Mid-way through a ninth year of increasing housing starts and growing lumber consumption, timberland investors and forest owners in the U.S. South continue to struggle with flat and, in certain local markets, falling sawlog prices. Previous posts discuss how this story has clear antecedents, which include continued, persistent improvements in technology, blowing away previous forest growth rates and the efficiency of wood-using mills. We grow more and produce more while using less.
Technology wields a double-edged broad sword in this story (yes, that’s redundant phrasing, like two-sided paper). While improved forest manufacturing and management effectively lower the per-unit value of trees destined for commodity forest products, the resulting increases in production and efficiency also reinforce strategic barriers against non-wood substitutes and imported competitors.
Excerpt from a conversation last week:
“Hey, aren’t you worried about substitution and competition from steel or other non-wood materials?”
“What about imported wood products?”
[Sound of crickets.]
The physical facts on the ground in the U.S. South, compounded by technological gains, create tremendous barriers to entry.
Meanwhile the timberland sector continues to attract interest from institutions that increasingly face a puzzling phenomenon: investors must make massive up-front commitments of capital to secure productive forested assets in attractive wood basins, while chasing erratic timber prices and changing market dynamics as these technologies improve throughout the forest industry supply chain, in effect devaluing each unit of wood.
[Let us pause. That was a long sentence.]
Ironically, this reality reinforces the original timberland investment thesis: wealth preservation and portfolio diversification. While falling or flat timber prices get the headlines, cash flow per acre dictates the investment returns. Price times volume – “P times Q,” says the Professor – drive these cash flows, and volume, along with improved grade yields from the woods, continue to increase. Thanks to technology.