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In the Worst Timber Market Since the Early 1980’s, Are There Any Options?

By: John Erixson, Northwest Management, Inc.

In our 2nd Quarter 2008 Market Report Newsletter Keith Balter, Senior Economist, Forest Capital Partners, LLC stated “Over the past year, timberland owners in the Inland West have seen sawtimber prices retreat as lumber producers sharply curtailed production at mills across the region.” This year the same sentence applies, as we have actually seen some and maybe even most area mills suspend their purchasing of logs altogether. For the first time in the 25 year history of Northwest Management, Inc. the mills have actually stopped purchasing logs.

Some would say we have the perfect storm. Housing starts are way down and foreclosures are way up leaving home inventories high. On top of this the falling home prices which leads to fewer new home purchasers and you end up with a really tough market for wood products. Not to mention, due to less consumer spending the demand for world wide pulp and paper products is down as well.

So there you have it…the bad news. The real question is where we are going from here? This is especially of interest if you are a landowner with timber and even more of interest if you were or are planning on harvesting within the next year. So let’s analyze this “Perfect Storm” a little further.

First, it is not likely that we will see a significant increase in housing starts during the remainder of 2009. Currently 18.6 million homes in America are sitting empty (Source: The existing home inventories, or “used homes” shall we say, are at about a 10 month level. Meaning there is an excess in “used homes” that covers the demand for the rest of the year. Add to this the 3% of US mortgages that are 3 months or more behind in payments and new housing starts may be delayed into next year.

Second, lending remains tight. Keith Balter again stated “Access to mortgages for first-time and marginally qualified buyers has been severely restricted in the wake of the sub-prime mortgage crisis. Lenders have increased their requirements for home buyers regarding income and credit ratings, and have increased vigilance in verifying financial information and assessing property values.” Again this statement is applicable for the current year. The good news here is that interest rates are near all time lows and are projected to drop a little more. This may lead to qualified buyers moving into the rental income markets as housing prices moderate and the mortgage expenses decline.

With housing starts down, the demand for the lumber produced by the mills is down. The mills are stuck in the middle with high inventories of logs; demand is low for lumber and they have high inventories of lumber. It is going to take a little time for this to correct itself once housing starts improve.

Butch Bernhardt from the Western Wood Products Association predicts that there will be a sustained recovery in wood products in mid to late 2009 or early 2010. As a landowner, if you are considering harvesting, if you can, waiting this recession out may be your best strategy as long as our industry is able to survive this decline. If you can’t wait this recession out, there are some strategies that can help maximize your returns. Marketing becomes increasingly important. You can hit spot markets and specialty markets even today that provide reasonable returns. Some non-traditional markets can include house and specialty logs, firewood, and individual species and products that some mills are still purchasing.

If you don’t need to harvest, what can you do? Like all markets the log and lumber markets are cyclic and there may be a better day to harvest logs and sell forest products down the road. So in the mean time, managing your forest for the future is a good approach. In other words, set yourself up to be ready when the markets improve. If you can afford to, invest in the future of your stand. Do pre-commercial thinning or plant trees. There are some cost share programs that are currently available and some new programs coming down the pike that will provide additional cost share opportunities. Now is a good time to take advantage of these opportunities and prepare for opportunities that will come in the future.

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