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Demand, Supply, and Timber Prices: A Southern Saga

This is the fifth in a series related to the Q1 2021 Forisk Research Quarterly (FRQ), which includes forest industry analysis and timber price forecasts for North America. Below is an excerpt from this quarter’s featured research.

Forisk closely reviews the performance of our price forecast models each quarter when publishing the Forisk Research Quarterly. We examine changes in starting prices, major shifts in forest supplies or wood demand in local markets, and the wandering trajectories of export markets and domestic macroeconomic drivers. At the start of each year, we also step back and look at the bigger picture to review our assumptions, particularly as they relate to price responses to demand and supply shifts in local markets. Traditionally, these elasticities are developed with a longer-term view, based on historic data that translates market dynamics to price responses.

During previous revisions of the southern pine forecast models, we worked to quantify the failure of prices to respond in the recovery from the 2008-09 Recession as they had prior to the Recession. As we confirmed again in 2017, supply accumulation across the South significantly altered the price response to demand changes. Until supplies stabilize, we are aiming at a moving target from a moving platform. The periods of 2002-04 and 2015-2017 are illuminating examples. In both periods, southern lumber production rose by roughly 1.5 BBFT from a starting point around 16.7 BBFT, a growth of 8-10%. In the earlier period, prices rose 4%, and in the more recent period they fell 8%. Supply accumulation was the main difference: sawtimber supplies rose 1.5% from 2002 to 2004 compared to 11% from 2015 to 2017. Perhaps more importantly, sawtimber supplies represented 16 years’ worth of total demand in 2004 compared to 26 years in 2017. The increased supply situation swamped a comparable shift in lumber production. In addition, much of the southern lumber industry improved its technology, meaning that 17 BBFT of lumber produced in 2017 needed fewer logs than the same 17 BBFT in 2004.

Given that prices ignored growing demand, we assessed how our price models from 2018 performed over the past three years? Figure 1 provides our forecast of 2020 prices from three years ago (Q1 2018) by product and state compared to 2020 actual prices. South-wide we over-predicted prices by roughly 20% across products. Part of the miss was forecasting demand changes. Back-testing with actual demand brought our price forecast in line with actuals. Using demand forecasts that matched actual growth, would have produced a South-wide pine sawtimber price forecast of $24.06, within 1% of 2020 actual pricing.

Figure 1. Difference between actual and forecast 2020 price by product

This exercise highlights two key issues: (1) the importance of understanding demand, and (2) the local nature of markets. This motivates the amount of time we invest into tracking and understanding mill capacities and consumption. Poor mill data erodes confidence and diminishes our ability to provide operable outlooks. Back-testing models also provides a pathway for improving them. Some states are more responsive than others to shifts in supply and demand. Using the last three years of demand and supply data, we evaluated how sensitive states were to each variable.

To learn more about the Forisk Research Quarterly (FRQ), click here or call Forisk at 770.725.8447.

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