Mediocre Demand And Aging Forests Weigh On Timber Markets

Despite the steady rise in housing starts, a primary driver of demand for wood products, timber markets are muddling, the head of one of the nation’s largest forest management firms writes in his firm’s quarterly newsletter.

Marshall Thomas, president of F&W Forestry Services, which operates across the major forested regions of the Eastern U.S., said in his firm’s summer newsletter that the current state of timber markets can be explained by the theory of supply and demand.

“Demand, in my opinion, still remains an issue,” Thomas said. “While housing starts have increased, they haven’t reached the magic level of 1.3 million units per year, which seems to be the accepted level at which demand begins to impact [timber] prices at normal supply levels.”

But Thomas also said there is an oversupply of softwood sawtimber, caused by the aging forest and the drop in the demand for wood during the recent recession.

“The aging forest means that we have a disproportionate amount of large trees, and the reduction in harvests has resulted in a buildup of supply,” Thomas added. “Prices will improve when all those factors balance.”

Softwood Lumber Dispute Heats Up As U.S. Imposes Tariffs

The dispute over Canadian softwood lumber entering the U.S. heated up this spring and summer when the U.S. Commerce Department announced preliminary countervailing duties on Canadian lumber imports in April, and followed up two months later with the announcement of antidumping duties.  This brings the total combined tariffs to be levied on Canadian softwood lumber imports to between 17.41 percent and 30.88 percent.

While the Canadian government denies it subsidizes the industry, it also acted quickly to provide more than $641 million in financial aid to Canadian softwood lumber producers to mitigate the new duties.

With NAFTA renegotiations set to begin in August, the new developments make it seem unlikely that a new softwood lumber agreement will be reached between the two countries by then.

Washington Turns Attention To Major Tax Overhaul

As the new Trump administration settles in, work has begun in earnest on the domestic policy agenda, with tax reform, forest biomass, Waters of the U.S., the federal budget, and softwood lumber imports just a few of the items on the table that will impact the forestry sector.

One of the most significant issues for forestry will be the proposed overhaul of the federal tax code. Any major tax reform initiative will likely impact existing provisions that apply to timber sales, forest management expenses, reforestation costs, and related expenses involved in the business of growing trees commercially.

President Trump and the Congressional GOP leaders have been working together for months to develop a unified tax reform plan, which they hope to roll out later this summer.

While there is no specific information concerning what will be included in the unified tax reform plan, President Trump and GOP leaders are all in agreement on the elimination of the estate tax, also known as the death tax.

Timber Prices Remain Flat Despite Upward Trajectory Of Housing Starts

Housing starts are finally approaching 1.3 million starts per year, a level that traditionally has led to upward pressure on sawtimber stumpage prices. However, there are factors at work that could undermine this pressure on prices, the head of one of the nation’s largest forest management firms reports.

Marshall Thomas, president of F&W Forestry Services, Inc., reports in his firm’s spring newsletter that while housing starts are approaching this milestone level, there is likely to be a delay in a corresponding increase in timber prices.

“It may be traditional wisdom doesn’t apply for two reasons,” Thomas writes. “First, we have too much standing inventory of pine sawtimber, and second, the houses being built today may not use the same amount of lumber that was used prior to the recent housing crisis.”

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Trump Sets Aggressive Agenda

While it may be some time before there are any major changes in forest policy under President Trump, it is very clear that the new administration is taking a sharply different approach on issues than the previous one.

Already President Trump and his new EPA Administrator, Scott Pruitt, have begun the process of rolling back the Waters of the U.S. (WOTUS) rule and the Clean Power Plan (CPP) program, both major environmental policy initiatives of the Obama administration that have a huge impact on forestry.

Trump has also tapped former Georgia Gov. Sonny Perdue to lead the Department of Agriculture. Perdue, a successful agribusiness man, will have oversight of the vast government agency that sets policy on issues ranging from agriculture, forestry, and natural resources to nutrition and rural development. He will also serve as the key liaison for the White House on the reauthorization of the Farm Bill by Congress in 2018.

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Reforestation Activity Mixed in 2016-17 Planting Season, Expected To Rise In Future Years

The latest survey of F&W managers on reforestation activity in their areas during the recent 2016-17 tree planting season was mixed, with reports of both increased and decreased planting and the status quo. But almost all managers expect an uptick in reforestation in the future.

Managers who reported increased reforestation activity said it was due primarily to more landowners conducting final harvests.  But those who reported a decrease in reforestation activity indicated that some landowners are still waiting for better timber prices before harvesting. Other managers said that weather, the availability of tree planting contractors, and/or a delay in the completion of harvests led to less tree planting this season.

But most managers believe reforestation will increase in the future due to increased demand for wood. The most recent tree planting statistics published by the U.S. Forest Service, based on the 2014-15 planting season, shows reforestation nationwide continuing to rise at a steady pace, increasing 10 percent overall since the 2011-12 season when the USFS resumed its estimation of tree planting.

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Sweeping Changes In Washington Likely To Be Felt By Forest Industry

While the November election answered one question—who will lead the U.S. for the next four years—it raised many more.  President-elect Trump and the Republican majority in Congress are now embarking on the complicated task of implementing new domestic and foreign policy agendas.  Many of the policy changes expected to be considered are likely to have a significant impact on forestry, particularly as it relates to taxes, the environment and trade.

A major overhaul of tax laws, which has long been a goal of Congressional Republicans, could result in the elimination of several tax provisions that are very favorable to forest landowners, including the treatment of most timber sales as capital gains and deductions related to operating and management costs. It could also result in the elimination of the estate tax, otherwise known as the “death tax,” which could benefit family forests.

Forestry is expected to fare well under Trump’s pick to lead the Environmental Protection Agency.  Scott Pruitt, the current Attorney General for Oklahoma, is expected to dismantle many of the onerous rules and regulations put in place during the Obama administration.  And the administration’s new foreign trade policies could have a mixed effect on U.S. wood markets.

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While Talks Stall, U.S. Lumber Producers Petition For Relief

With negotiations between the U.S. and Canada at an impasse for a new Softwood Lumber Agreement (SLA), which expired in October 2015, a coalition of U.S. lumber producers has moved forward on another track and filed petitions with two U.S. government agencies requesting the imposition of import duties on Canadian lumber.

The Committee Overseeing Action for Lumber International Trade Investigations or Negotiations (known as the Coalition) petitioned the Department of Commerce and the International Trade Commission in late November to “restore the conditions of fair trade in softwood lumber between the United States and Canada.”

The petition alleges that Canadian softwood lumber is being sold in the U.S. below fair market value. The Coalition said it is seeking trade remedies to “offset the harm caused to U.S. mills, workers, and communities.”

The softwood lumber dispute will likely be one of the first significant trade issues handled by the new Trump administration.

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Timber Prices Flat In 2016; Washington Changes Create Challenges/Opportunities

Timber markets didn’t have a great year in 2016. A lackluster home building sector, dry weather conditions, and increased Canadian lumber imports into the U.S. combined to hold timber prices in place.

“Housing starts stayed relatively flat and so did our (timber) stumpage prices,” wrote Marshall Thomas, president of F&W Forestry Services, Inc., in the winter edition of his company’s quarterly newsletter.

However, Thomas said the change in weather patterns towards the end of the year will hopefully give a boost to timber prices in the coming months.

Anticipated changes in Washington could also have a big impact on timber markets and the forest industry.

“Changes in taxes and trade positions could have dramatic impacts and we just don’t know which way that will go right now,” Thomas said.

“This election upset may lead to some economic changes that benefit us—let’s hope for the best as the new president sets up his administration and begins to set policy,” said Thomas. “It is a good time to get more involved with your Congressmen and Senators to make sure they are on their toes in terms of our specific forestry issues.”

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