history to influence the price forecast in this way.  So we develop a separate view, based on how we understand demand to affect prices locally, and layer this into the forecast using a combination of quantitative analysis and experiential judgment.  We supplement the effort with multiple tests and scenarios.  Every six months, we rebuild our forecast models and review, test and reconsider scenarios and assumptions.  (After which we toast the gods and have a drink.  Wouldn’t you?) Generally, the amount of testing and supplemental judgment is inversely proportional to the amount and depth of historic data available.

In our business, we analyze markets and advise management on capital allocation for timber-related and wood-using assets. Our views on timber markets and modeling prices must be transparent, coherent and integrated. Models need flexibility and transparency to deal with questions, potential errors and new information. To quote Mellody Hobson, the president of Ariel Investments in Chicago, “If you have a problem, the only way to fix it is if you have a process you can dissect, so that when something is missed you can go back to your source document.”





How Do Wood Bioenergy Projects Affect Local Stumpage Prices?

30 09 2012

Foresters and timberland owners in Texas could care less about wood bioenergy projects in Florida or Georgia.  Why?  Because wood bioenergy markets impact timberland investments and the forest products industry at the local level.  The uncertainty of new project announcements requires project-by-project assessments and assumptions to estimate the potential impacts of bioenergy projects on stumpage prices in local timber markets. In the September issue of Wood Bioenergy US (WBUS), Brooks Mendell and Amanda Lang explore two bioenergy-related variables as they affect stumpage price projections: project risk and feedstock volumes by type.

An analysis of six scenarios of announced and operating biomass projects in Alabama/Mississippi revealed that assumptions regarding project viability affect stumpage prices to a greater degree than assumptions regarding feedstock mix.

The results are specific to Alabama/Mississippi, in which only 32% of currently announced and operating projects pass viability screening. A systematic, repeatable approach to screen bioenergy project risk provides a transparent and flexible process for testing different assumptions. Modeling feedstock mix requires assumptions related to the percent of pulpwood versus logging residues versus other forestry volumes and urban wood wastes.   Overall for the Alabama/Mississippi case, assumptions related to project risk and viability had 6.7 to 7.2 times more impact on forecasted stumpage prices than did assumptions related to feedstock types.

National update: as of September 25 2012, WBUS counts 452 announced and operating wood bioenergy projects in the US with total, potential wood use of 124.8 million tons per year by 2022.  Based on Forisk analysis, 298 projects representing potential wood use of 77.0 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.

Forisk announces the recent publication of its book “Wood for Bioenergy: Forests as a Resource for Biomass and Biofuels” by Brooks Mendell and Amanda Lang.  This book was published by the Forest History Society with support from the Plum Creek Foundation, U.S. Forest Service Research, Forest Investment Associates, National Alliance of Forest Owners, Potlatch Corporation, Price Biostock, the Westervelt Company, and the Lynn W. Day Endowment for Forest History Publications.  For more information and to purchase, click here.