The biology and science of growing trees has an uneasy and inconsistent relationship with the economics of pricing timber. Like hair, forests grow. Unfortunately, U.S. wood use declined 34% during the Great Recession. Fortunately, over the past five years alone, from 2016 through 2021, housing starts increased 34%[1], U.S. softwood lumber production increased 23%[2] and U.S. production of oriented strand board (OSB) increased 19%. Finally, log prices in select local markets in the South and more generally in the Pacific North have demonstrated strength and resilience over the past several years, though others lag.

Demand and supply, muffled by mill capacities and product inventory levels and kinks in the supply chain, drive per unit pricing for building products such as lumber, plywood and oriented strand board (OSB). But for individual trees, local market conditions have more to say about price levels and volatility. While macroeconomic conditions drive the trend, we study local mills and log specifications relative to local available supplies to assess how one timber market may fare relative to another. We are mindful that, at times in local market, correlation can differ from causation.

Scenarios Test Assumptions

Forisk employs Base, High and “Slow” Case scenarios to test the effects of different assumptions related to housing markets, the success and failure of bioenergy projects, the shifting production of lumber across North America, and the impacts of log export markets. Then we add “special” case scenarios to assess the implications of shifts in technology, natural disasters and large or risky capital investments.

We do not view all scenarios as equally likely; rather the Base Case represents, in our view, the most likely scenario and forecast given our research and reconciliation of current and previous models.  The Base Case is grounded in historical precedents and significant price-to-demand relationships at the regional and state levels. As expected from a useful benchmark or operable market analysis, the Base Case aligns with “observation” and available data.

Conclusion

We have little control over housing markets or inflation. That said, analytically in the forest products and timberland sectors, we find signs of growth and increased production across the U.S. forest industry, even as supply chains strain. The data speaks to how the continued self-sufficiency in U.S. lumber markets, tightening log supplies in Canada, and expanding wood-using capacity raise the floor for timber demand and mitigate the effects of economic sluggishness.

 

Interested in learning a process for tracking and analyzing the price, demand, supply and competitive dynamics of local timber markets and wood baskets? Register here for Forisk’s 2021 “Timber Market Analysis” class, offered virtually via Live Zoom on December 8th and 9th. Registration ends today! 

 

[1] Based on 1.57 million housing starts for 2021.

[2] Source for lumber and OSB five-year trends: Q4 2021 Forisk Research Quarterly (FRQ).