Recovering Housing Market Combined With Wet Weather Offer Promise of Better Timber Markets

Timber stumpage prices were stable to declining across most timber growing regions in the third quarter but all signs point to a continuing—if sputtering—recovery ahead, the head of one of the nation’s largest forestry management firms reports.

Marshall Thomas, president of F&W Forestry Services that operates across the southern pine belt as well as the central and northeast forested regions of the U.S., said lumber prices dropped and sawtimber prices held fairly steady despite significant year-to-year increases in housing starts and wetter than normal weather across the South.

“But hope springs eternal, and it seems that the slow but steady increase in housing starts and the likely continuation of wet weather through the winter should put continuing upward pressure on prices over the next year or so,” Thomas said.

Thomas noted that while El Nino conditions should help bump up timber prices this coming winter, there are other factors at play that could have a negative impact on timber markets, including the expiration of the U.S.-Canadian Softwood Lumber Agreement, softening demand for lumber/log exports, and the strengthening U.S. dollar.

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New Home Construction Makes Slow But Steady Progress

The U.S. home building sector is starting to show improvement that offers a promise of better prices and demand for timberland owners.

The U.S. Commerce Department reports that housing starts in August hit an annualized rate of 1,126,000 units, the fifth consecutive month that starts have been above the one million level and an increase of almost 17 percent over the same period in 2014.

Permits for new home construction, an indicator of future building, were even stronger in August, hitting 1,170,000 units, up almost 4 percent from July and more than 12 percent from the same month in 2014, the Commerce Department reported.

The increase in home building is expected to be reflected in increased demand and higher prices for lumber and sawtimber, both of which have been depressed due to weakness residential construction.

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Agricultural Land Values Rise in 2015 Over Prior Year

Agriculture land values across the U.S. increased by 2.4 percent in 2015 to an average of $3,020 per acre including land and buildings according to the latest report from the U.S. Department of Agriculture.

“Regional changes in the average value of farm real estate ranged from a 6.1 percent increase in the Southern Plains region to 0.3 decrease in the Corn Belt region,” the report stated.

The per acre farm real estate values tracked by USDA includes separate breakouts for cropland and pasture values. But the surveys do not include forestland values, which in major regions of the country—notably southern areas—would add significantly to the value of many farms.

Broken out by F&W’s U.S. service areas by state and region, the highest valued agriculture area in the 2015 survey was the Mid-Atlantic comprised of North Carolina and Virginia that averaged $4,410 per acre, down slightly from $4,415 in 2014. This sub-region was followed closely by the Central region comprised of Kentucky, Ohio, and Tennessee with an average per acre value in 2015 of $4,217.

The Southeastern region of the U.S., the heart of the nation’s wood basket with vast rich pine forests, had a farm real estate value of $3,670 per acre in 2015, up 1.1 percent from its 2014 valuation.

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Timber Prices Ease In Second Quarter But Outlook Is Encouraging

Prices received by tree growers eased modestly in the second quarter of 2015 from first quarter as home construction continued to make a recovery, the head of one of the nation’s largest forestry management firms reports.

Marshall Thomas, president of F&W Forestry Services that operates across the southern pine belt as well as the central and northeast forested regions of the U.S., said the pick-up in home construction and other demand factors were not enough to offset the seasonal decline in timber prices but the wet weather conditions forecasted for this fall and winter could result in a strong run-up in prices.

“Housing starts continued their slow rise, reaching an annualized average of 1.027 million units through May 2015. Of course, this is a long way from strong demand but compared to 500,000 starts a few years ago it looks pretty good.  Remember, the rule of thumb is that we don’t feel demand pressure on timber prices until we hit about 1.3 million starts,” Thomas writes in the summer edition of his firm’s newsletter, The F&W Forestry Report.

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U.S. House Members Urge Retention Of Timber Tax Provisions

A bipartisan letter signed by 80 members of Congress representing 26 states has been sent to House Ways and Means Committee leaders urging them to preserve the federal timberland tax provisions in any tax reform effort.

The prospect of a wide-ranging overhaul of the tax code as applies to timber and timberland owners is generating concern in forestry circles.  Key tax provisions in existing law affecting timberland owners include capital gain treatment of most timber sales and deductibility of some forest management expenses, including reforestation.

The letter to Committee Chairman Paul Ryan (R-Wisconsin) and Ranking Minority Member Sander Levin (D-Michigan) encouraged retention of the current tax treatment for timberland owners and investors as the Committee examines ways to revise and modernize the federal tax code.

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Proposed Changes In Timber Tax Code Catastrophic For Small Landowners

Last year, former House Ways and Means Committee Chairman Dave Camp (R-MI) proposed to repeal four critical timberland tax provisions in the U.S. Tax Code.  His draft legislation, which was formally introduced in December 2014 as H.R. 1, would be catastrophic for small forest landowners, a group already reeling from the impact of the worst recession in the forestry world since the 1980’s.

These provisions identified for removal include:
* The long-term capital gains treatment of timber revenue. (IRC 1231(b)(2))
* The deductibility of timber growing expenses in the year they are incurred, rather than capitalizing these costs. (IRC Sections 162 and 263A(c)(5))
* The deductibility of up to $10,000 of reforestation expenses as these expenses are incurred and the allowable amortization of remaining reforestation expenses over a seven-year period. (IRC Section 194)
* Treatment of timberland and standing timber as real property for purposes of the real estate investment trust (REIT) rules. (IRC Section 856) (not considered in this article)

In order to quantify the impact of these changes on a small forest landowner, we have taken the forecasted cash flows from an actual 631 acre timberland property in Georgia, which we renamed the “Sample Tract” to protect the privacy of the landowner.

In terms of cash flow from the property, the average annual cash flow per acre from all sources, after taxes, under the current tax provision is $53.37.  Taking away capital gains reduces this to $37.96, and taking away the deduction and amortization provisions reduces this further to $35.46.

To put it into terms for the non-financial among us, let’s take a look at the impact on a timber sale for a typical landowner who has little cost basis in the property.  If they receive $2,000 per acre for a final timber sale of a 30 year old pine plantation, the current net, after sale expenses, is about $1,200 ($2,000 less sales cost of $100 less capital gains tax of about $450 less $250 reforestation cost).  After all expenses, the landowner retains only a little more than half of the gross receipts.

If the law changes, then the landowners net is reduced to $825 ($2,000 less sales cost of $100 less ordinary tax of about $825 less $250 reforestation cost)—substantially less than half of the gross receipts for the sale—and almost $400 per acre less than they would receive currently.

These are fatal numbers for Southern timberland owners, who are now selling at some of the lowest real timber prices in the last 60 years.

Most small landowners have their property because they inherited it from farming parents, as a recreational property, as a hedge against inflation, as a savings account for college, or some combination of all of these and many other reasons.  Because of these and other diverse reasons for ownership, and the different objectives of each owner, we have a very diverse forest landscape across the South—a wonderful mixture of native forest, plantations, and creeks.

Within these forest types, some landowners thin their trees, some burn to control vegetation and improve wildlife habitat, and some just let the trees grow until they are ready to cut.  Next time you are driving through a rural area of the South take a look at the roadsides and you will see this diverse landscape.

Regardless of objectives and management practices, almost all landowners, especially the smaller ones, need cash flow from time to time to justify the investment they have in the property. Reducing returns and cash flows by almost one-third will force many of these owners to look for other uses for their property or stop planting after harvest to reduce costs.

Alternative uses include agriculture or pasture, both fine uses, but neither of which provide much habitat for the diverse wildlife and plant species found in the Southern forest.  The biggest loser, if these tax proposals are implemented, could be the wildlife and plant species found in the Southern ecosystem.  It has taken us 80 years to recover from the pre-depression period in the South, when most land was in farms or cutover woodlands that were burned annually and grazed as pastureland.  It would be a shame to let a short sighted change in the tax code push us back to those conditions.

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Timber Prices “Light and Variable” During First Quarter, Tax Reform Troubling For Timber Owners

The economic recovery of the forestry sector continues at a painfully slow pace while Congress mulls tax reform legislation that could eliminate timber tax provisions that will have a negative impact on small private forestland owners, one of the nation’s largest forestry consulting firms reports.
Marshall Thomas, president of F&W Forestry Services, Inc., one of the nation’s leading forestry management and consulting firms, reports in his firm’s quarterly newsletter that timber price increases during the first quarter were “light and variable.”

“Wet weather (in this case snow)—normally a harbinger of higher timber prices—actually caused a significant drop in February housing starts, perhaps contributing to the lack of excitement in local stumpage markets,” Thomas writes in the spring 2015 edition of the F&W Forestry Report. “Fortunately as we enter the warm season, it looks like El Nino has a good chance of staying with us and should have its predictable positive impact on stumpage prices.”

“As our painfully slow recovery continues, a real threat to forest landowners is coming from our politicians [in Washington] in the form of tax reform. The proposals for forestry include the elimination of capital gains, annual expense deduction, amortization of reforestation expenses, and tax credits for reforestation expenses,” Thomas said.

“If made, these changes could reduce long term returns for small private forestland owners by as much as 25 percent … That’s more than enough to offset the recovery for the next five years or so,” he added.

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Forestry Coalition Urges Congressional Tax Leaders To Retain Timber Tax Provisions

More than 150 forestry organizations, timber industry groups, and private timberland owners have come together to file joint letters with the U.S. House and Senate tax-writing committees urging Congress to retain long existing timber tax provisions of the revenue code, including capital gains on timber sales.

The House Ways and Means Committee and the Senate Finance Committee will play influential roles in writing any new or revised federal tax laws applying to timber sales, forest management expenses, reforestation costs, and related expenses involved in the business of growing trees commercially.

The forestry-generated letters to the Congressional tax leaders urged their respective committees to retain the existing tax law treatment of the timber-growing industry, noting it works for trees, forestland owners, including the 22 million family forest owners across the country, wood products and paper manufacturing, fish and wildlife, and outdoor recreation.

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Housing Starts Drop, New Home Sales Soar, While Permits Edge Up In First Quarter

Under the onslaught of harsh winter weather, new home construction in the U.S. fell below the annualized million new starts marker in February for the first time since September 2014. The decline is being attributed to the devastating winter weather that has plagued much of the country and slowed home building for a second consecutive winter.

While housing starts were floundering, sales of newly built, single-family homes in February actually rose 7.8 percent to a seasonally adjusted annual rate of 539,000 units. This is the highest sales pace since February 2008 according to the National Association of Home Builders.

But there was more positive news for housing in the form of new home building permits—an indicator of future housing construction activity. The Department of Commerce reports that new housing permits were issued for 1,060,000 units in January of this year and for 1,092,000 units in February in spite of the harsh winter weather.

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Housing’s Modest Improvement Pushes Large Tree Prices Higher

The slowly recovering home construction industry is resulting in long-awaited improvement in demand and prices for large pine logs across the southern pine belt, one of the nation’s largest forestry consulting firms reports.

Marshall Thomas, president of F&W Forestry Services, Inc. based in Albany, Ga., that provides management services to forest landowners in much of the nation’s commercial tree-growing regions, reports in his firm’s quarterly newsletter that prices for pine sawtimber used for manufacturing lumber have been up modestly for three consecutive years.

“For the last three years southern pine sawtimber stumpage prices (paid landowners) have increased at a steady rate of about $2 (per ton) per year—from $23/T in 2012 to $25/T in 2013/T and all the way to $27/T in 2014,” Thomas writes in the winter 2014-15 edition of the F&W Forestry Report. “While those aren’t the kinds of gains we saw in the 1990’s, they are steady and going in the right direction for the first time in a long time.”

Thomas says he expects the timber price gains to continue as new home construction continues to gather steam as most economists predict.

“Housing starts at the end of the year were slightly over the million mark, up from the 2013 average of 925,000,” Thomas said.  “A recent survey of economists by the Wall Street Journal found that forecasters expect housing starts to reach 1.22 million in 2015.  That is getting close to the number that has typically stimulated the Southern timber market.  Long term forecasts call for continued increases through 2017, so this important demand factor for sawtimber is looking good,” Thomas wrote.

 About F&W

Established in 1962, F&W Forestry Services, Inc., of Albany, Ga., is one of the nation’s oldest and largest forest consulting and management firms.  The company handles timber sales and provides comprehensive forest management and consulting services to private and industrial landowners through a network of 20 offices in 12 states comprising the Southern pine belt, the Central and Appalachia regions, Upstate New York, and Oregon in the Pacific Northwest. It also manages private forestlands in South America and Europe with offices in Uruguay, Brazil, and France.

 Related Links:  

www.fwforestry.com