Horizon recently released its Forest Products Industry Outlook, a document which provides a current assessment of forest products industry in Pennsylvania.

Thad Taylor, executive loan office and forest products specialist, shared highlights from the Outlook document and his perspectives on the forest products industry. Listen to the full podcast episode with Thad here.

Please share a high level overview of your perspective of market conditions in the forest products industry.
Our Pennsylvania forest products industry faces many challenges right now. The global COVID pandemic and trade-related issues in recent years have created challenges specific to both pricing and demand for many forest products. 

First, Pennsylvania kiln-dried hardwood-grade lumber prices are down about 11% year-over-year versus 2019, and down about 27% from the mid 2018 highs. That reduction is somewhere around $375 per thousand since the high point recently in 2018.

Second, Pennsylvania timber stumpage prices are down about $326 per thousand board feet, which is about 36% reduction since the mid 2018 high. That may sound like some help to the industry from a lumber production and margin standpoint, but that reduction isn't quite enough to offset the $375 per thousand board feet reduction in average lumber pricing. In addition to that, hardwood saw timber stumpage sales happened to be the main product for most of our Pennsylvania landowners who sell standing timber. So, to the extent that stumpage price reduction helps some of our sawmill clients, it certainly hurts some of our standing timberland management clients.

The third item is Chinese tariffs and weaker overall Chinese economic demand. Economists can debate whether the tariffs hurt the Pennsylvania forest products industry or the weaker Chinese economic demand to hurt the industry. I think both happen to hurt our industry, and until the Chinese economy picks back up along with the global economy, I think we're going to have some headwinds for overall foreign demand for Pennsylvania forest products. Our industry is somewhat dependent on foreign demand for our forest products. 

Next, export demand for U.S. hardwood lumber is down about 25% in 2019 compared to 2018, and down another 18% year-to-date, May 2020. That has been a significant impact on lumber demand and pricing in Pennsylvania.

Finally, I'll mention pulp and chip demand. Both of those items are down right now in Pennsylvania and throughout the New England region, mainly because of the types of paper that are produced in the paper mills in this particular region. Both pulpwood and chip demand are down. In addition to that, palette blocking industrial lumber railroad tie markets, which were a bright spot in 2018 and 2019, have started getting tight.

Those are some significant challenges, but not everything in the industry is challenging right now. There are some bright spots. One would be diesel fuel prices, which are a huge part of the cost structure of any logging operation and indirectly, then, part of the cost structure for any sawmill operation. Diesel fuel prices are low right now. They're considerably off their 2018 highs. I think they're down about $0.75/gallon, retail basis since the 2018 high. The logging weather, which has been historically unreliable every spring and summer, has been terrific for both June and July here in 2020. We've had good sunny weather with very little rain. A final bright spot is both sawdust and bark demand, which have been very difficult the past few years, seem to be better right now. Both wood pellet manufacturing is consuming a lot of sawdust and various landscaping projects are also consuming a lot of bark and bark mulch. 

Within the Forest Products Industry Outlook, the document outlines six items on a forest products industry ‘Watch List.’ What is on the Outlook’s Watch List?

There are six items on the Forest Products Industry Outlook Watch List. It’s important to note that they are not all the negatives. They can be some positives or can be anything that we find occupying our mindshare to consider. 

1. COVID-19: The global pandemic has caused disruptions to supply chain. It has changed economic growth substantially. We're in a recession now because of the impact to overall economic activity, and restrictions on movement and purchasing behavior. Those things are a big concern. It's hard for me to make any predictions given just the scope of the unknown and uncertainty that surrounds what might happen next regarding economic performance in response to that.

2. Interest rates: This is a positive. Interest rates are very low right now. The Fed has reduced interest rates to near zero and wants to keep them there. I will say that anytime there is a rapid change in interest rate, it doesn't happen in a vacuum. No matter what the reason for the change in interest rate, there's always going to be some kind of distortion that happens in normal purchasing behavior, in human behavior that follows that change in interest rates. So, we might see asymmetric changes in asset values as people use the low interest rates to take advantage of additional longer-term purchasing opportunities they might not have otherwise made. I say all that to say it, it does create some changes, and disruptions, and distortions to normal purchasing behavior and asset values.

3. U.S. housing starts: U.S. housing starts were on an upward trend going into early 2020 until COVID-19. Since then, both U.S. and Northeast housing starts have fallen off a cliff. As housing goes, the forest products industry tends to have economic performance that responds in lock step with U.S. housing. Until U.S. housing recovers and steadiness returns to the economy from the COVID-19 pandemic, I think housing is going to be a concern area for us.

4. Labor: Labor has been a concern for our industry for many years. This is a decades-long change in the skilled labor force, skilled labor available ability, and simple technological trends in our economy has impacted labor availability. It’s going to continue to be a concern. One of the potential long-term solutions we've seen is that many operations have tended to address their labor concerns by adding additional technological capital or machinery capital.

5. Upcoming U.S. election: Before any election, we tend to see purchasing behavior get a little bit more cautious. We tend to see normal levels of risk taking back off a little bit in the months before any election. That's irrespective of which political party is in power at the time. It’s clear that the upcoming election is on all of our minds and is dampening purchasing behavior and risk-taking behavior.

6. Invasive pests: Within our Forest Products Outlook, we highlight the Spotted Lanternfly and the Spruce Bark Beetle. Both pose direct risk to plant health and mortality from an economic standpoint. One of the things that's always concerning is when quarantine zone boundaries change, creating barriers for trade and for logistics. It tends to be a disruptive force. 

Are there any other thoughts you'd like to share today?
The forest products industry is something I am passionate about at Horizon. Forests cover about 60% of our state's land base, and it's always going to be an important industry for our state. The industry is very important to Horizon. It's a large portion of our loan portfolio and a focus for a lot of our time, talent, and treasure here at Horizon. And we want to make sure we stay abreast of everything that is happening in the industry so we can ensure we serve the market appropriately.

We recently interviewed Katie Epstein, loan officer and assistant manager with Horizon Farm Credit.

Katie reviewed CFAP 2, a second round of Coronavirus Food Assistance Program (CFAP) assistance for farmers who experienced losses related to COVID-19. Katie discusses the program and next steps that Pennsylvania farmers need to take to access the funding.

Let’s start with some of the basics. What is CFAP 2, how is the funding different than CFAP 1 and what do farmers need to know? 
CFAP 2 is a second round of funding for agricultural producers who continue to face market disruptions and associated costs because of the COVID-19 pandemic. It totals an additional $14 billion, using funds available from the Commodity Credit Corporation (CCC) Charter Act and CARES Act.

You might remember that CFAP 1 was available this summer and was the first round of direct assistance for farmers and ranchers. For comparison, CFAP 1 totaled $16 billion in direct funding for farmers. CFAP 2 is similar to CFAP 1 in that there are specific guidelines for each commodity on how the CFAP funding is calculated. Under CFAP 1, commodities generally qualified for payments if their price declined by at least five percent for a specified amount of time, typically between January and April 15. Under CFAP 2, the five percent price decline is one of three methods to determine eligibility and the time frame extends from April 15 to the end of the year. Additionally, CFAP 2 is available to a wider range of commodities than CFAP 1 and includes goats, bison, tobacco, hemp, additional classes of wheat and more. 

CFAP 2 is administered through the Farm Service Agency (FSA) and the application period opened earlier this week on September 21. The application period will remain open until December 11.

What’s your perspective on how CFAP 2 will help Pennsylvania farmers and who should apply?
With the expanded scope of CFAP 2, many Pennsylvania farmers will be able to qualify for most, if not all, of their commodities produced. That makes it a great program for Pennsylvania farmers.

In CFAP 2, payments are made for three categories of commodities.

• First is the Price Trigger Commodities which I already spoke about briefly. This is for commodities that meet a minimum five percent price decline over a specified period of time. Price trigger crops include corn, soybeans, barley, wheat and more. Payments are based on 2020 planted acres of the crop, excluding prevented planting and experimental acres. Payments for price trigger crops will be the greater of
  • The eligible acres multiplied by $15 per acre, OR
  • The eligible acres multiplied by a nationwide crop marketing percentage, multiplied by a crop-specific rate and then the producer’s 2020 Actual Production History approved yield.

The CFAP paperwork and your local FSA office can help you determine which method qualifies for your situation.

If you are in the poultry industry, the calculation for broilers and eggs will be based on 75 percent of your 2019 production.

If you are a dairy producer, payments are based on actual milk production from April 1 to August 31 and production for September through December will be estimated by FSA.

If you are a beef, hog or sheep producer, payments are based on the maximum owned inventory of eligible livestock, excluding breeding livestock, on a date selected by you, the producer, between April 16 and August 31, 2020.

• The second category is for Flat-rate Crops. These are crops that don’t meet the five percent price decline trigger or don’t have data available to calculate a price change. For this category, payments are calculated based on 2020 acres multiple by $15 per acre. This would include alfalfa, hemp and triticale to name a few crops here in Pennsylvania.
• The third and final category is Sales Commodities. This includes specialty crops, aquaculture, nursery crops and floriculture and some other commodities not in the first two categories. Payment calculations will use a sales-based approach where producers are paid based on five year payment gradations associated with their 2019 sales.

One item to keep in mind that is that there is a payment limitation for CFAP 2 of $250,000 per person or entity for all commodities combined, which is similar to CFAP 1. This is a separate limit from CFAP 1, so any payments received from CFAP 1 will not impact your limit for CFAP 2.

What else do you think is important for farmers to know about CFAP 2? 
First, I encourage you to learn more about CFAP 2 and the specific details related to the commodities you produce. Information is available from USDA at farmers.gov/CFAP or you can call USDA at 877-508-8364 to speak directly with a USDA employee who is ready to offer assistance. Again, you will apply for CFAP through your local FSA office, so once you have your information prepared you’ll want to reach out to them.

Second, I want to emphasize that while this assistance from the federal government will be helpful to agricultural producers this year, especially with the swings in commodity prices and uncertainty of markets, CFAP funds are taxable and may result in tax consequences on your operation. Tax planning is important every year but especially in 2020 because of the extra government support programs this year due to the pandemic. I encourage you to consult with your accountant or tax advisor in the coming months. 

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The Farm Credit Foundation for Agricultural Advancement is now accepting applications for Phase I of its Community Education Program, providing up to $10,000 to local non-profit organizations that benefit agriculture education. The program will offer funding for projects that make a positive impact within MidAtlantic Farm Credit’s footprint and Washington D.C.

“Agriculture education plays a vital role in the future of our industry,” says Charles Wright IV, Chairman of the Foundation. “This program will assist the many local organizations that offer ag-related activities, programs, and trainings to our community. The Foundation encourages those eligible to apply for funding to continue creating educational opportunities.”

Funding options include up to $2,000 and up to $10,000, depending on the size and scope of the project. Applications will be accepted online in two phases:

• Phase I: Now – June 30, 2022
• Phase II: July 1, 2022 – October 20, 2022

Qualified programs must serve communities within MidAtlantic Farm Credit’s 44 county footprint and Washington D.C. and be consistent with the values and mission of the Foundation. Requests that meet the selection criteria are considered by the Foundation Board. Only 501(c)(3) organizations or those otherwise exempt from federal income tax will be considered.

For more information about the requirements, guidelines and restrictions of the Community Education Program and to apply for funding, visit FCFoundationForAg.org.

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What is Livestock Risk Protection (LRP) and why do I need it?

With the never-ending fluctuation and unpredictability of the market, Livestock Risk Protection (LRP) is something all cattle producers should consider. The primary purpose of LRP is to protect against the unexpected downward price movement in the marketplace by setting a base on any given date and type of cattle you wish to insure.

The producer should determine when their cattle will be marketed, target weight, and number of head they wish to insure. There are a variety of coverage level options ranging from 70 to 100 percent of the expected ending value. At the end of the selected insurance period, if the actual ending value is below the coverage price, you will be paid an indemnity for the difference in price.

How does livestock risk protection work?

*This is for demonstration purposes only. This scenario is not based on an actual claim and should not be compared to an actual claim. Chart originally produced by Rain and Hail LLC*

It is important to remember that your local selling price has no impact on the LRP policy. LRP coverage uses prices from the CME Group that are announced almost daily.  As of 2020, LRP (Cattle) is now available in all states when the market is available.

LRP has two types of coverage for cattle available:

1. Feeder Cattle with ending weights under 600lbs or 600lbs-900lbs, and

2. Fed Cattle with ending weights between 1,000lbs-1,400lbs that will be marketed for slaughter near the end of the insurance period.

What is the difference between Livestock Risk Protection and Livestock Insurance?

LRP does not cover death, disease, or any other peril, whereas livestock insurance does. It is important that you keep an open communication with your agent if something of this nature should arise. If your policy does trigger a loss, there will be documentation that the agent and insurance company will require you to fill out and turn in to show proof of ownership, and sale or retention within the appropriate sale window of 60 calendar days from the closing date of your specific coverage endorsement. Livestock Risk Protection (LRP) provides you with a defense against declining livestock prices for fed cattle, feeder cattle, and swine by setting a base on any given date and type of cattle or swine you wish to insure.

How to get LRP

You must buy an LRP through a crop insurance agent who has taken the extra training courses for livestock coverage. You can fill out an application at any time, however coverage will not attach until you sign a specific coverage endorsement. Timing on this policy is everything. Once the market closes in the afternoon, you have until the following morning to get the paperwork signed with the agent to attach coverage to your cattle. Like other crop insurance policies, this policy is subsidized by the federal government as long as you meet all the requirement guidelines.

The good news is our crop insurance agents are certified and ready to help you sign up for livestock risk protection through our Crop Insurance program. Give us a call or visit farmcreditcropinsurance.com to request to speak with an agent as soon as possible.