What’s Happening with Pine Sawtimber Prices in the US South?
Economic news over the last 12 months in general has been very positive. The Dow Jones Industrial Average is up over 20% since this time last year. Housing starts have been fluctuating between 1.1MM and 1.2MM units, 6% higher than a year ago. The Random Lengths framing lumber composite price index, a broad measure of lumber prices, is up 19%. In addition, consumer confidence, the degree of optimism that consumers feel about the broader economy and their personal finances, is at its highest level in almost 17 years. With all this good news, you may be wondering what is happening with sawtimber stumpage prices?
Even though demand is increasing, there is still too much supply in the system for prices to show improvement. A big reason for this is the so-called ‘deferred harvest’ effect.
A key benefit of timber investment is the ability of an owner to time the market, waiting out periods of low stumpage prices by choosing to defer harvest. Since stumpage does not expire, it can remain uncut and be stored in the woods (“on the stump”) until pricing is more favorable. This allows timber investors and forest landowners to ride out market downturns.
Since the start of the great recession, pine sawtimber markets have been down as low housing starts dampened the demand for lumber. Housing starts hit a low of 478,000 units in April of 2009 and remained below 1MM units for over 4 years. Even the current level of 1.1MM units is low from a historical standpoint. During the housing boom in the early 2000s, starts were above 2MM, propping up lumber demand, and therefore pine stumpage prices. When housing starts dropped and lumber demand dried up, many landowners chose not sell to their timber for years, holding out in hope of a quick return to the boom years.
Meanwhile, the trees kept on growing, as they always do, not only putting on volume, but smaller sized pulpwood and chip-n-saw trees matured into sawtimber products over the same period. The south-wide deferred harvest has led to an oversupply of available sawtimber. It is estimated that in the US South timber markets, there is an additional 60 months of surplus sawtimber supply over what is historically available for harvest during a healthy cycle. Forisk Consulting described it well in their blog post as “Sawtimber inventories grew from the equivalent of 15 years of removals on the stump (relative to annual demand) up to 20 years on average across the US South today.” This reflects an additional five years of inventory relative to removals in the system. This oversupply will take years of to be fully absorbed back into the system.
The years of market downturn also led to many mill closings and consolidations across the US South, which has reduced competition in many market areas. The mills that went dark first were the older, less cost efficient mills, leaving more modernized sawmills to dominate, in what was essentially a culling of the herd. These surviving mills have also invested in new technology, leading to greater efficiency and more lumber being extracted from each tree. These factors keep pressures on the market that further hamper stumpage price recovery.
Strong mills and markets are critical to the long term health of the industry, so these changes are necessary and inevitable. With the recent improvement in the economy, new mills and markets are being announced regularly. Large investments are being made into existing facilities as well, so the future is positive, as there is essentially nowhere to go but up.
Landowners should work with their advisors closely to weigh harvest decisions and determine if continuing to wait on increased pricing is the best financial decision. We expect continued short term peaks and valleys. Landowners with favorable soils and good access may be able to take advantage of local weather related price spikes. Secondly, prices are very local in nature so prices received in one area of a state can differ greatly from prices in other areas for the same products. A professional forester who is engaged with the market can represent the landowner’s best interest, and help him/her realize the best stumpage price in any market condition. If you are a forest landowner, American Forest Management stands ready to listen to your objectives, and help you make the best possible management and timing decisions on your timber investments. We operate in virtually every timber growing region in the United States.