Timber Market Analysis offers an organized, systematic way of (1) specifying a question related to forest industry investments or operations; (2) gathering and evaluating fundamental wood supply and demand information; and (3) using this to answer the question as best as possible to make a decision. It answers, “what matters, and what does not, in this local market or wood basket?” The process attempts to balance the volume of information with its quality and relevance to the question.

How we collect and analyze data, and ultimately communicate results, profoundly affect understanding and insight. For example, in The Effective Executive, the late management writer Peter Drucker wrote about the problem of production data getting averaged out and “translated” for accountants:

“Operating people, however, usually need not the averages but the range and the extremes….”

This applies in forestry. There is no such thingy as an “average timber market.” Timber markets are uniquely local. And participants in these markets want quality information with a sense for variance, trends, and cycles. They want to know who else buys wood, how much they buy, and what they pay. However, even in the close-circuit, localized nature of timber markets, information often remains unavailable, incomplete, or out-of-date.

Fortunately, the inputs for analyzing timber markets, as with the ingredients for baking bread^[1], are basic and consistent. Unfortunately, there are hundreds of ways to arrange these inputs. In other words, having information and knowing how to apply it are two different things.

When in doubt, clarifying the local mill set gives a starting point for any timber market assessment. Wood demand and mill capacity over time provide a way to compare timberland regions and identify industry trends in addition to profiling local markets. Each U.S. region features different patterns of forest ownership, timber quality, and end use markets, but confirming the local mills directly addresses the economic fundamentals of any local market. Owning a forest located two hundred miles versus fifty miles away from wood-using mills, and vice versa, fundamentally affects operability and value.

The importance of wood demand and forestry supplies increases because timber prices tell incomplete stories. Prices provide a key signal; they mark the intersection of wood supply and demand today and historically in an easily understood form. However, prices remain silent on volume and logistics. Markets are constrained by the physical facts of forest supplies, local mills, and regional infrastructure. Therefore, we need both physical and economic information to understand local timber markets.

This post includes themes covered in the (virtual) “Timber Market Analysis” course on October 11^th and 12^th. For more information, click here.

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[1] For reference: flour, yeast, water, and salt.