Forest Products Industry Outlook
We interviewed Thad Taylor, executive loan officer and forest products specialist with AgChoice Farm Credit. AgChoice recently released its Forest Products Industry Outlook, a document which provides a current assessment of forest products industry in Pennsylvania. Thad shared highlights from the Outlook document and his perspectives on the forest products industry. Listen to the full podcast episode with Thad here.
Could you share with our listeners an overview of your perspective of market conditions in the forest products industry.
One of the things that's most significant is the rapid rise in U.S. hardwood lumber pricing. The kiln dried US grade lumber average is about 62% year-over-year, compared to where it was this time last year and up about 23% from what was the previous high watermark in 2014.
We've also seen increases in raw material prices. Timber stumpage material ultimately gets converted into lumber in sawmills, and timber stumpage prices come up about 52%, so that started to compress what would have been really strong margins for most sawmill operations in Pennsylvania. We see those margin being compressed a little bit, but not a whole lot.
One of the more interesting things we've seen in this price run up compared to some of the other ones I've seen here in the about 18 years I've been with AgChoice, is that there's an awful lot of U.S. Federal Reserve driven stimulus that's come into the U.S .economy. That's not only driven up prices indirectly, let's say for U.S. hardwood lumber, it's also driven up prices for a lot of consumer goods and a lot of purchases that are current in our economy, one of which is real estate prices and the rural real estate prices. So what we're seeing in the hardwood lumber market right now isn't a perfect picture of just demand-related forces, there are some supply impacts and also some noise in the economy that comes from the sheer size of the Federal stimulus that's made its way economy.
One of the bright spots we're seeing right now is that foreign demand for U.S. hardwood lumber is back up. We saw that fall off quite a bit it in 2020, mainly due to COVID-related impact. But we're seeing foreign demand for U.S. hardwood logs and hardwood lumber up significantly right now, and that's a bonus.
One of the things I'll mention about our Outlook, it's a forest products industry outlook, but it tends to be focused on the activity here in our lending area in Pennsylvania, which is a hardwood dominated geography. The U.S. forest products industry is much bigger than just our hardwood industry here. One of the things I won't talk about much in the outlook is U.S. softwood prices, which have been the really important story on the news for the last year, but a lot of our outlook is focused on hardwood-related markets.
One of the last things here I'll talk about as far as overview update is going to be overall U.S. economic expansion in the form of GDP and some of what's going on in housing right now. We're seeing somewhat favorable trend in U.S. housing driven by some pent up demand and overall demographics and household formation. We're seeing fairly large segment of the population entering the stage of life where they want to be moving out and having children and forming households and have a house of their own. We're also seeing decent economic expansion in the form of GDP right now. I think global economic expansion's probably going to be about five to six percent for 2021 and 2022. We're going to see both developing economies and developed economies both have decent positive GDP growth, at least in the short term.
Those are probably the biggest highlights and overview items for this particular AgChoice Forest Products Outlook.
Within the Forest Products Industry Outlook, the document outlines five items on a forest products industry ‘Watch List.’ Could you share with us about the Outlook’s Watch List?
These are five or so things that would fall into the category of things that keep a person up at night or have my attention as a credit person and a lending person. They are the same sorts of things that would have most of our clients paying attention to throughout the year. At least here in the near term.
First is labor shortages. This has been a topic of discussion for years, but is really starting to show up in the form of absenteeism and the ability to fully participate in the demand right now that a lot of hardwood sawmills and logging operations in our chartered territory are seeing is the inability to fully participate in the demand that's out there simply because the surge capacity in both logging and saw milling can't occur today like it would have 20 years ago, mainly because of tightness in the labor market. That's something that I think is going to continue to define our industry's ability to out produce or surge when there is capacity in the marketplace from a pricing and demand standpoint to offer that.
Next is housing starts. Housing starts are a big part of the whole national economic story, but it's not even across the entire United States. There are places where additional housing construction is occurring and places where it's not. Labor force participation rate is one of the things I always look at with the potential for the housing market to expand in the U.S. I think those two things have gotten a little bit decoupled over the last several years, mainly because we have retirees that don't need to be in the labor force. When we have cohorts the population from an age class distribution standpoint, that aren't even across all of the age classes. For instance, we have a large segment of the population disproportionately, so in baby boomers, and then another large cohort that's bigger than the surrounding age classes. In Gen X segment of the population, when those large portions of the population either change a stage of life or change their participation in the labor force, it does impact housing related economics. Right now I think we can expect to see continued strong housing, at least for a little while, irrespective of the labor force participation rate.
The third thing that's on my mind is the stimulus effect. The Federal Reserve balance sheet has about doubled in the past year related directly to pandemic-related and post-pandemic-related policy decisions. Whether directly or indirectly, that massive balance sheet expansion has an impact on economic behavior in the United States. It has a big impact on pricing. I think as we see some of that stimulus come out of the economy, it's going to be difficult to predict exactly how the economy's going to respond. I think it's potentially, we could see some disruption from an inflation-related standpoint. We could see hardwood lumber prices, I think we could see them come off quite a bit.
The fourth thing that is always on our mind from a lending risk standpoint is invasive species in the forest. Whether it's species that have an outbreak that have been with us for a long time, like say Gypsy Moth, but doesn't impact the forest every year or something like Emerald Ash Borer or Spotted Lanternfly. One of the things those insect pests can do is introduce quarantine boundary lines right in the middle of our chartered territory, that impact a client's ability to transfer logs or lumber or other forest products across quarantine boundary lines. That's less of an issue right now with the Spotted Lanternfly and Emerald Ash Borer, mainly because the Emerald Ash Borer is across the entire state and therefore, there aren't quarantine boundary lines that impact that kind of travel. Additionally, we're seeing the tail end of our viability of our Ash and Ash related sanitation harvest that have been happening for the last 10 years. But the Spotted Lanternfly presents a concern. About half the state or so is in a designated area right now. There's quite a bit of regulation that truckers and loggers have to pay attention to it as they're moving into and out of that quarantine zone. Not that Spotted Lanternfly kills our forest species, but it's a species bug that has to be controlled and some of those controlled measures can cause disruption with as far as regulatory compliance.
The last thing I'll mention is this brand new pandemic assistance for timber harvesters and log haulers. It's less of a risk area, but it's on the watch list mainly because our industry has not historically received the same kind of consistent support through policy and assistance as traditional ag producers have received. So this is new for timber harvesters and haulers. When I tested the numbers here, this $200 million figure against the total payrolls in the U.S. forest products, logging sector, it's a significant amount of money. So I wanted to make sure that readers knew about this.
Are there any other thoughts you'd like to share today?
Two things I'll share - Anytime we have a lot of change in whether it's lumber pricing or U.S. economic performance, I always get nervous about writing this Outlook. I fear the minute it finally gets through final edits, it could become irrelevant quickly, especially when we have quick movements in certain macroeconomic factors in our economy. I am lucky in this particular case that things haven't moved too much since we initially published this, but that kind of thing is always a concern or something that makes me nervous, but this particular Outlook has held up pretty well since we initially published it a couple weeks ago. I'm happy about that.
Secondly, I encourage readers to take a moment to read and digest the Outlook. There's a lot in the written document and we can’t do it justice here on this podcast. The Outlook document is posted at agchoice.com under the News and Education tab.
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