A Timber Update for the U.S. South
September 2003
Coleman W. Dangerfield, Jr., Professor
Center for Forest Business, Daniel B. Warnell School of Forest Resources
The University of Georgia, Athens, Georgia
Introduction
The situation and outlook for timber in the U.S. South is approached through events at the
national and global levels. An examination is provided of items related to forest industry,
regional forest resources, and possible directions for environmental health, forest resources
production sustainability, and financial profitability of this major sector of the southern
landscape and economy.
U.S. Economy
The Commerce Department reports housing construction totaled 1.87 million units at a
seasonally adjusted annual rate during July, an increase of 1.5 percent over the June 2003 level
of 1.85 million units. The gain lifted housing starts to the highest level since April 1986.Housing
purchases and consumer spending overall have been the standout performers for the economy,
which has struggled for almost two years to mount a sustainable rebound from the 2001
recession.
However, there are concerns that housing activity may falter in coming months as
mortgage rates, which touched levels not seen in more than four decades, begin to rise. After
hitting a low of 5.21 percent in mid-June, rates for 30-year mortgages have risen by a percentage
point to stand at 6.24 percent, according to a recent nationwide survey by mortgage giant Freddie
Mac.
Consumer confidence is considered important because consumer spending accounts for more
than two-thirds of U.S. economic activity. Monthly Conference Board survey results are
converted to an index and expressed in comparison to the 1985 average of 100.
Retail sales are a broad measure of consumer spending trends. It includes sales of motor
vehicles, clothing, food at grocery stores and restaurants, electronics, building materials, drugs,
and other items. It is expressed as a percent change from the previous month, adjusted for
seasonal variations, but not price changes.
The gross domestic product (GDP) is the broadest measure of the economy, comprising the
value of all goods and services produced in the United States. It is reported quarterly with
frequent revisions. GDP is generally expressed as a percentage change from the previous quarter
in “real” or inflation-adjusted terms. Economists presume real GDP is capable of growing at an
annual rate of about 3.5 percent over the long term. When GDP declines over a sustained period,
the economy is considered in a recession.
The Institute for Supply Management (ISM) Index is the first major economic indicator
reported each month, and is considered a reliable assessment of how the manufacturing sector is
performing. It is based on a survey of executives done by the ISM. A reading above 50 percent
indicates the manufacturing sector is expanding, while a reading below 50 percent indicates it is
shrinking.
Factory orders presents data on new orders for manufactured goods, adjusted for seasonal
variation, offer a good indicator of the manufacturing sector's health, closely watched because it
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is the most volatile part of the economy. It is expressed as percent change from previous month.
(Source: Census Bureau)
The employment situation represents the month-to-month change in jobs on payrolls of the
nation’s business, government, and non-profit establishments. It generally is considered a more
accurate indicator of labor market health than the unemployment rate. Analysts estimate the
economy should add about 150,000 jobs monthly to keep up with the nation’s growing work
force. The measure is based on a sample of 300,000 establishments employing nearly a third of
the nation’s workers. The figure is adjusted for seasonal variations and frequently revised.
(Source: Bureau of Labor Statistics)
Consumer Price Inflation (CPI) is the most widely known and used measure of inflation. The
CPI is based on the price of a “basket” of goods including food, beverages, fuel, medical care,
and clothing. Value refers to year-over-year change in “core” prices, excluding volatile food and
energy categories. (Source: Bureau of Labor Statistics)
Housing starts are a good indicator to assess demand for housing and construction industry
health. It represents the number of new residential buildings, including single-family and
multifamily homes, where construction was started. It is expressed as a seasonally adjusted
annual rate. Construction was started on 1.73 million new residential structures in 2002, the
highest level since 1986. (Seasonally adjusted rate) (Source: Census Bureau)
Home sales are one of the bright spots of the economy in recent years, driven at least in part
by historically low mortgage rates. The figure represents the sum of new and existing singlefamily home sales, expressed as a seasonally adjusted annual rate. In 2002, a record 6.5 million
homes were sold. (Seasonally adjusted annual rate) (Sources: National Association of Realtors,
Census Bureau)
The U.S. dollar trade weighted exchange rate against major currencies, March 1973 = 100,
has weakened from a high of 109 in early 2002 to around 90 currently. Other factors remaining
constant, a relatively weaker U.S. dollar indicates that exports of wood, wood fiber, and wood
products could be expected to increase. Concurrently, imports of such products should decrease
with a relatively weaker U.S. dollar.
Across the U.S. South, the gross state product (GSP) for lumber and wood products is highest
in Georgia and Texas, in the range from $2.1 to $2.8 billion per year. Alabama, Florida, North
Carolina, and Virginia GSP range from $1.2 to $2.1 billion per year. The remaining southern
states’ GSP range from $0.4 to $1.2 billion per year.
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•
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In summary for the U.S. economy:
Attractive interest rates, improved weather, and a boost in consumer confidence pushed
housing starts up 6.1% in May 2003.
Home sales reached a seasonally adjusted annual rate (SAAR) of 1.73 million units
An average 30-year, Fixed mortgage rate for June was 5.21%. It is currently 6.24%, compared
to 6.71% last year at this time.
Weaker US Dollar, Still too strong?
Growing concerns over deficit due to war.
Industry Update
An examination of the forest products sector reveals there were 37 companies on the Fortune
500 list in 1990 compared to 10 in 2002. There were seven forest product companies in the top
100 in 1990 compared to only two in 2002. Total revenues in the sector were $107 billion in
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1990 compared to $90 billion in 2002. Profits dropped from $6.9 billion in 1990 to -$1.1 billion
in 2002. Over the same period, employment in the forest products sector dropped from 590,497
to 307,948.
Examining the continued consolidation of the forest products sector, several trends are evident:
 There is a move away from the traditional integrated view of the forest products business.
 There is recognition of the differences in risk between timber and timberland and
manufacturing (and also differences among product lines in manufacturing).
• Timberland assets ownership is moving toward more tax efficient structures.
In 2002-2003, 3.9 million acres of timberland sold across the U.S. South for $3.1 billion. Why
sell timberland now?
• Over the past four years, the world and national economy has been down while the relative
strength of the U.S dollar has been up. The impact of an unfavorable exchange rate can be
seen in the figure at left where the relative cost of delivered roundwood has increased for the
U.S. South compared to other global competitors.
• Industry Consolidation has followed the macro economy to reduce the over supply of products
relative to reduced global demand.
• Industry debt load has increased with consolidation.
• Shareholder returns have been down.
• Mature markets exist for raw materials.
• Timberland ownership is no longer viewed as a required asset for forest product
manufacturing.
• Land ownership is moving to more efficient tax structures. New owners are private, public,
and institutional buyers.
• Shown in the figure below, over the past ten years, investment in land producing timber has out
performed the S&P 500.
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•
•
•
In the forest products sector several trends are evident:
There is a move away from the traditional integrated view of the forest products business.
There is recognition of the differences in risk between timber and timberland and
manufacturing (and also differences among product lines in manufacturing).
Timberland assets ownership is moving toward more tax efficient structures.
With a variety of tax structures available for timberland ownership, there is quickly becoming a
hierarchy of tax efficient owners.
– Highest valuations – Privately owned tax-exempt entities (TIMOs, MLPs, REITs, and
certain S-corps).
– Intermediate valuations – privately owned double taxed entities or publicly owned singletaxed entities (REITs or MLPs).
– Lowest valuations – Publicly owned double-taxed entities (C-corporations).
Pulp and paper summary:
• Many market sectors near to all time lows.
• Operating efficiency rates for pulp and paper mills are in the mid 80s. There is room for
additional supply if markets recover.
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• There is a possibility for additional mill shutdowns if markets do not respond. Larger industry
segments can more readily open and close individual mill units to match demand for products,
compared to smaller industry segments.
• Mills are not expected to shutdown if with each price increase, supply is increased.
• Abundance of pulpwood.
• Recent recoveries in CNS and sawtimber prices.
• Drop in overall stumpage markets from late ’90s.
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•
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Industry summary:
Greater recognition of risk variance across segments of industry
Continued consolidation within industry segments.
Less of traditional integrated view of the forest products business.
Timberland ownership patterns will continue to favor tax efficient structures.
New Directions for Forest Resources
• Guarantee that current and future wood products meet consumer needs of wood quality and
supply.
• Develop new wood markets to provide alternatives to non-renewable materials with expanded
forest resource industries, such as small-scale manufacturing.
• Create new users of forest products through development of advanced engineered wood
composites.
• Consider competition with existing forest industries and existing markets.
• Research, development, and technology transfer will continue to be important components.
• Develop new products to meet evolving needs such as:
– New forest resource industries: Ex., New uses for Small Diameter Wood (Soft and
hardwood).
– Consider: Competition with existing fiber & wood demand.
– New manufacturing processes, partners, products, and designs.
– Research, development, and technology transfer.
• Develop a political and policy climate that recognizes forest industry as a major manufacturing
sector and land use in the region.
– Landowner income, employment, taxes, and regulations.
– Dept. Industry Tourism and Trade, Exports, Economic Development.
• Include focus on non-wood product goods and services from forest resources
– Pinestraw, recreation, ecotourism, wildlife, greenery, agroforestry, bio-fuels, more and
cleaner water and air, green space, environmental sustainability and health, etc.
Timber Management Implications for scenarios with relatively low current PW prices
• Landowners’ expectation of return to higher price scenarios of late 1990s is unrealistic.
• Maintain >33% live crown ratio in forest trees
• Fertilize if you can and if site is responsive
• Include pine straw as a cash crop, among others.
• Aggressively market tree crops. Use professional assistance where needed.
• Accept current PW price as a timber improvement cut
• Thin stand if needed to maintain optimum growth. Leave best crop trees after thinnings.
• Grow pulpwood to higher value Chip-N-Saw, sawtimber, and poles.
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•
Key economic indicators, 2003
(seasonally adjusted annual rates)
Item
US Dollar
Period
Latest
Prev.
• Consumer Confidence
Aug
81.3
77.0
• Retail sales
July
1.4%
0.9%
• GDP
Q2
3.1%
1.4%
• Inst. for Supply Mgt. Index
Aug
54.7
51.8
• Factory Orders
July
1.6%
1.9%
• Unemployment Rate
Aug
6.1%
6.2%
• Employment situation
Aug
-93,000
-49,000
• Consumer inflation
July
1.5%
1.5%
• Housing starts
July
1,872,000
1,845,000
• Home sales
July
7,285,000
7,030,000
Source: Federal Reserve Bank of St. Louis
Yearly Average Housing Starts:
thousand units
US Total and US South
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1982
2002 Fortune 500 Comparison For
the Forest Products Sector, 1990–2002
Items
Sales of new single-family homes jumped 12.5% in May. Compared to last
year at this time, May’s figures marked a 17.9% rise.
1986
US Total
1990
US South
1994
Linear (US Total)
1998
2002p
1990
2002
# Companies on list
37
10
# in top 100
7
2
$106,799
$90,168
Profits (Millions)
$6,923
-$1,107
Employees (#)
590,497
307,948
Total revenues (Millions)
Linear (US South)
Sources: U.S. Census Bureau & National Association of Home Builders (Single Family +
Multifamily Starts)
Conifer Wood Fiber Prices for Delivered Roundwood
Including effect of exchange rates
Comparative Value of $10,000 Forestland Investment
US $s per Ton Green Weight
$80,000
$70,000
$60,000
$50,000
$40,000
Sawtimber
$30,000
S&P 500
$20,000
Pulpwood
$10,000

2.6 Ton/cd.
1990

$90/cd.
2002
So
ut
h
US
NW
E.
Ca
na
da
Sw
ed
en
Fi
nl
an
d
Ge
rm
an
y
Br
az
il
Ch
ile
Au
st
ra
lia
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
$0
100
90
80
70
60
50
40
30
20
10
0
US
*
SE Pine Sawtimber
SE Pine Pulpwood
S&P PFP
* PFP =S&P
Pulp 500
& Forest Products
Nasdaq
Timber Mart-South, 2002
5
Timber Mart-South http://www.tmart-south.com/tmart/
Number of pulpmills and pulping capacity, by State, 2001
http://www.srs.fs.usda.gov/pubs/rb/rb_srs084.pdf
http://www.tmart-south.com/tmart/
http://www.tmart-south.com/tmart/
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Trends in US Southern Pulp Fiber Consumption
(Million cords)
Southern Pine Lumber Production, Million Board Feet
90
80
70
60
50
40
30
20
10
0
17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
1995
1996
1997
1998
1999
2000
2001
1970
2002p
1975
1980
1985
Total
Sources: AF&PA and SFPA
South includes KY, OK,and MD
1990
1995
2000
Pine Total
Source: Forest Resources Assn. (formerly APA)
U.S. South pulpwood production by State and broad species, 2001.
Quarterly Average US Lumber Prices
Quarter 1996 through 4th Quarter 2002
4th
US dollars per mbf
500
450
400
350
300
250
200
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
USDA-FS SRS-84, 2003
Sources: Random Lengths Composite Framing Lumber
http://www.srs.fs.usda.gov/pubs/rb/rb_srs084.pdf
U.S. South roundwood production for all products by species and year.
U.S. South roundwood production by type of product, 1999.
http://www.srs.fs.usda.gov/pubs/rb/rb_srs085.pdf
http://www.srs.fs.usda.gov/pubs/rb/rb_srs085.pdf
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