What Can Marching Bands Teach Us About Tracking Wood Demand and Timber Markets?

When tracking wood demand and timber markets, we look not only to the past and to the future for guidance, but we look to the side – peripherally – to gauge our performance across markets and industries. For members of a marching band, this peripheral awareness is called “dressing the line,” and it serves to maintain formation and, ultimately, performance. What can we learn from looking at trends across wood and timber markets over the past few months?

Wood Demand Softens

Pine sawtimber demand declined ~1% across the South, primarily driven by curtailments at several plywood mills. While demand declined less than expected, pine sawtimber prices, according to Timber Mart-South, declined 5.1%, more than expected. Dry weather and selling by timberland owners eager for cash flows may have pushed prices to new lows. Pine pulpwood demand increased 1.7% in the South and demand for hardwood pulpwood held steady in Q3 2011; stumpage prices for both products declined. We continue to monitor softwood lumber and pulp prices, and the proposed lower design values for SYP lumber.

Wood Bioenergy Markets

Industrial pellets for export to European utilities lead all bioenergy activities. F.E. Wood & Sons plans to build a 300,000 ton/year pellet plant in West Baldwin, ME. German Pellets plans to build a 500,000 metric ton/year pellet plant in Woodville, TX. Westervelt Renewable Energy held a groundbreaking ceremony at its 250,000 metric ton pellet plant site in Aliceville, AL in October. All three firms plan to export pellets to Europe. As of October 2011, Forisk research indicates 471 bioenergy projects could use 136 million green tons/year of wood by 2021, while projects representing only 73 million tons/year pass basic viability screening.

Forest Finance and Timberland Ownership

As demand for pulpwood increases in select local markets, forestland owners have called to ask “when should I clearcut for pulpwood versus manage for sawtimber?” We published research commissioned by NAFO that addresses this issue at a regional level. [In February, I will detail the step-by-step financial analysis required to answer this question for specific timberland ownerships and markets as part of the Applied Forest Finance course on February 9, 2012 in Atlanta.]

Based on the research for NAFO, forecasted pine pulpwood prices in the South in 2016 would have to increase from $11.47 per ton to higher than chip-n-saw prices of $17.09 per ton for landowners to be economically indifferent between a pulpwood-dominated forest and a sawtimber-dominated forest. Across the South, bioenergy demand would have to increase 435% by 2016, from an expected 22 million green tons a year to 120 million green tons per year, for pine pulpwood prices to reach $17.09/ton. Biomass energy wood use will have to be high enough for a sustained period to maintain high pine pulpwood prices to cause a shift in landowner behavior. At the same time, competing higher-valued product prices would have to remain at prices low enough to incent switching from pulpwood to sawtimber rotations.

Timber REITs Adjust

When we “dress the line” in timber markets, this includes an assessment of the public timber REITs: Potlatch (PCH), Plum Creek (PCL), Rayonier (RYN) and Weyerhaeuser (WY). As publicly-traded firms with publicly-available filings and quarterly conference calls with senior management, these firms provide a path for staying educated on the business of timberland investing and related real estate markets. What did we learn from their Q3 2011 performance?

All firms met or exceeded consensus expectations, even accounting for special items. Two timber REITs referenced, but did not name, the closure of Georgia-Pacific’s Crossett, Arkansas lumber and plywood facility, which had the capacity to consume close to 1 million tons of pine sawtimber annually. This represents a material loss of demand in a key Southern market, and will influence timber REIT valuation models sensitive to state-level stumpage pricing and wood demand. Alternately, all firms cited demand from China as a driver of strong log pricing and demand in their Western markets, though Weyerhaeuser noted this demand had softened since the second quarter. Looking forward, all four firms look to adjust their activities and strategies to account for shifting markets, cash flow needs and practical operational needs.