Each week, our team communicates with dozens of forest industry professionals and investors. At times, these discussions reveal patterns or highlight concerns common across sectors and regions. This post shares and answers versions of three of the most consistently asked questions from the past two months:

With softwood lumber prices at record highs, why aren’t timber (log) prices increasing?

This story has (at least) two parts. First, the relationship between softwood lumber prices and softwood stumpage prices, in the South in particular, is tenuous at best. Second, the current situation speaks more to supply chain issues than to high levels of demand. Let’s take these one at a time.

Part 1. While historical lumber and log prices rarely correlate strongly or in lockstep, they did tend to acknowledge each other’s existence and attend the same parties. Prior to the Great Recession of 2007-2009, Forisk’s research and original price forecast models found a positive, modest correlation of 0.2 to 0.4 between pine sawtimber stumpage and softwood lumber prices with a lag of 6 to 15 months. This relationship varied across states and local timber markets, and over time.

After the Recession, this relationship disintegrated. To quote Forisk research from 2012:

States with the most severe pine grade “oversupplies” showed material decreases in their price-to-demand relationships over the past five years…In sum, elasticities have fallen and [pine grade stumpage] prices remained suppressed even as lumber prices skyrocketed for most states.

Yes, we’ve seen this situation before.

Part 2. Recent rabid lumber prices reflect a confluence of short-term factors. Strong reductions in production and capacity earlier in 2020 corresponded with real-time demand growth from COVID-confined families dusting off their at-home DIY projects. This depleted softwood lumber inventories as housing starts accelerated from Q2 to Q3. Meanwhile, lumber manufacturers, doing their best to manage safe operations and coronavirus quarantines, are mixing and matching personnel from three shifts to get two shifts of production.

In our Forisk Market Bulletin research that keeps up with market sentiment and investments, more than one executive shared a version of, “Look, at these lumber prices, we’d run three shifts if we had the staff to do it safely.” These folks are doing what they can to get more volume to market and, ultimately, they will.

That said, consider the context. We’re still on pace to build fewer homes in 2020 than we did in 2019. And we’re on track to produce and consume less lumber in 2020 than we did in 2019. So, it’s not like we blew the top off the volcano….rather, someone pinched the hose.

What opportunities exist to lower cost and make the harvest and transportation more efficient?

Dr. Shawn Baker, Forisk’s VP of Research, leads our analysis of the forest industry supply chain and operations. Each quarter in the Forisk Research Quarterly (FRQ), he forecasts regional logging/hauling costs and analyzes trends in North American employment/wages and technology. As many noted in our conversations, a key constraint and issue is the inability to scale the supply chain in ways that mirror our ability to leverage technology inside of a mill (or even inside of a seedling). Rather, the fastest way to improve productivity – one that uses existing infrastructure and technology – is to increase the allowable loads carried by trucks.

Each year, Shawn shares ideas at “Wood Flows & Cash Flows” on constraints and opportunities with forest industry supply chain. The following posts include examples of this research:

• Localized Wood Demand and Logging Capacity
• Injuries, Fatalities, and Logging’s Status as the Most Dangerous Job in America

With low timber prices and high forest supplies, what arguments can be made to convince landowners to keep their timberlands and invest in forest management?

This question comes down to available alternatives and investment objectives. When speaking with landowners who talk about selling their timberlands, assets that may have been in the family for decades, I often ask “what are you going to do with the money? What alternative investments do you have lined up?”

My experience to date has been that “investment-oriented” forest owners and their heirs do not have great alternatives that (1) consistently generate cash and (2) preserve wealth/diversify with a hard asset (and (3) offer hunting and other recreation). While everyone wants higher timber prices and more cash, in the context of an uncertain world, the wealth preservation, cash generation, security and enjoyment of owning a forest is a “package” of benefits difficult to replace. The evidence and research show that timber assets hold value and generate cash even during the worst economic recessions.

As for forest management, even in places with high forest supplies, the long-term dynamics justify active forest management if a primary objective is to maximize financial returns. We see this in our current research with timberland owners and managers in the U.S. South and Pacific Northwest.

On the other hand, if heirs need the money or have other opportunities or objectives, I do my best to direct them towards potential buyers who would or could appreciate the forest and forestry-related benefits and continue to manage the assets as forests.

Click here learn more about our annual “Wood Flows & Cash Flows” conference, held virtually on December 8^th. To learn more about the Forisk Market Bulletin, click here.