This is the fourth in a series related to Forisk’s 2014 forecast of softwood stumpage prices in the United States. This excerpt comes from the feature article, which includes Forisk research on foreign exchange rates and capital investments in wood-using capacity.

The world is awash in financial activity.  According to the International Monetary Fund (IMF), the global gross domestic product (GDP) was $72.2 trillion in 2012, with the European Union, the United States and China accounting for $16.7 trillion, $16.2 trillion and $8.2 trillion, respectively. As a group, these three comprise nearly 57% of global GDP.  Assessing the relevance of macroeconomic activity improves when we have a “feel” for the magnitude and direction of numbers such as exchange rates and economic growth.  In forestry, timberland investors and forest industry executives often ask how FX can affect the imports and exports of logs and lumber, and the valuations placed on U.S. timberlands.

Current thinking takes an “asset approach” to understanding how and why exchange rates change over time.  This view recognizes that currencies and exchange rates play a key role in determining the relative attractiveness of investment “assets” that may be located in different countries. For example, when U.S. investors think about buying bonds from a foreign country, they account for exchange rates, in addition to interest rates, relative to their portfolio of U.S. dollar investments.  In sum, the “asset approach” says the movement of investments around the world has a powerful impact on exchange rates.

The other primary way to understand exchange rates takes a “goods market” approach, which argues that floating currencies tend to adjust with trade balances. In 1973, when the U.S. abandoned the gold standard, many economists believed that the exchange rate would adjust and balance the trade of goods and services across the industrialized world.  It turns out this “goods market” approach was too simplistic. Goods and services account for less than 5% of the trading volume in foreign exchange; the bulk comes through transactions driven by investment activity and speculation. In other words, global investment activity drives exchange rate changes more than do spending on “goods” and services such cashmere sweaters and Club Med vacations.

To take a closer look at potential FX influences on timber and timberland markets, we worked with Dr. Jack Lutz of the Forest Research Group to evaluate the relationships between exchange rates and U.S. timber and log prices over time to highlight areas of relevance (and irrelevance).  Our research highlights three key points: (1) U.S. domestic softwood log and timber prices are strongly correlated, (2) large economy exchange rates largely track each other relative to the U.S. dollar, and (3) U.S. economic factors are more relevant to domestic log and timber prices than exchange rates.

To learn more about the 2014 Forisk Forecast or Forisk’s market-specific forecasts of softwood and hardwood stumpage and delivered prices tailored to individual wood-using facilities or timberland ownerships in the US, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447.