Timber markets How much wood is in the woods?

Ci ewloc HARvEST LEVELS in 2010 are \)running well below the Peak levels of the last decade and timber inventories are growing. Given our forecast for wood products and log exports, harvest levels will remain below the previous highs through the remainder of this cycle and sawtimber inventories will continue to grow. This will have a direct impact on stumpage and delivered log prices over this period.

Primary end-use markets for North American sawtimber collaPsed in recent years. Lumber production in the U.S. and Canada fell 44Vo froml4.9 billion bd. ft. in 2005 to 42.0 billion ft. in 2009. Plywood production fell 4lvo from 17.3 billion sq. ft. (3/8" basis) in 2OO4 to 10.2 billion ft. in 2009. As a result of such breathtaking declines' North American sawtimber harvest volumes fell 38Vo from an annual average of 66;7 billion bd. ft. (1/4") in 2004-2005 to 41.3 billion ft. in 2009 (see chart at right).

Unlike industry, which can throttle back production to realign output with demand and manage its inventories, when timber demand droPs, Production (timber growth) in the woods does not and volumes not harvested do not go away. The unanticiPated buildup of uncut timber in recent years now hangs over the market as "pentup" supply. And given our forecast for the lumber and plywood markets, this pent-up supply of uncut timber will grow through most of this cYcle.

Harvest levels going into the downturn were at levels that drained inventories, which in turn put upward pressure on log prices and political pressure on managers of Public timberlands. The drop in inventories stopped in 2006-2007 as removals droPPed below growth levels. And we estimate that inventories have rebounded from those lows because of both the reduc-

North American Softwood SawTimber Demand

2008 2010 2fi2 2014

British columbia r EasErn Canada

tion in harvest and the fact that trees grow if they are left standing. Furthermore, given our forecast for demand, inventories will not stabilize (removals will not get back to growth levels) untll 2013-2014. Only at this point will the "pent-up" supply of timber start to be worked off.

The implications for timber markets will vary bY region. In B'C. Interior, undercutting salvage wood means that an increasing volume of the beetle-killed wood will degrade to levels rendering them useless. In eastern Canada, harvest levels will remain below policy set levels and, in contrast to the last decade, the provinces will be working to attract investment in the forest products sector.

Impacts in the U.S. will also be varied. In the U.S. West, where 707o of the timber harvest goes into lumber, the recovery over the next cycle will push up demand faster than in the

South, where 52Vo of the sawtimber harvest goes to lumber mills (plywood demand is expected to remain well below peaks set in the last decade). As a result, timber markets will tighten up somewhat faster in the West than in the South.

The immediate implication of this built up timber supply is that real timber prices are unlikely to reach levels seen in the last decade (which were lower than the previous decade) over the next cycle. This being said, it is unclear exactly what the imPact on timber prices will be because of the dramatic shift in timber ownership that we have seen in the timber markets. Timber ownership has shifted from integrated mills to private investors (TIMOs and REITs). And it is unclear how the timberland owners will dole out their timber (supply response).

Cash flow on timberland invest(Please turn to Page 58)