CHAPTER FIVE

CHAPTER FIVE

ECONOMIC TRENDS AND FORECASTS

Crystal Balls and Tea Leaves

Predicting the growth of woodland investments for any period of time into the future is risky business. As with any investment, past returns provide some gauge for potential gains, but of course, do not guarantee future performance. Crystal balls and tea leaves are seemingly unreliable tools for predicting the future, so it seems prudent to review the facts that are known through published reports. From those, a few very tentative assumptions about what the future could hold in store might be appropriate.

Market Reports

Most market analysts agree that the southeastern United States is rapidly becoming America's wood basket. Recent changes in environmental regulations, a reduction in available timber from Federal lands, and other influences such as urban sprawl have caused a major shift in the timber industry from northern and western states to the South. This shift places more demand for timber currently available in Tennessee. Significantly increased demand has already begun in some parts of the State. These increases, especially along the southern border, have boosted prices. This price boost has proven very welcome news to many woodland owners.

The Tennessee Forest Products Bulletin provides helpful information in reviewing past trends in price gains for certain grades and species of logs delivered to mills. These delivered log prices closely correlate with the prices timber buyers offer for standing timber. This report clearly shows that the value of high-quality logs has increased each year at a substantially higher rate than low-quality logs of the same species..

For example, from 1977 through 1994, the average price paid for Grade 2 red oak sawlogs increased by approximately 10 percent per year as compared to a mere 4.2 percent for Grade 3 sawlogs. During the same period, the percentage increases for white oak sawlogs were 12 percent and 3.8 percent respectively. Hardwood veneer prices annually soared by as much as 16.6 percent in some parts of the State, while hardwood crosstie log prices rose an average of 5.5 percent each year. Price increases for some species, such as Sweetgum, did little more each year than pace inflation at about 2.8 percent.

Forest Inventory Analysis

The USDA Forest Service conducts an inventory of Tennessee's forests each ten years. Their 1989 survey showed that the combined volumes of wood in grade 1 and grade 2 hardwood trees dropped from 44 percent of the total state wide hardwood volume in 1980, to only 30 percent of the total in 1989. This significant decline is extremely important since grade 1 and 2 trees constitute the backbone of Tennessee's hardwood lumber industry.

Taken as a whole, however, wood volumes are increasing across the State. In other words, tree growth is annually exceeding tree removal by a substantial margin. Therefore, Tennessee is not facing a general wood famine for the foreseeable future. That same positive situation may not exist in every county. Again, some southern counties have felt the full impact of increased demand from mills in Georgia, Alabama, and Mississippi. The latest inventory demonstrates that in some very localized areas, annual timber removals exceed annual growth.

What Do All of the Facts Mean to the Average Investor?

The prices paid for large, high-quality hardwood logs have traditionally shown significant annual increases. The supply of high quality sawlogs has continually decreased. What does that mean to an investor who is looking towards the long-term production of high-quality hardwood sawlogs and veneer? "Up, Up and Away?" Probably.

Concurrently, the value of low-quality hardwood sawlogs has risen very gradually in the face of increased low-quality supplies. Can investors hope to see rapid increases in prices offered for low-quality hardwood logs at anytime in the near future, if ever? Unless we experience some unforeseen explosion in demand, more than likely not anytime soon. Say, not before the next ice age.

What about pine prices? There are very few large southern pine sawmills active in most parts of Tennessee. With a few notable exceptions, sawlog markets are generally limited to mills located south of the state line. But, those mills are actively buying Tennessee wood at ever-higher prices. Pulpwood is purchased for both in-state and out-of-state facilities, and both demand and prices have generally been increasing over the past several years. In many parts of the state, investments in southern pines, especially loblolly, have yielded total annual returns well in excess of 10%. White pine prices in East Tennessee have shown nominal annual price increases of about 5.5%, but rapid annual tree growth, the other side of the economic equation, dramatically improves the overall financial assessment for this species. Demand is increasing for many pine products across Tennessee, so price increases could very well mirror, or possibly even exceed past performance.

The supply and demand picture for Tennessee wood products can be drawn with reasonable confidence from published reports. Although expert opinions are still only opinions, they are better than relying on crystal balls or tea leaves. Anticipating with reasonable assurance what the future may have in store is, without a doubt, essential to responsible decision-making. At Tennessee Timber Consultants, we can help you make those difficult decisions.