F&W Forestry Report - Spring 2023

Interest Rates Up, Housing Starts Down, And Guess What?

By Marshall Thomas, President

It is with a great sense of sadness that I have to report that stumpage prices continued their retreat of last year, declining from both the fourth quarter and the same quarter last year (price graphs, pages 6 to 9). That makes it a trend, and it is not a good one.

I had hoped that I wouldn’t have to write an opening like that for a long time. It was too often the opening line in the period after the 2008 collapse, and it seemed as if the Covid crisis had cured the problem.

It feels like we are, once again, caught up in the old Greek myth, where Sisyphus pushes a rock up a hill, watches it roll back to the bottom of the hill, and then pushes it up all over again.

But I really feel like this isn’t going to be the long hill that we had after 2008. It looks like most forecasters agree that the recession will come and go this year (no telling when), and that next year we may be back in the good times. The pent-up demand for housing is still there, we just need

interest rates down and the economy stabilized for homebuyers to become active again.

For landowners in the South, the weather may also shift our way. El Niño is forecasted to return in the late summer and that usually brings wetter-than-normal conditions. If we can come out of the recession together with wet weather, maybe we can test the upper limits of what the consuming mills will pay.

It is interesting to see that tree planting was up over the last planting season (pages 4 and 5). We talk about how people cut more trees when prices are high, but to see evidence of increased harvesting in the form of an increase in tree planting is interesting, and also backs our claim that our business is sustainable. We harvest and then we plant.

On the legislative side of things, there are several items of interest.

Foreign ownership of ag and timberland is once again an issue in the U.S. (page 3). Last time was the late 1970s. This time it is resulting in the introduction of bills around the country that limit foreign ownership of ag and timberland. Most of these

bills limit the restrictions to countries that the U.S. government identifies as bad actors.

And surprise, surprise … EPA has changed WOTUS (Waters of the United States) rules yet again! And once again people and states are filing lawsuits to stop the change. See page 2 for a wrap-up of the latest excitement over the types of streams, waterways, and wetlands that the federal government can regulate.

I saved the best for last. The Disaster Recovery Act has been reintroduced (page 7). This bill would allow timberland owners to deduct the fair market value of timber destroyed by wind and fire and other natural disasters, rather than their cost basis. This is a big deal. Due to the long-term nature of a reforestation investment, by the time a stand is 15 or 20 years old, the basis has been devalued by inflation. In the case of natural regeneration (which is most hardwood forestry), there is no basis. Allowing a fair market value deduction reduces risk for timberland owners and makes it easier to justify capital investments and holding timber on the stump

of F&W Forestry Services, Inc.

WOTUS Redefined (Again) But Uncertainty Prevails

The Biden administration closed out 2022 by finalizing new regulations that define which “waters of the United States” (WOTUS) the federal government has the authority to regulate under the Clean Water Act (CWA). The action, which became effective March 20, reinstates a definition of WOTUS that was in effect prior to 2015 with updates to reflect court decisions and the latest science, according to the Environmental Protection Agency (EPA) announcement.

The new rule was met with immediate opposition from agricultural and landowner organizations, saying it was vague and complicated.

“We need rules that are clear and can be interpreted by farmers without spending thousands of dollars on legal fees,” said American Farm Bureau Federation (AFBF) President Zippy Duvall.

Forestry Report

For further information on material in this report or to discuss your forestry needs, contact the nearest F&W office or the Albany headquarters at: PO Box 3610, Albany, GA 31706-3610 229.883.0505 / fax 229.883.0515 www.fwforestry.com

Marshall Thomas, President

Jeff Jordan, Chief Operating Officer

Jody Strickland, Chief Business Officer

Sonya Farmer, Chief Financial Officer

Stephen Logan, Chief Information Officer Brent Williamson, Forest Operations

The F&W Forestry Report is produced by: Bates Associates 770.451.0370 batespr@bellsouth.net

For decades, WOTUS has been a flashpoint between environmentalists who want to broaden the EPA’s authority over the scope of water that can be regulated and farmers and other landowners who say the regulations are burdensome, costly, and curtail property owners’ rights.

The latest WOTUS definition is the third attempt that started in 2015 when the Obama administration sought to expand federal protection for streams, wetlands, and other waterways. The Trump administration narrowed the definition of which waters could be regulated under the CWA, along with detailing which waters are not subject to federal control.

The Forest Landowners Association (FLA) said that while the new rule attempts to provide a more durable approach to protecting wetlands and streams, there is new language that may impact forest owners. In determining what waters are considered WOTUS under the pre-2015 guidance, FLA said two tests can be used:

“The Significant Nexus Test determines whether smaller water bodies or wetlands substantially affect the chemical, physical, or biological integrity of larger navigable waters. The Relative Permanence Test says that only ‘relatively permanent, standing or continuously flowing bodies of water’ such as streams, oceans, rivers, and lakes should be considered as Waters of the U.S. and that only wetlands that shared a ‘continuous surface connection’ with a relatively permanent body of water fall under Clean Water Act jurisdiction.”

Landowners have struggled with ambiguous language in these tests and rather than provide clarity on implementation of these tests, the final WOTUS rule broadens them,

FLA said.

AFBF and 17 other groups comprised of agriculture, construction, mining, oil, and housing industries sued EPA over the new rule. Other coalitions, including a group of 24 Republican-led states, filed separate suits against the rule. On March 19, a federal judge issued a preliminary injunction against the rule in one case, applying only to Texas and Idaho, but the rule was allowed to take effect in the rest of the country, leading to a patchwork of regulations nationwide.

The new rule also spurred members of Congress to introduce legislation challenging the rule through a Congressional Review Act joint resolution, which passed the U.S. House on March 9 and the Senate on March 29. The procedure permits Congress to reject new rules from the executive branch and passage invalidates the rule. However, President Biden vetoed the measure on April 6.

The Biden administration’s action also comes ahead of an expected Supreme Court ruling that could limit EPA authority. In October, the Court heard Sackett v. EPA, a case concerning an Idaho couple who planned to build a home but the EPA said it would disturb wetlands. The outcome of this decision, which is expected this summer, may set a new precedent for the agency to follow.

QUICK LINKS

Lawmakers Target Foreign Ownership Of U.S. Ag Land

Concerns over food supply and national security have created a nationwide debate over foreign ownership of U.S. farmland, which intensified following the downing of a Chinese spy balloon off the South Carolina coast in January.

Recent land purchases in the U.S. by Chinese and other “foreign adversary” government investors have raised concerns about food exports being prioritized over domestic consumption, spying, and theft of American agricultural intellectual property. Examples include the recent purchase by a Chinese company of 300 acres of North Dakota farmland near the Grand Forks Air Force Base for $2.6 million and the purchase of 140,000 acres in Texas by a Chinese billionaire near Laughlin Air Force Base.

As a result, momentum is building among federal and state lawmakers to closely monitor and restrict foreign ownership of U.S. agricultural land.

In 2021-2022, eight states proposed laws restricting private foreign investments in land, specifically

agriculture land, according to Micah Brown of the National Agricultural Law Center. But in 2023, he said some 29 states and counting have introduced legislation to restrict foreign ownership, sparked primarily by the two Chinese purchases near military installations.

There are also proposals before Congress to address concerns involving foreign purchases of U.S. farmland and investment in the American food and agricultural sectors, including tightening disclosure requirements, restricting U.S. Department of Agriculture (USDA) program eligibility from foreign entities, and prohibiting transactions by certain foreign countries and persons.

Current federal law imposes no restrictions on the amount of private U.S. agricultural land that can be foreign-owned. However, foreign persons and entities are required to disclose information to the USDA.

The Agricultural Foreign Investment Disclosure Act (AFIDA) of 1978 established a nationwide system for collecting information pertaining to foreign ownership of U.S. agricultural land, defined as land used for forestry production, farming, ranging, or timber production.

land in the U.S.

In 2021, forest land accounted for 47 percent of all reported foreignheld acreage, cropland accounted for 29 percent, and pasture and other agricultural land accounted for 22 percent. The USDA reports that foreign holdings of U.S. farmland increased modestly from 2009 to 2015, averaging 0.8 million acres per year. But since 2015, foreign holdings have increased an average of 2.2 million acres annually.

Although a great deal of attention is focused on China, most foreignowned land in the U.S. is held by other countries. Five countries accounted for approximately 62 percent of all foreign-owned acres, including Canada (31 percent, mostly forestland), the Netherlands (12 percent), Italy (7 percent), the U.K. (6 percent), and Germany (6 percent). Nine other countries had holdings of more than 500,000 acres. China accounted for 383,935 acres in 2021, slightly less than 1 percent of all foreign-held land holdings.

https://www.fsa.usda.gov/programs-and-services/economic-and-policy-analysis/

Foreign investors held an interest in 40.8 million acres of U.S. agricultural land as of Dec. 31, 2021. This was an increase of more than 2.4 million acres from the prior year and represents 3.1 percent of all privately-held ag

States with the most foreignheld agricultural land were Texas (5.3 million acres) and Maine (3.6 million). Other states with more than one million foreign-owned acres were Alabama, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Oregon, and Washington. Some 90 percent of foreign-owned forestland is located in 15 states. Maine tops the list of states with the largest concentration of non-U.S.owned timberland at nearly 3.6 million acres. Other states with the largest acreage of foreign-owned forestland in 2021 were Texas, 2,155,919 acres, and Alabama, 1,783,673 acres. Seven states had “substantial” increases in foreign forestland ownership in 2021: Alabama, Arkansas, Georgia, Mississippi, Ohio, Tennessee, and Wisconsin.

U.S. LANDHOLDINGS BY FOREIGN INVESTORS BY TYPE OF LAND USE FOREST PASTURE CROPLAND

Forest Service Data Shows Reforestation Jumps Following Start Of Pandemic

In the first planting season following the start of the COVID-19 pandemic—and subsequent booming timber markets—tree planting across the U.S. increased by 8 percent, according to the latest survey and analysis by the U.S. Forest Service in association with three land-grant universities.

During the fall-to-spring 2020/21 planting season, forest nursery production was nearly 1.4 billion tree seedlings with an estimated 2.6 million acres planted across the nation.

A region-by-region breakout finds that planting in the Southern U.S. was up 7 percent to a little more than two million acres. West Coast planting was up 3 percent to 435,161 acres. Planting in the Northeast was up some 84 percent to 20,773 acres, which is attributed to a return to normal operations following COVID-19.

“In the Eastern United States, seedling production generally declined

from 2012 to 2020, but nearly doubled from 2020 to 2021 because many nurseries had ceased lifting operations during the pandemic,” the report said.

Tree planting estimates are based on data collected directly from the forest and conservation nurseries that grow forest tree seedlings across the U.S. The approximation of planted acres for each state is derived from estimates of average tree planting area based on historical ground-plot data collected by the Forest Services’ Forest Inventory and Analysis (FIA) Division.

The South remains the national leader when it comes to reforestation, with approximately 80 percent of all tree planting in the 2020/21 season occurring in the 13-state region. The three West Coast states of Oregon, Washington, and California comprised 16 percent of all U.S. reforestation. Tree planting in the Northeast represented only 1

percent of all reforestation but in this 12-state region, forest regeneration is primarily conducted through natural approaches for establishing desirable species. The modest amount of tree planting in this region is primarily focused on either establishment of forests on abandoned land or the conversion of hardwood forests to softwood plantations.

Approximately 71 percent of seedlings grown by nurseries were bareroot stock but there was a 14 percent increase in the number of container seedlings grown by nurseries in the 2020/21 season. The predominant species grown were conifers, with hardwoods comprising only 3 percent of seedling production.

The U.S. Forest Service received assistance in the seedling planting data and estimates from three prominent universities: Auburn University, the University of Idaho, and Purdue University.

USDA To Invest $10M In Reforestation Initiatives

The U.S. Department of Agriculture (USDA) will invest nearly $10 million in forest nursery and native seed partnerships to help build capacity across public and private lands to meet mounting reforestation demands.

“According to The Nature Conservancy’s Reforestation Hub, it’s estimated that up to 146 million acres of land in the U.S. could benefit from reforestation,” the USDA said in a press release announcing the funding. “This translates to a need for more than 75 billion trees. At their current level of production—about 1.4 billion

annually—it would take more than 50 years for nurseries to meet that need.”

Of the total funding, $4.5 million is going to 29 facilities throughout states, territories, and commonwealths to upgrade and modernize forest nurseries, and $5.3 million will be used to support native seed collection and plant availability to restore and support resilient ecosystems on national forests and grasslands. The funding can be used to purchase new equipment, replace aging infrastructure, adopt new methods to boost nursery productivity, and more.

“As forests across the nation are

confronted by the climate crisis, wildfire, natural disasters, and insect and disease outbreaks, it is critical to support nurseries and help them meet the demand for seedlings to restore healthy, resilient forests,” said Secretary of Agriculture Tom Vilsack.

The department said the initiative complements the recently announced $35 million investment in Forest Service nurseries in support of the National Forest System Reforestation Strategy.

Strong Timber Markets Grow Reforestation Activity

The spike in lumber demand during the COVID-19 pandemic provided a boost to timber markets that hadn’t been seen in years, and a ripple effect from the increase in clearcut harvests is a rise in reforestation activities.

During the 2022/23 tree planting season, F&W managers conducted reforestation activities on more than 26,000 acres, a 9 percent increase over the previous season. The uptick in planting this year is due directly to strengthening timber markets in late 2020 through 2021 that had landowners deciding to market their mature pine stands in clear-cut sales, according to a survey of managers.

The annual survey is based on data and observations provided by regional managers operating across the company’s footprint. Tree planting activity is mostly concentrated in the South, where it is a long-established forestry practice. In the Northeast and Central regions, where hardwoods dominate, reforestation occurs primarily through natural regeneration.

MORE ACRES PLANTED

Most managers reported that the number of acres planted this season was the same or more compared to the prior season; however, Rick Sluss, based in Clinton, Tenn., said he planted less, attributing it to fewer markets.

“East Tennessee and eastern Kentucky have limited markets for pine pulpwood. With the retraction of the overall paper markets, I do not see a viable future in planting pine in this area,” Sluss said. “Things could change, so hopefully we will see more markets in the future.”

El Dorado, Ark.-based Eric Sumner said the number of acres planted this season was similar to last year, but he’s concerned about future planting.“We are in a depressed pine pulpwood market so we may see more natural regeneration in the

future,” he said.

Managers said they faced several challenges in getting sites prepped and ready for reforestation this season, including a shortage of herbicides, escalated fuel costs, and labor availability, resulting in higher costs. Several said contractor attrition was an issue, allowing contractors to pick and choose projects, turning down difficult or rough jobs.

When it came time to plant, managers reported few obstacles this year, including labor. However, several nurseries reduced the number of seedlings delivered to customers because of mortality issues that resulted from the extremely frigid temperatures that settled across the Southern Pine Belt in late December. Most F&W managers reported that this had little or no effect on their reforestation activities, with several completing planting before the freeze.

CONTAINERIZED USE RISING

In the South, approximately 85 percent of all seedlings planted this season by F&W were loblolly pine, with slash pine comprising 9 percent, and longleaf pine 6 percent. And more managers are primarily planting containerized seedlings.

“We’ve been leaning harder on container seedlings over the past several years because of their higher recruitment and first-year growth,” said T.R. Clark, manager of the Lafayette, Ala., regional office. “We use bareroot for clients who are more budgetconscious.”

Bryan Croft, manager of the Orange Park, Fla., office, planted almost all container seedlings this year. “Containerized seedlings offer better survival during early planting while temperatures are still high and rainfall is limited,” he said.

Chad Hancock of the Albany, Ga., office said he mixes it up and keeps costs comparable between the two by

machine planting bareroot seedlings at 605 trees per acre (TPA) and hand planting containerized seedlings at 565 TPA.

Glen Worrell in Charlottesville, Va., said he also planted a higher percentage of containerized seedlings this year. “The reason for the shift to containerized is expansion of the planting season and significantly higher survival rates,” he said.

Jason Potts in Mississippi said he planted all bareroot seedlings, primarily due to the higher cost of container seedlings and the sluggish timber markets in his region.

“HOT” PLANTING

Several managers conducted “hot” or pre-season planting with containerized seedlings, including Croft who said he completed almost all of his reforestation ahead of the normal start of the planting season.

“We took a calculated risk in October to start, and it worked out with a hurricane in early November followed by cold fronts containing just enough rainfall. Survival so far looks very good, and I am pleased we avoided the seedling damages that occurred in some of the nurseries in late December due to cold weather,” he said.

Worrell conducted early planting on tracts that are traditionally wet during drier fall months. He said this enabled his client to save on mechanical site prep costs ($400/acre for bedding) and he anticipates a 95 percent survival rate.

Looking ahead to the next planting season, managers say planning is key.

“The best genetics are in high demand, so being sure those are already ‘spoken for’ very early in the year is important. The schedules of herbicide applicators and tree planting contractors fill up pretty quick, so get ahead of the game by securing those service providers,” advises Clark.

SOUTHERN TIMBER PRICES

Legislation To Help Landowners Recover After Natural Disasters

Bipartisan bills to help forest landowners recover from the loss of timber destroyed by natural disasters have been introduced again in Congress.

The Disaster Reforestation Act (H.R. 655 and S. 217) provides for the equitable tax treatment of casualty loss of timber when a disaster strikes, allowing forest owners to deduct the value of the timber damaged. The bipartisan measures are sponsored in

the House by Reps. Buddy Carter (RGa.) and Terri Sewell (D-Ala.) and in the Senate by Sens. Bill Cassidy (RLa.) and Raphael Warnock (D-Ga.).

Under current law, forest landowners can only deduct the lesser of the fair market value (FMV) or the cost basis, which is often $0 or a fraction of FMV. In the case of a newly purchased timber tract, the new owners may only deduct the adjusted basis of timber or FMV, whichever is

the lesser amount.

While most farmers qualify for federal funding payments for crops damaged from natural disasters plus clean-up and replanting costs, timber owners only qualify for clean-up costs and reforestation cost-share. Forest landowners have to pay expenses and taxes annually without regular income from their forest “crop” while they wait for their timber to mature to market, usually 30 to 40-plus years.

All prices based on sales handled by or reported to F&W offices. If no sales occurred, prior quarter ’s sales and other data are used to compile price range. Price ranges are due to proximity to mills, timber quality, logging conditions, type of harvest, and other local market conditions (i.e. weather, mill downtime, fuel cost, etc.).

NORTHERN TIMBER PRICES

RUMFORD, ME MONTPELIER, VT GLENS FALLS, NY HERKIMER, NY CLARION, PA BLUEFIELD, WV

FALLS, NY HERKIMER, NY TUPPER LAKE, NY CLARION, PA BLUEFIELD, WV

ME

VT GLENS FALLS, NY

NY TUPPER LAKE, NY CLARION, PA

WV

NORTHERN TIMBER PRICES (continued)

ME MONTPELIER, VT GLENS FALLS, NY

NY TUPPER LAKE, NY

ME MONTPELIER, VT GLENS FALLS, NY

NY

All prices based on sales handled by or reported to F&W offices. If no sales occurred, prior quarter ’s sales and other data are used to compile price range. Price ranges are due to proximity to mills, timber quality, logging conditions, type of harvest, and other local market conditions (i.e. weather, mill downtime, fuel cost, etc.).

1.5

1.25

F&W’S LUMBER-USE ADJUSTED HOUSING STARTS

1.74 1.65 1.29 1.38

1.55 1.60 1.43 1.39 1.47

1.5 1.2 1.05 1.05 1.15 1.32 1.22 1.39

2019 2020 2021 2022 2023 Q1 1.0

Source: US Department of Commerce

PERMITS 855

0.9

0.6

2.0 1.75 2019 2020 2021 2022 2023 Q1 0.3

IN MILLIONS OF UNITS (2023 AVERAGE THROUGH FEBRUARY)

IN MILLIONS OF UNITS; TOTAL HOUSING STARTS WITH MULTIFAMILY STARTS REDUCED TO 40 PERCENT TO BETTER REFLECT LUMBER USAGE (2023 AVERAGE THROUGH FEBRUARY)

Source: US Census and F&W Forestry Services

IN BILLIONS OF DOLLARS (2023 AVERAGE THROUGH FEBRUARY)

HOUSING 5.34%

SOUTHERN PINE–$/MBF

Source: Random Lengths Southern Pine Composite Index

US DOLLAR VALUE AGAINST 26 MAJOR TRADING PARTNERS

Source: Federal Reserve