This post includes themes from the (virtual) Applied Forest Finance course on April 3^rd, 2025. Early registration ends March 20^th!

Over the past 30 years, the ownership and management of private industrial forestland has changed. Fewer forest owning firms are vertically integrated or publicly traded. Across the ownership landscape, the sector managed and reforested at more intensive rates resulting in unexpected riches as measured by the volume of wood accessible for sale (in the South) and the market value of timberlands.

However, the forest industry operates within a box of physical constraints, determined by the location and availability of wood raw materials relative to the mill technologies required to convert them into value-add products. As an analyst, I understand that a lot of financial analysis in forestry is done, as a first step, in a vacuum. What does the math say about the risks, returns, cash flows, and diversification of a specific investment or project? Then, we take that math into the physical world and evaluate its relevance, viability, and strategic value to make decisions.

Mill Technologies Affect Timber Values

In the 1980s, it took five-and-a-half tons of logs to produce one thousand board feet (MMBF) of softwood lumber, on average. Today, it takes about four tons to produce one MMBF of lumber. That means, as a sector, we can produce the same amount of lumber we did thirty years ago with 20 to 25% less wood thanks to advances in technology.

About ten years ago, I participated in a meeting with a large timberland firm where we reviewed these technological advances, and one of the executives said, “Well, I don’t believe those numbers. I don’t think we’re that much more efficient than we used to be…”

At the time, I understood that this executive wanted a different story to justify his preferred outlook, project, or scenario. However, the fact remained, and remains to this day, that we require less wood to produce the same amount of lumber. And ignoring this means wasting time and baking in additional downside risk into any strategic plan or investment decision.

Tariffs, Physical Facts, and Demographic Trends

The White House has imposed tariffs on a range of products, including forest product imports from Canada. In a previous post, I outlined the potential impact of tariffs given the physical facts of Canada’s softwood lumber infrastructure. The tariffs take place as Canada’s lumber industry shrinks; its softwood lumber capacity is 25% less than it was at its peak in 2006. The U.S. imports 50% less softwood lumber from Canada now versus 20 years ago.

In addition, Canadian forests are regulated at the province level with harvesting volumes limited to the annual allowable cut (AAC). However, in West Canada, the 20-year average “under harvested” the AAC volumes by 25%. In East Canada, on average over the same time frame, harvest volumes reached only 60% of the AAC. Physical facts matter. While provinces set the AACs, harvest volumes fall short each year. Why? Generally, the trees don’t match the need or are located too far away from the mills.

More broadly, other trends and policies have more significant forest industry implications than near-term tariffs. Immigration, aging, and fertility inform our understanding of who buys forest products and who builds homes, plants trees, and works in mills. Twenty years ago, the U.S. was unique among industrialized nations with positive growth in all three areas, each of which is associated with growing demand for wood and supplies of labor. This is no longer the case.

Who Would Harvest and Haul More Timber from Public Lands?

On Saturday March 1, 2025, the White House told federal agencies to look for ways to increase timber production on public lands. The executive orders also directed government officials to streamline regulations and reduce costs associated with forest harvesting and management activities. Generally speaking, efforts that reduce red tape, mitigate forest fire risk, and facilitate economic development in rural communities also support healthy forests and sustainable businesses.

While activities are certainly doable and viable on the margin, the forest industry remains constrained by the physical realities of people, gravity, and distance. Just because something is allowed, permitted, or signed does not guarantee relevance or change in local timber markets or forest investments (see Canada’s AACs). Today, it remains difficult to increase logging, trucking, and manufacturing capacity because the sector is short labor.

According to US Census data, construction had the highest percentage of immigrant workers, at 28.6% of all construction employees, or over 3.3 million people. Manufacturing was next with 3.2 million foreign born workers. And there are hundreds of thousands in agriculture, forestry, and fishing. In my quarterly calls with forest industry manufacturers and timberland managers, labor remains a primary constraint for filling shifts and transporting product. Firms can barely fill the shifts they have.

Conclusion

While forest investment analysis can occur in vacuum, the actual forest investment decisions are not. The physical facts on the ground, the priorities of key stakeholders, and the external policy environment affect the economic context in which these decisions get made. Timberlands are real assets that require real work done by real people. Direct timberland investing means buying into an operating business that produces and supplies raw material to wood-using manufacturers located within economically viable distances of the forest in specific timber markets.