The United States has 5% of the world’s population and over 500 million acres of timberland. According to the U.N.’s Food and Agriculture Organization, the U.S. leads the world in producing “industrial roundwood”, consuming logs and manufacturing lumber. Globally, the U.S. is a top three producer and consumer of wood panels, paper, and paperboard. Remarkably, the U.S. also has 50% more forest inventory than it did in 1953. In sum, the U.S. excels at growing, and using, trees.
Like hair, forests grow. And while forest growth rates continue to climb, the amount of wood needed to produce one unit of lumber continues to fall. From an analytic standpoint, these facts tease, encouraging us to link increasing forest supplies with dampened wood prices. However, we make this leap cautiously. Correlation differs from causation.
Demand and supply, muffled by mill capacities and product inventory levels, drive per unit pricing for building products such as lumber, plywood and oriented strand board (OSB). But for individual trees, local market conditions have more to say about price levels and volatility. While macroeconomic conditions drive the trend, we study local mills relative to local available supplies to posit how one timber market may fare relative to another.
The exercise of analyzing local timber markets within a regional or global forest industry assumes a framework with the following understanding:
- Given assumptions about the economy and housing markets,
- How will demand for wood or key end products drive timber prices in each local market,
- Subject to constraints and surpluses in manufacturing capacity and forest supplies.
Analyzing timber markets, while straightforward, requires discipline.
Prioritizing assumptions provides context. Housing starts, the most critical of all factors, do not drive softwood lumber production in a vacuum; rather, housing starts serve to proxy overall economic activity. However, as a sector, we have little control over housing markets. Outside of kicking members of our own households out onto the street and co-signing loans so they can buy (new single-family) homes, we wait on accumulating housing formations to transform into home sales.
This reality reinforces the need to evaluate capacity and timber markets locally; each wood basket is an independent market based on forest inventories, forest removals, wood demand, log exports, price-to-demand elasticities and mill capacity. And based on these local assessments, we make timberland and wood manufacturing investment decisions.
For investors, analysts and wood procurement professionals evaluating wood and timber markets, Forisk offers “Timber Market Analysis” on July 13h in Atlanta. For more information and to register, click here.