Vol. 15 No. 1                Fall, 2006

 

Weather – A Primary Force Driving Timber Markets

 

With all the changes that have been occurring in the forestry industry, it may seem strange that weather patterns have perhaps been the most significant driving force behind the ups and downs of stumpage markets in the past three years.  The short reason for this is how weather can greatly affect the amount of timber transported to the mills.  Let me briefly review the last couple of years:   

 

We had a very wet year in 2004, with abnormally heavy rainfall in May, June, July and October that restricted logging throughout the summer and fall.  This is the time of year when mills normally build up yard inventories to last them throughout the winter months.  The wet weather restricted logging in many areas and the mills found themselves struggling throughout the year with short supplies of logs.  Prior to this, the mills had been gradually relying more and more on accepting delivered logs as their primary source of raw materials.  This way, they reduce the amount of timber they have to purchase until it reaches the gate of the mill.  Suddenly, they had a situation where they needed to buy as much timber as they could to keep logs flowing.  Prices for pine sawtimber rose about 30% from 1^st quarter 2004 to the first quarter 2005. 

 

We began having a severe drought in the late spring and summer 2005.  The rain basically just stopped, and the yards at the mills began filling with log inventories.  With high inventories and weakening stumpage prices in the early fall 2005, Hurricanes Katrina and Rita hit us.  Mills had little room for the extra timber that was (and largely still is) lying on the ground.  Prices for timber in the affected areas sank by half or more.  Salvage and clean-up efforts are still underway from these storms.  Much has been written about the hurricanes, and so I will not dwell on them.  Allow me to say only that I was heartened by the outpouring of the generous support from the people of Louisiana and the nation for the victims of Katrina and Rita. 

 

In central and north Louisiana, pine sawtimber stumpage prices actually rose a little in the 4^th quarter 2005 and in early 2006 in anticipation of the normal wet weather patterns we have in the winter.  The rains never came.  We had a very dry winter and spring this year, although we now are catching some summer rainfall in portions of the state.  The dry weather adversely affected planting survival as well as our timber markets.  Those landowners who had good site preparation and invested in herbaceous release applications had much better seedling survival than those who didn’t. 

 

The pine sawtimber stumpage markets retreated moderately since the beginning of 2006 as mills have maintained high inventories due to the dry weather.  Many mills have been limiting the amount of loads a contractor can bring into the mills in 2006 because they are so full.   On the other hand, mills are still interested in buying timber because many of their previous purchase contracts are running out of time.  The anticipation is that demand for lumber and plywood will be strong as rebuilding efforts strengthen along the Gulf Coast.  This anticipation is helping to support prices for timber that have at least two years removal period. 

 

No one can predict the next hurricane or even the next rainfall with much certainty.  Many of the assumptions we make about the future will be wrong.  However, I have found that landowners who plan for the future are better prepared to capitalize on opportunities when they present themselves.  

 

Benefits from forests, whether they be judged financially, environmentally, recreationally, are all enhanced with management.  We at Templin Forestry are blessed to be able to offer forest management services to our clients and endeavor to provide the highest quality of services from integrating scientific and business perspectives with our desire to serve our clients.   

 

Stumpage Report

 

While weather can be a significant factor affecting the supply of raw materials, it is only one factor in the larger context of forest economics.  Another significant factor affecting supply is the successful effort in pine regeneration (accomplished mainly through planting trees).  We have a large supply of pine plantations needing first and second thinnings.  Quite simply, there is a glut of small timber available for market.  Limited production facilities and a limited logging force create significant hurdles for private landowners who have timber ready for thinning.  Prices for pulpwood are low in many areas and logging contractors are choosey in accepting thinning jobs.  Poor access and wet soils are factors that can delay thinnings for plantations that may have otherwise been thinned when the supply of small timber was not so large.  We look forward to the opening of the Martco OSB plant in Oakdale, which will utilize a large amount of small timber for the production of panels.   

 

The hardwood pulpwood markets are weak.  In past years, we’ve seen the market for hardwood pulpwood rise and fall with weather factors and the fine paper markets.   We are not optimistic for pine or hardwood pulpwood stumpage prices. 

 

The hardwood sawtimber markets are not as poor.  Red oak sawtimber prices have fallen from their highs a few years ago.  However, other species are in good demand.  We expect red oak demand to return this fall and winter as molding markets are anticipated to be strong. 

* compiled from Random Lengths

** Templin Forestry, Inc. clients

 

Large pine sawtimber prices seem to be holding their own better than the smaller timber.  Production capacity in the state and throughout North America has been rising in the past few years.  The housing markets have been amazingly strong.  However, economic forecasters estimate that housing starts will be from 7 – 10% lower in 2007 due to higher interest rates.  The housing markets have led our economic boom since the early Clinton years.   The combination of decreased demand and higher production does not bode well for the price of lumber and panels.  

 

Despite the decreased national housing forecasts, we know there will be high demand locally for rebuilding from hurricane damage in Florida, Alabama, Georgia, Mississippi and Louisiana.  Louisiana will receive $4.2 Billion in Community Development Block Grant funds to help rebuilding efforts.  Louisiana has been much slower than Mississippi in getting any funding for recovery. 

 

There are many benefits landowners receive from using a consulting forester to market their timber.  One benefit is more money for your timber.  The graph below shows the stumpage rates for pine sawtimber that our clients received compared to the average price paid to landowners throughout the state, as reported by the Louisiana Department of Agriculture and Forestry.  The data suggests that our clients received 15% more than the average sold in the state in the past year.  Because many clients allowed us to control the timing of the marketing process, we sold more timber when rates were rising and our clients actually received over 22% more than the state average during the past year. 

 

 

  

U.S.-Canadian Lumber Agreement

 

One significant factor that will assist our lumber mills is the price support for lumber that were agreed upon by the United States and Canada on July 1, 2006.  The agreement, due to be finalized this fall with passage by the Canadian government, will end all litigation by both parties and will create unrestricted free trade in favorable markets.  Lawsuits and judgments from various courts have been see-sawing back and forth for the past four years.  When the Random Lengths Framing Composite Price falls below $355/MBF, Canadian producers will pay an export tax ranging from 5 – 15% depending on how low the prices fall.  Producers in some provinces have the option to reduce output to a quota and pay a lower tax.  The tax would be paid to the Canadian government.  Canadian producers are now paying 10.8% duty on lumber shipped to the U.S.

 

Once the agreement is ratified, about $4B of the $5B held back in duties during the past four years will be returned to the Canadian companies.  About half of the remaining $1B is supposed to be distributed to the U.S. member companies of the Coalition for Fair Lumber Imports (who have paid for the litigation), with the remaining half going to “meritorious initiatives in the United Sates as identified by the U.S. government in consultation with Canada” and a joint initiative benefiting North American lumber trade.  A recent court ruling may restrict U.S. companies from receiving any of the funds.  The agreement has a term of seven years.  On July 21, 2006 the Random Lengths Framing Composite Price was $308/MBF. 

 

I’m not an enthusiastic supporter of this agreement.  The cause of the “unfairness” is due to non-competitive markets for timber that Canadian producers enjoy.  This agreement doesn’t address the reason for the imbalance.  It treats a symptom by helping to float the price of lumber at an artificially agreed upon level.  I doubt that is good news for landowners in the long run.  Over 60% of Canadian production is sold in the U.S. comprising over 1/3 of the lumber we use.  That amount has been growing steadily despite past duties.  

 

 

 

Real Estate Page

 

Prices for land have been increasing, even as large companies dispose of their properties.  More private investors are purchasing land for investment for timber production.  Hunters are driving prices for recreational land.  We are also seeing a greater trend for premium prices paid for land with good access near metropolitan areas, small cities and even in some communities.  We’ve been seeing record prices paid for land recently.  We are in constant communication with both buyers and sellers.  Please call us if you desire our professional assistance and knowledge.  We will work for your best interest.