FOREST PRODUCTS INDUSTRY OUTLOOK
Forest Products Industry Outlook 4/20/2022
Introduction As Pennsylvania’s premier forest products lender, it is the business philosophy of AgChoice Farm Credit to continually research and evaluate the industries it serves, assess risk and make sound lending and business decisions. The Forest Products Industry Outlook has been developed to provide insight and guidance on Pennsylvania’s forest products industry.
Date Prepared: April 20, 2022 by Thad Taylor
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Forest Products Industry Outlook 4/20/2022
Table of Contents
Overview, Executive Summary, and Implications
Pages 4 - 5
Watch List Items
Page 6
Charts and Commentary
Pages 7 - 17
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Forest Products Industry Outlook 4/20/2022
Overview, Executive Summary, and Implications Kiln-dried Appalachian-U.S. hardwood grade lumber prices are up 27% year-over-year (YOY) and up 21% ($300/MBF) from their mid-2014 previous high-water-mark. Our Pennsylvania hardwood timber stumpage price index rose 45% YOY in response to robust demand related for both hardwood logs and hardwood lumber. Regional hardwood producers continue to enjoy strong economic performance, but have worked hard for it, given significant challenges in shipping, labor and normal supply sourcing (parts and saws). In the near-term, expect lumber prices to normalize with downward pressure on margins. Absent a significant economic or trade disruption, most regional hardwood operators should experience profits in 2022. Foreign demand for U.S. hardwood lumber rose 25% in 2021 compared to 2020 and is up 20% year-to-date (YTD). Current challenges include available labor, shipping capacity, long equipmentorder lead times, and sharp price increases for most inputs, including energy. Bright spots include strong demand and pricing for most lumber and log products, along with healthy markets for chips, pulpwood, and residuals. The most recent economic forecasts by the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and Conference Board suggest U.S. and world GDP growth will be 3.0% and 4.0%, respectively in 2022, and 1% to 1.5% points lower in 2023. India’s economy is projected to expand 8.2% in 2022, while Russia’s is expected to contract 8.5%. China is our nation’s largest single hardwood lumber export destination. Their economy grew 4.8% in 2021 and is expected to expand at a 4.0% pace in 2022. Chinese demand for U.S. hardwood logs and lumber continues to grow. Further global economic growth is vulnerable to several factors right now: inflation, the war in Ukraine, and ongoing supply-chain disruptions. U.S. housing construction trends are favorable, but are uneven among regions. In the short term, the U.S. forest products industry will enjoy healthy profitability from stable demand and constrained supply (labor and trucking). Companies with strong liquidity, lower levels of debt, superior leadership and relationship-management will enjoy stronger financial performance compared to peers. The United States’ forest products industry faces supply-related challenges in the short term, but it is well positioned for long-term global competitiveness due its accessible growing stock (18% of global standing timber), infrastructure, industrial capacity, innovation and technology.
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Forest Products Industry Outlook 4/20/2022
U.S. hardwood grade lumber prices continued to climb, reacting to global economic expansion, supply constraints, and inflationary pressure. Prices are likely to plateau in the near-term and soften in the coming year, while movements will vary by-species.
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Forest Products Industry Outlook 4/20/2022
Watch-List Items 1. Supply constraints continue for the forest products industry. Sawmills, logging companies and trucking operations have been unable to exercise any surge capacity, facing simultaneous bottlenecks in trucking, ocean freight, replacement parts availability, equipment lead-times, and labor. Solutions include replacing skilled labor with automation, and creative employee incentives, all of which present a new host of benefits and drawbacks. 2. Recovery, inflation and after-effects – The pandemic spurred significant central bank intervention in many developed countries, providing a surge of liquidity into their respective national economies. That - combined with the post-lock-down, global economic recovery – drove U.S. consumer price inflation to 8.5% (YOY) by March of 2022. U.S. Federal Reserve monetary policy (increased interest rates) will bridle inflationary pressure, but will take several quarters to achieve its aim, and will slow economic growth to some extent. Operators can mitigate their interest-rate risk exposure by converting variable-rate debt to fixed rates, which remain affordable by long-term historical standards. 3. U.S. homebuilding activity continues its favorable trend, reaching 1.79 million starts in the most recent quarter (3.9% growth YOY). Housing markets create terrific demand-stability for domestic forest products operations and help mitigate single-region export-concentration risk. We can expect decreased homebuilding enthusiasm as consumers react to the combination of higher interest rates, increased energy costs and shortages of building contractor surgecapacity. 4. Carbon (carbon offsets) remain a developing and growing market, watched closely by many in the U.S. forest products industry. Dollar-denominated carbon offset contract prices currently range from $4.94 to $31.45 (per tonne of CO2 equivalent), depending on registry and market, as of this writing. The vast range in markets and pricing - combined with the expanding variety of offers and marketing targeted toward forest landowners of all sizes – illustrates the challenging on-ramp these markets will face for some years before achieving global, climaterelevant scale.
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© AgChoice Farm Credit
Forest Products Industry Outlook 4/20/2022
Charts and Commentary
Timber stumpage prices fell from the mid-2018 peak until beginning a post-pandemic rebound. 7
Forest Products Industry Outlook 4/20/2022
The green line (above) illustrates the span between lumber prices and timber stumpage prices, and thus represents the combined operating revenue available to the logger, trucker, sawmiller and kiln operator. When the green line exceeds $515/MBF, many in the supply chain can generate a favorable operating margin, before considering fuel price impacts. 8
Forest Products Industry Outlook 4/20/2022
Appalachian U.S. low-grade hardwood lumber prices (4x4 and 4x6 cants, shown above) are a critical portion of the overall revenues from sawmills in AgChoice’s territory. These industrial lumber items’ prices have continued to climb further since last year’s Outlook, achieving new highs. The center of each log contains knots and pith, disqualifying it for #2 Common grade (or better), under NHLA grading rules. As such, the center of each hardwood log is destined for the industrial hardwood lumber market, which includes, cants, blocking, pallet, crating, railroad ties and crane mats.
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Forest Products Industry Outlook 4/20/2022
Foreign demand for U.S. forest products continues to grow. Exports were up 27% in 2021 compared to 2020, and are currently 10% above the levels seen last year at this time. Our top-four foreign customers are noted above. Japan and Vietnam – although not shown above - are right behind the U.K., in the #5 and #6 trade-partner slots, respectively.
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Forest Products Industry Outlook 4/20/2022
Hardwood lumber is the largest single contributor to overall U.S. forest products exports. U.S. hardwood lumber exports were up 25% in 2021 vs. 2020, and are up 20% now compared to this same time last year. The top destinations are similar those for all forest products exports - but with the addition of Vietnam. Readers will note that U.S. hardwood lumber exports rely heavily on Asia. As such, any disruption in Chinese-U.S. trade relations can severely impact U.S. hardwood lumber demand and pricing.
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Forest Products Industry Outlook 4/20/2022
Foreign demand for U.S. hardwood logs is a significant market driver for regional timberland owners, and enjoyed similar demand patters as U.S. hardwood lumber exports last year. 2021 demand was up 31% vs. 2020 levels. 2022 demand levels are currently 7% above the same period in 2021.
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Forest Products Industry Outlook 4/20/2022
Pulp and paper are critical to the U.S. forest products industry as value-added manufacturing, an outlet for sawmill residuals, a market for lower-value trees produced during growth-enhancing silvicultural thinnings, and a key employer. The sharp drop – and later recovery - in pulp prices since mid-2018’s is a function of separate forces: a secular decline in domestic fine paper usage, the pandemic, and rationalization of mill capacity across the country (mill closures). 13
Forest Products Industry Outlook 4/20/2022
Total U.S. housing starts continue growing at a healthy clip, up 3.9% YOY. Activity in the northeastern region is up considerably based on the March Census Bureau data. Despite the 77% YOY increase for total northeastern U.S. housing starts (shown in orange, above), readers should note a) regional figures can be much more volatile than the national data; and b) starts declined 33% YOY for the single-family portion of northeastern units (not shown), which tend to use more hardwood furnishings than multi-family units. 14
Forest Products Industry Outlook 4/20/2022
The dash-board chart above overlays three major macroeconomic metrics, illustrating the impact of population dynamics and the economic contraction related to the global health pandemic. 15
Forest Products Industry Outlook 4/20/2022
Diesel prices are up 63% YOY as of the March month-end EIA report, creating challenges throughout the forest products supply chain, and rippling through consumer pricing. Energy costs present headwinds to the overall economy. While oil and natural gas production can respond with greater supply in the near-term, refinery capacity is not as flexible, likely prolonging elevated diesel prices. 16
Forest Products Industry Outlook 4/20/2022
AgChoice’s Forest Products Team is proud to serve the hardworking families in this important industry and strives to remain the premier lender to Pennsylvania forest products operations. The Association’s combined forest products loan portfolio (above) continues a favorable growth trend, currently exceeds $246 million, and includes local branch loans and capital markets business.
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