Future Looks Bright for Timber

Now is a good time to own timber — and it’s going to get better. “There are a lot of reasons for optimism,” says Rocky Goodnow, vice president of the North American Timber Service at Forest Economic Advisors.

That’s welcome news for Tree Farmers after seven dismal years in the timber markets. While the whole economy was in a long recession, the timber industry “went into a depression,” says Lynn Michaelis, president of consulting firm Strategic Economic Analysis and former chief economist for Weyerhaeuser.

The numbers back up that view. Housing starts are the main driver of demand for wood in the United States. Between 2005 and 2009, those housing starts plunged from 2.2 million per year to just 600,000. As a result, demand for softwood lumber took a nosedive, dropping from 64 billion board feet in 2005 to 34 billion board feet in 2009. Prices tanked. “Adjusted for inflation, prices were back to where they were in the Great Depression,” says Michaelis.

Hardwoods took a beating too, with production dropping from 10.5 billion board feet in 2005 to 7 billion in 2009. Some investors and woodland owners even started to fear that timber was a declining industry that would never rebound.

But that fear now seems unwarranted. “In this industry you can never use the last five to 10 years to forecast the next 10,” Michaelis says. Several trends are now on the upswing.

Reasons for the Rebound

First, the number of building permits  is increasing, putting the housing industry on track to build more than 1 million homes per year—a pace that’s expected to increase.

“Since the collapse, we have overwhelmingly underbuilt, so we should see a strong recovery in demand,” says Goodnow. That’s especially important for producers in the South, who have less access to export markets than do timberlands and sawmills on the West Coast.

The second key trend is growth in those export markets, with China leading the way. “It’s very likely that China will increase its consumption of wood,” says Hakan Ekstrom, president of consulting firm Wood Resources International. “That will be good news for West Coast mills and log exporters for many years to come.” It’s also good news for the hardwood industry, because the Chinese love red oak, the top hardwood species
in the United States, but one which had been in a slump.

Another potential increase in demand will come from the growth in the use of wood pellets for fuel, both domestically and in Europe (see Markets story in the summer issue of Tree Farmer Bulletin for details).

Canadian Market Changes Give U.S. a Boost

At the same time, American timberland owners are getting a boost from Canada’s misfortune on the supply side. British Columbia had been racing to salvage trees killed by the outbreak of mountain pine beetle. But the remaining dead trees have now deteriorated so much that most have little economic value. So harvests from western Canada are expected to drop by more than 20 percent. In eastern Canada, regulators have trimmed the allowable cut by 12 percent due to overharvesting. Producers also have been hit by both the stronger Canadian dollar and hard times in the newsprint industry, reducing the demand for residual chips from sawmills, making wood from eastern Canada more expensive.

Add these trends together and for the U.S. timber industry “my message is: ‘Prepare for the coming shortage,’” says Michaelis. “It may be hard to see that shortage from here, but we are going back to very tight timber markets by 2015 or 2016.”

Because of the basic laws of supply and demand, prices should rise significantly from the current level of about $650 per thousand board feet for delivered softwood logs on the West Coast and about $320 per thousand board feet for southern yellow pine. Meanwhile, “the hardwood industry is still not out of the woods yet, but it’s getting better—and we’re pretty bullish going forward,” says Andy Johnson, regional editor at Hardwood Publishing.

Woodlands Increase in Value

The uptick will also make woodlands themselves more valuable. Both forest owners and major investors are already spotting an opportunity, with “significant large sales of timberland starting to hit the market,” says Goodnow.

Just don’t expect the path to this more lucrative future to be completely smooth or swift. The downturn put so many loggers and sawmills out of business that woodland owners may face challenges finding logging crews and mills—and when they do they may have to pay higher costs or sell their timber for less.

For smaller woodland owners, Goodnow counsels patience. “The prospects are very strong for the timber market going forward, especially in the South,” he says. “But it will take time.”