This is the fifth in a series related to the analysis of timber markets and wood baskets. It includes a case example of how local timber forecasts differ from regional averages.

Dr. Stephen Covey advised, “Seek first to understand, then to be understood.” This advice serves all of us well when localizing forecasts for mill or property-specific markets on behalf of others. It guides us to seek mutual understanding when analyzing timber markets or wood baskets in “the heat of battle” during budget season, strategic planning and mill or timberland acquisitions. In these situations, we’ll commonly encounter two types of questions. The first relate to “price sensitivity” and the second relate to “expectations” for future prices relative to history or regional averages.

How can you address these questions for internal and external clients?

First, conduct “sensitivity analysis” to test the relative importance of inputs. The process clarifies the understanding of relationships between wood costs, timber prices, forest supplies and localized forest industry capacity given available data and our analysis. Partly for this reason, we typically include three or more forecast scenarios to test potential differences in key assumptions or inputs. We also maintain the ability to incorporate client-specific scenarios related to housing, lumber production and wood demand. As addressed in a previous post, localizing forecasts can reduce investment risk and facilitate the communication of results.

Second, employ a bottom-up approach that starts with the physical facts on the ground to put client “expectations” in context. Different expectations for price forecasts can come from a timber investor who, for example, views a pine sawtimber forecast as “conservative” or a wood procurement executive who sees a pulpwood projection as “aggressive.” With this approach, we account for multiple factors affecting future timber prices. Why? Because per unit timber prices provide an incomplete view of timberland investments or procurement costs.   In addition, prices vary significantly on a local basis.

As an example, as of Q2 2015, the Forisk Research Quarterly’s (FRQ) South-wide average pine sawtimber forecast in the “Base Case” for 2020 is $34.59 per ton. However, at the state level, forecasted prices range from $20.81 to $40.91. In addition, for client specific markets under the same scenario, prices can exceed $45 per ton. The physical facts and economic relationships of the local market help dictate what’s possible. Regional or national projections wash out local variance and fail to reflect the physical realities identified in bottom-up analyses. Forest industry capacity exists in clusters, sawmills become more efficient, and forests increase their productivity. And these physical facts vary locally.

 

Forisk will address localizing forecasts during “Timber Market Analysis” on August 4th in Atlanta