Recent consternation and turmoil over lower timber prices in the South are justified for forest owners trying to sell timber in some markets across the region.
The case made by The Daily Caller News Foundation’s Tim Pearce and others in the national press is that forest owners spent big bucks to plant trees decades ago with the idea that timber was a safe investment that would support a retirement or pay future college tuition.
Timberland has an excellent long-term record as an investment, especially in terms of diversifying a portfolio and in risk-adjusted return. Notice I said “timberland,” and that is the more proper investment to evaluate as you can’t grow timber without land.
The principles taught in a basic forest economics courses that deal with timber supply will include price expectations and derived demand. Price expectations have a great impact on timber supply because trees planted today are based on financial models that project prices well into the future (farmers have the same problem, only they deal with a single year, while timber growers deal with long time horizons spanning decades).
Low prices today discourage tree planting, resulting in too few trees several decades. Vice versa, higher prices in the past led to overplanting then and oversupply now. The longtime horizons involved with forestry investments have led to similar timber price problems in a continuing cycle.
Timber prices are determined by supply and demand, just like other commodities, but timber demand is a derived demand. No one wants to buy a tree or even lumber; the demand for timber is driven by things like houses, furniture, and paper.
Which timber products to grow for which markets and for how long? Twenty years ago, who would have predicted all the new wood pellet mills in the South based on bioenergy needs? Anyone using a crystal ball to project future timber prices will also need to know the changing demands for all of those end products. When newspaper articles describe too few sawmills, they are actually describing a lack of lumber demand and, really, a lack of housing starts.
In that long time horizon, market issues like international trade and tariffs come into play. When I built a house in South Carolina a few years ago, I noticed the contractor was using Canadian lumber. Forest owners are forced to add issues like that to their price expectations crystal ball. Certainly, part of the equation on current timber prices in the United States is the impact of President Trump’s punitive tariffs on Canadian softwood timber.
Some aspects of timber supply are much easier to project. One major culprit in the oversupply of timber in the South is the acres of Conservation Reserve Program (CRP) plantings that began in the 1980s (actually, these types of tree planting can be traced back to the 1950s and the Soil Bank Program).
It does not take much of a forest economist to predict the resulting timber supply or glut that develops from government-subsided tree planting. But “conservation” is the operative word in those CRP plantings; the government’s goal was to take highly erodible land out of farm production (the landowners got significant annual payments for planting trees or grass). Timber gluts from those acres are just unintended consequences that forest planners knew about from the very first seedling.
That timber prices are low can’t really be debated. Traditional supply and demand arguments, however mainly confuse the issues. It goes beyond simple counting of sawmills then and sawmills now. Sawmills produce an intermediate product, not a final one.
Discussions on timber prices become very complex very quickly and simple analyses of the number of trees and sawmills are just the tip of the iceberg.
Thomas J. Straka is a professor of forestry and environmental conservation at Clemson University in South Carolina.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.