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. 


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. 

ForiskForecast for Stumpage Prices: What Do We Expect?

9 04 2012

In 2011 for the second consecutive year, Forisk’s localized pine sawtimber forecast hit within 4% of actual on average at the state-level.  South-wide, Forisk’s regional pine sawtimber average of $26.57 per ton exceeded Timber Mart-South’s actual price of $23.97 for 2011 by 4.7%.  The just published 2012 ForiskForecast takes on 11 states in the US South and Oregon’s and Washington’s Douglas-fir and hemlock markets in the Pacific Northwest.

Our research develops three economic and forest industry scenarios.  The baseline and “low growth” forecasts expect more of the same, with relatively flat to negative pricing in 2012 for pine sawtimber, with modest strengthening in 2014 as housing returns.  Higher sawtimber prices require more than simply increased housing starts; prices require a suitable balance of forest industry capacity to lumber demand and production, with sawmills exceeding 85% utilization for six to twelve months to “reset the floor.”  Pine pulpwood markets vary across the US South, as those states with concentrated pulp mills and “viable” bioenergy projects – as specified in Wood Bioenergy US – show strong pulpwood stumpage markets.

Meanwhile, other market activities provide opportunities to supplement needed demand, including active export markets and the expansion of the Panama Canal.  Forisk developed a “high growth” scenario that accounts for both strong economic and housing market growth, and potential increased log export activity from the US South by state.  This scenario expects pine sawtimber strengthening in 2012-2013, with prices in 2014 $2.86 per ton higher than the baseline forecast.

To learn more about the 2012 ForiskForecast, click here.

Forecasting Stumpage Prices and Timberland Investment Performance Requires Local Knowledge of Wood Demand

16 10 2011

Last week, I met with the CEO of one of world’s largest forest management and consulting firms.  We ended up discussing a mutually perplexing question, “why do some timberland investors prioritize macro issues like housing at the expense of understanding market-specific issues such as local wood demand, mill risk and actual forest inventories?”  While housing market forecasters have, once again, delayed expectations of the anticipated home building recovery, Forisk analysis of local timber markets affirms the primacy of micro-market, investment specific factors over regional and national trends.

Shifts in forest supplies and wood demand influence regional timber markets. The extent to which sub-regional markets, such as mill-specific wood baskets or property-specific timber markets, are influenced by regional or macroeconomic changes remains unclear.  Previous analyses by USDA Forest Service and University researchers such as Bob Abt, Fred Cubbage, Tom Holmes, David Newman, Jeff Prestemon, and Runsheng Yin, estimate a price elasticity of demand for softwood stumpage ranging from -0.50 to -0.57 and a price elasticity of supply ranging from 0.29 to 0.50.

This implies that for every 1% change in price, changes in demand or supply will be considerably less than 1%. [This also implies that for every 1% change in demand, price changes would exceed 1%.]

In 2005, Forisk Consulting began collecting mill-specific wood demand data on a quarterly basis throughout the US South.  In 2008, we expanded this coverage to the continental United States.  Today, our team manages an ongoing research program that collects and confirms data on 3,196 announced and operating wood-using forest industry and wood bioenergy mills throughout the US.  We believe this to be the most comprehensive and current tracking of US forest industry health and demand available in the world.

How has this research helped the forest industry and timberland investors?  We have found that local market performances have wide ranges of price-to-demand elasticities and mill risk profiles, beyond those established in regional or national analyses.  The differences across markets are statistically significant and provide a rigorous basis to adjust market-specific discount rates, stumpage price forecasts and expected rates of recovery.

For example, the expected price effect from a demand shock (i.e. a new mill) in a sub-regional market depends heavily on:

  1. Available forest inventories and growing conditions; and
  2. The competitiveness and distribution of wood-using mills in the local market.

Competitive markets with multiple mills can aggravate and prolong the impact of a demand shock on prices.  Alternately, competitive markets provide the best uses of new capital for timber and forest industry investments when benchmarked against ranges of wood baskets and timber markets across multiple performance criteria.

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

23 09 2011

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.” 

Timber REITs: Weyerhaeuser Timber Segment Positioned to Outperform South-wide Average

16 05 2011

Two-thirds of the nearly 6.2 million acres that Weyerhaeuser (WY) owns and leases in the United States are located in the South.  Our Equity Research team matched WY’s timberland acres to Forisk’s state-by-state forecast of stumpage prices and wood demand to assess the revenue growth potential for the next five years from WY’s timber operations in the US South.

Forisk forecasts state-specific pine sawtimber and pulpwood prices in the South for eleven states.  These forecasts use statistical models that establish relationships between stumpage prices and the state-specific demand for timber relative to other states.  These relationships allow each state to individually “express” its price relationship to changes in, for example, sawtimber demand (driven primarily by the housing markets) over time.

According to our models, the top five states in the US South in terms of demand growth for 2011 are Mississippi, Louisiana, Alabama, Tennessee and Arkansas. Approximately three million acres, or 74% of WY’s southern timberlands, are located in four out of five of these high growth markets.  Since these markets are expected to outperform the other Southern states with respect to demand growth, this positions WY’s timber business to outperform the South-wide average assuming any strengthening in housing and lumber markets.

During the housing downturn, WY deferred its harvest substantially and plans to increase harvest by approximately 10% this year and 70% from the current levels over the next 10 years.