U.S. timber supplies and rising demand for softwood lumber

T"u U.S uns more softwood trees

I- than you can shake a stick at. Analysis of U.S. Forest Service data indicates the South has nearly 3.5 billion tons of standing pine grade and pulpwood inventory on private, operable timberlands. That's about 140 million truckloads. Coastal Oregon and Washington, a region with 103 open softwood mills, has over 68 billion bd. ft. (over 400 million tons) of standing softwood grade inventory on privately-owned timberlands. And these numbers represent but a fraction of total U.S. forest stocks.

Forisk conducts research on the impact of local supply events (such as natural disasters) and trends (such as increased forest growth rates or plantation acreages) on timber markets to forecast timber and delivered log shipments. For the near-term, states with the most severe pine grade oversupplies show how stumpage prices become less sensitive to increases in demand in those states for which a quantitative basis exists for significant excess inventories.

Alternately, analysis of coastal markets in the Pacific Northwest indicates less quantitative evidence for dampened log prices in a region buffeted by robust export demand.

Forest Supplies & Demand

What do we think about the poten- tial impact of forest supplies on timber prices across the United States in the short and long-term as housing markets recover and forest harvesting increases?

In evaluating the potential for softwood grade oversupplies or constraints, Forisk uses the "removal year" metric-accessible inventory divided by removals-to identify a local market with a potential supply imbalance. The removal year estimates how many years it would take to deplete standing inventories, given a set level of removals per year. For example, if we assume one extra year's worth of standing inventory, it would take four years of removals at 25Vo above the long-term average to deplete the backlog.

In the Pacific Northwest, estimated changes in operable inventories on private lands have been modest, with Coastal Oregon and Washington averaging 16 years of softwood grade removals on the stump on private lands alone.

The results in the Northwest change slowly for two reasons. First, the U.S. Forest Service analyzes onetenth of Oregon and Washington's forests each year. Therefore, we are continually looking at an average l0year forest. Second, Northwest markets have supplemented domestic downtime with increased export vol- umes, reducing the impact on net harvests. We note that the total removal years in the Northwest are higher when operating public forests are included, but we focus on private lands to better reflect harvest responses to changes in market prices.

Log exports are important to forecasting models for the Pacific Northwest because exports, while volatile and inconsistent, influence domestic sawlog prices. Export pricing ripples inward from the Coast to the Eastern Washington and Inland markets. In addition, log exports are subject to substitution across products, species and size classes. This is especially critical in Washington, where the ratio of domestic-to-export demand is 5:1. For Coastal Oregon, this ratio is closer to 50: l.

On the other hand, analysis of timber markets across the South indicates that. in the short term. excess sawtimber volumes can delay the strengthening of pine grade prices. For the U.S. South, not including outliers associated with lower-volume Tennessee and Virginia, states historically average 18 years of pine grade removals on the stump on private lands. Recent data indicates inventories for these same states approaching 3 I years of pine grade removals on the stump. The largest gains have occurred in Georgia, Mississippi and Arkansas.

U,S.

Softwood Lumber Produetion by Region, 1990-2013

While the Northwest benefits from log exports, forecasts for the South enjoy an increasing share of U.S. softwood lumber production. Current and forward-looking views on U.S. lumber production by region must account for two shifts. One is the increased U.S. market share of domestic lumber at the expense of Canadian imports. The U.S. share has risen from 6lvo in 2OO4 to 72Vo for 2Ol3 based on year-to-date WWPA data.

Two is the U.S. South's increased market share of domestic softwood lumber production relative to the Pacific Northwest. The South grew its share of domestic production from 347o in 1983 through 1993 to 467o in 1993 through 2003. The 2008 to 2Ol2 five-year average was 50Vo.

Long term, we assume that the South will grow its share of U.S. lumber production as the demand for housing returns to trend. This assumption is supported by the location of capital investments made and announced by forest industry firms in the United States.

Forward-looking projections highlight differing potential impacts of the recent economic recession on future forest supplies in the South and Pacific Northwest. Reduced harvesting activities over the past five years resulted in fewer acres of replanted trees.

For the near-term, states with the most severe pine grade oversupplies continue to show 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, Mississippi and Arkansas. Alternately, coastal Oregon and Washington have less evidence of supply-driven price effects.

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.

- Brooks Mendell, Ph.D., is president and v.p.-research of Forisk Consulting, Athens, Ga., providing research and educational services to executives and analysts making decisions related to timber REITs, timberlands, and wood-using energy and manufacturing facilities. He can be reached at (770) 725-8447 or bmendell@forisk.com. Building-Products.com