Difference of prices at market vs. for sawlogs
By Tony Diaz, LFA President, 2020-2021
We often use the metaphor of a three-legged stool when explaining a basic model of the forestry business community. The three legs represent forest landowners (in all their forms), logging functions (timber buyers, harvesters, trucking operations) and consumers (mills and their supply chain function). This is the basic model, but in economics the basic model is never adequate to explain the realities we experience when these basic components are all moving and being impacted by surrounding market forces of supply and demand, and the friction of competition.
The normal course of procurement work for my employer exposes me to frequent meetings and conversations about the various aspects of timber and forest products markets in the southern region of the United States, particularly in Louisiana. Moreover, there are multiple sources of data and reporting we use regularly to make sound business decisions.
Even so, there is sometimes debate over the best course of action for the current market, and there are always nuances of difference from one wood basket to another. If it is complex for someone who does this for a living, what is a landowner to do?
I have been approached a few times this year by forest landowners who do not think their personal situation reflects what they are seeing and hearing in the news or in publications. For example, “If lumber prices are so high, why are my sawlog prices not a lot higher too?” One generational landowner reflected he had always been able to look at housing starts to gauge his expectations for sawtimber prices, but that did not seem to work now. He was frustrated and looking for an explanation.
Many of our readers remember when the bottom fell out of the sawlog and lumber markets in 2007 from the weight of the Great Recession. The market settled into relatively flat prices for years afterwards. Recent movement in housing starts and lumber prices have piqued the interest of forest landowners, and they are eager to profit.
Landowners are always interested in the value of their resources relative to the trends they see in articles and reports. Sources for pricing information and trends are easily available now on the Internet. Some include Forest2Market, TimberMart-South, Louisiana’s Department of Agriculture and Forestry, and various governmental and news analytics. Reading these sources can inform the landowner about trends, but how can it be used?
Government entities and companies seeking expansion may use large-scale data to assess potential locations for a new facility or to evaluate growth-drain ratios to track sustainability. To be frank, however, much of the published pricing data available on the Internet is not going to be useful for individual forest landowners. For instance, it would not be helpful to know the average price for pine sawtimber in your area of the state is $250/mbf. You would have to know how much of that is needed to cover the cost of logging, how much is freight and what mix of sales was used to determine those values.
Assume you are able to find out the going stumpage price for sawtimber in your area. Can you then expect to receive that for your timber? Maybe. There may be a considerable difference between the lows and highs in that data. Some variables include:
1) Size of the tract (how long the logger can stay there without having to move again)
2) Distance to the consuming mill (freight cost comes out of what the mill is paying)
3) Quality of the raw material
4) Competing mills in the area (competition usually means higher prices)
5) Mill inventories (mills may pay more when inventories are low)
6) Access to the tract and terrain for logging
7) Efficiency of the logger (their cost structure)
8) Availability of logging contractors
You can know all the latest about lumber market trends and housing starts, but there is a good wood procurement axiom to remember: All markets are local.
When it comes to your own timber sale, you are dealing with your specific local market. The price you can attract will be based primarily on what the consuming mills can pay and what the logger needs to process and haul it. You can improve your profit: 1) Get advice from someone who understands the timing of the markets. 2) Get as many bids for your sale as possible. This is the only way to know its true worth. 3) Make sure you have a solid forest management plan and follow it.
Timberland is a good investment, but it must be managed to get the best yield. Not having a good management plan cannot be counterbalanced by trying to get a good price at the time of the sale. Presently, there are at least two new sawmills planned in the western part of Louisiana, and an OSB plant expansion in East Texas. Other pending projects for Louisiana are unannounced that may also improve demand for forest resources.
These are the missing pieces to improve returns for forest landowners when they are ready to market their forests. The market continues to adapt to imbalances in supply and demand, and when it moves it leans on at least one of those stool legs.
The Louisiana Forestry Association represents the combined interests of landowners, loggers and consumers. Each of these has unique issues and interests as well. It is our desire to help educate all forest stakeholders and promote the general health of the forest industry. We all benefit from the markets in the long run.
(Tony Diaz is president of the Louisiana Forestry Association and chip mill manager for Graphic Packaging International.)
