This post, the second of a two-part series, includes topics covered in the (virtual) Timber Market Analysis course on October 11^th and 12th, 2023 and in the Forisk Research Quarterly. Also, for those interested in this type of research, please consider Forisk’s forest economist job opening.

Part I addressed the importance of forest management and ended by asking, “Given the variety of markets, mills, and forest supplies, how do we organize our thinking for deciding what to do with our timberlands?” This post summarizes three approaches.

Have a Simple Framework for Understanding How Things Work

The late author and management “thinker” Peter Drucker, a hero to my Dad and me because of his ability to communicate big ideas in simple terms, wrote “The purpose of business is to create and keep a customer.” Drucker taught that every activity, to the extent possible, should support and add value to those objectives.

At Forisk, we have a simple model. Conduct and deliver forest industry research relevant to clients, and support clients in their application of this research to make better decisions. Our daily activities and improvement efforts prioritize research quality and relevance, the delivery of this research, and supporting clients in their use of it. We do our best to prune the rest.

How might we frame the forest products industry? The economics point to a set of simple, overlapping models that accept the fact that wood is heavy. Distance and the ability-to-pay for wood drive value and risk. For example, logging and hauling, to quote a late friend and colleague Kelly Stanley, is about “getting rubber under the wood.” Timberland management is about maximizing value per acre, which is a function of growing and selling logs to mills that can buy those logs and turn them into something else at a profit, which is largely a function of, to bring it full circle, mileage and manufacturing margins.

Having a clear and clean understanding of how things work helps us choose appropriate questions, which in turn creates a need for relevant information and benchmarks.

Support Cooperatives and Benchmarking

In sectors such as forestry, we often gain more from participation than from secrecy. That is my belief after years of conducting and delivering applied research. Aside from the confidentiality necessary for mergers, transactions, and personnel decisions, the operational and asset management aspects of forestry benefit from pooling resources. As an industry, anything we do to enhance viability, sustainability, and career opportunities supports the long-term.

As a firm, we support and subscribe to cooperative research, such as supply modeling at SOFAC and timberland investment benchmarking at NCREIF. We are members of and participate in multiple forest industry associations, where we learn, network, and contribute. In addition, we conduct and deliver timberland management and silviculture research, which now includes dozens of participating firms in the South and Pacific Northwest, covering over 36 million acres across both regions.

Supporting well-organized and relevant cooperative research is efficient. For the industry as a whole, it mitigates risk and enhances value. This is especially true when we leverage this research in our business operations and scenario planning.

Develop Detailed Scenarios

For firms that own forests and mills, realizing value from a given timber market is a localized resource allocation exercise. Previously, we posted basic models for framing the fundamentals, from volume-based scenarios to those focused on value-per-acre. Making better forest management and investment decisions relies on the detailed application of relevant information and experience. Simple frameworks (approach #1) and cooperative benchmarking (#2) clarify what’s important so we can prioritize.

Detailed scenarios test our strategy and thinking through the upside and downside associated with factors in and out of our control. Consider log-by-log (spec-by-spec) outlooks by basin with potential log prices and realizations. Breaking down assumptions across scenarios makes visible the ideas, value drivers, and implications. For example, consider this approach for a 10” DBH chip-n-saw log in a Southern timber market or wood basket:

Scenarios to Optimize Value for 10” CNS Logs (EXAMPLE)

End Market	Base Case	High Case	Slow Case	Mechanism/Risks
Dimension lumber: sell stumpage	$20/ton	$24/ton	$16/ton	Macro, housing markets, lumber prices
Dimension lumber: sell logs delivered	$38/ton	$42/ton	$32/to	Macro, harvest/haul costs
Pulp: sell CNS blends	$18/ton	$22/ton	$14/ton	Pulp markets, lumber to residual chips
Forest carbon	$20/ton	$30/ton	$10/ton	Legislation, verification

 

Scenario planning exercises can include probabilities by scenario, along with volumes and cash flow modeling to quantify the annual implication of one scenario versus another. This highlights value and risk in one market versus another. This can be especially helpful as the restructuring of North America’s lumber industry settles in.

Strategic planning and scenarios remind us that resources are limited and committing to priorities is difficult. If all mills upgrade (in a region), then lumber production variance is more a function of the local resource (who can buy cheaper logs easier or who can manufacture product more efficiently) than it is of beetles or fires in Canada. Scenarios help us build these stories from the ground up to stack our options and make firm decisions.

Conclusions

What is the best way to preserve forests? We only need a reasonable and defensible answer. We need intuition and experience how things work from the ground up to develop and test reasonable projections and decisions. Understand your data, frameworks, and models.

Efficient and knowledgeable management support success and profits. To me, each word is important. Efficient means reduce waste; knowledgeable means apply insight and experience; management refers to good decisions and implementation with our teams and operations.

Simply, I have come to believe that, at least in forestry, our sector tends to grow and learn better together, that through certain areas of collaboration and cooperation we build better teams, more efficient operations, and a healthier industry. From there, we live another day to tell our stories and help others succeed, as well.