Rapid Assessment of Rapid Assessment of Market Change in the Market Change in the

SouthSouth

Douglas Carter and Dave Douglas Carter and Dave WearWear

Assoc. Prof., SFRC, Univ. of FLAssoc. Prof., SFRC, Univ. of FL

andand

Project Leader, Economics Work Unit, Project Leader, Economics Work Unit,

USFS SRSUSFS SRS

ProblemProblem

►Perception that there has been a loss Perception that there has been a loss of markets in southern region to of markets in southern region to foreign competitionforeign competition

►Declining returns to investment as Declining returns to investment as indicated by declining stumpage pricesindicated by declining stumpage prices

►Unclear future of the southern forest Unclear future of the southern forest resourceresource

ObjectiveObjective

►Analyze recent structural changes in Analyze recent structural changes in markets using best available datamarkets using best available data harvests and pricesharvests and prices demand and supply factors demand and supply factors

►Consider potential implications for the Consider potential implications for the future of the southern forest sectorfuture of the southern forest sector

What Has Happened?What Has Happened?--Harvests----Harvests--

► Steady growth Steady growth ’62-’98’62-’98

► Declining harvests Declining harvests ’98-’01’98-’01

► Softwood and Softwood and hardwood pulpwood hardwood pulpwood harvests declined harvests declined 11% and 21% from 11% and 21% from ’98-’01’98-’01

► Softwood sawtimber Softwood sawtimber harvests were more harvests were more stablestable

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

mm

cf

S. Sawtimber S. pulpwood H. pulpwood

Southern US Timber Harvests

Harvests (continued)Harvests (continued)

► Yellow bars Yellow bars indicate indicate recession yearsrecession years

► This is the first This is the first decline in decline in production not production not associated with associated with a recessiona recession

► Structural Structural changes are changes are indicatedindicated

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

S. Sawtimber S. pulpwood H. pulpwood other

What Has Happened?What Has Happened?--Prices----Prices--

► Biggest declines Biggest declines were in softwood were in softwood pulpwood since ‘98.pulpwood since ‘98.

► Softwood sawtimber Softwood sawtimber not impacted as not impacted as severely.severely.

► Hardwood pulpwood Hardwood pulpwood more volatile but more volatile but regained strength regained strength since 2000.since 2000.

0

0.5

1

1.5

2

2.5

3

3.5

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

ind

ex

(19

77

=1

)

H Saw H Pulp S Saw S Pulp

Southern US Stumpage Prices

0

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1500

2000

2500

3000

1977 1980 1983 1986 1989 1992 1995 1998 2001

mm

cf

0

0.2

0.4

0.6

0.8

1

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1.4

1.6

1.8

Inde

x (1

977=

1)

Harvest Price

Softwood Pulpwood MarketsSoftwood Pulpwood MarketsMost ImpactedMost Impacted

Summary of ChangesSummary of Changes

►Moderate Growth Phase (1977-1986)Moderate Growth Phase (1977-1986) Harvests increased at a moderate rateHarvests increased at a moderate rate Prices constant or declining for all three Prices constant or declining for all three

products (soft. pulp., hard. pulp, soft saw.)products (soft. pulp., hard. pulp, soft saw.) Consistent with demand and supply expandingConsistent with demand and supply expanding

►Rapid Growth Phase (1986-1998)Rapid Growth Phase (1986-1998) Harvests increasing at a faster rateHarvests increasing at a faster rate Prices increasing at a higher rate than harvestsPrices increasing at a higher rate than harvests Consistent with strong outward shift in demandConsistent with strong outward shift in demand

Summary of ChangesSummary of Changes

►Adjustment Phase (1998-2002)Adjustment Phase (1998-2002) Both harvests and prices declining for Both harvests and prices declining for

pulpwoodpulpwood Consistent with demand contraction for Consistent with demand contraction for

pulpwood, especiallypulpwood, especially For sawtimber, harvests leveled off with For sawtimber, harvests leveled off with

declining pricesdeclining prices►Consistent with expansion of sawtimber Consistent with expansion of sawtimber

suppliessupplies

Market Factors ExaminedMarket Factors Examined

► Demand FactorsDemand Factors Competing products--substitution and technical Competing products--substitution and technical

changechange Domestic demandDomestic demand

► Capacity dataCapacity data

International tradeInternational trade

► Supply FactorsSupply Factors Land useLand use InvestmentInvestment OwnershipOwnership InventoryInventory

Domestic Demand--PulpwoodDomestic Demand--Pulpwood

► Southern pulping Southern pulping capacity down 16% capacity down 16% since 1998 and down since 1998 and down relative to US productionrelative to US production

► No indications of No indications of increasing domestic increasing domestic demanddemand Per capita use of paper Per capita use of paper

products declinesproducts declines► Capacity expanding in Capacity expanding in

other countriesother countries e.g., Chile, Brazil, Finlande.g., Chile, Brazil, Finland

► Loss of comparative Loss of comparative advantage in new advantage in new markets (costs)markets (costs)

0

20

40

60

80

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Ton

s (m

illio

ns)

Total U.S. South

Pulp Mill Capacity

Average Distance to Pulpmills Average Distance to Pulpmills and Chipmills in the Southand Chipmills in the South

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pulp & chip distance1 - 50 51 - 100101 - 250251 - 500501 +

# Pulpmills_chipmills_south.shp

500 0 500 1000 Miles

N

EW

S

Domestic Demand--LumberDomestic Demand--Lumber

► Southern softwood Southern softwood lumber capacity lumber capacity increasing 1997-increasing 1997-20032003

► No indication of No indication of decreasing demand decreasing demand overalloverall Even given increases Even given increases

in engineered wood in engineered wood productsproducts

38

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41

42

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44

45

46

1997 1998 1999 2000 2001 2002 2003

Survey Year

Mill

ion

cu

bic

me

ters

U.S.-South U.S.-West

Softwood Sawmill Capacity

Average Distance to SawmillsAverage Distance to Sawmills

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sawmill distance1 - 50 51 - 100 101 - 150

# Sawmills_south.shp

500 0 500 1000 Miles

N

EW

S

Domestic Demand--PanelsDomestic Demand--Panels

► Panel capacity Panel capacity grew strong grew strong through 1997through 1997

► Shift from solid Shift from solid wood raw wood raw material to chips material to chips and fiberand fiber

Southern Panel Capacity

0

5

10

15

20

25

30

35

40

1965 1970 1975 1980 1985 1990 1995 1996 1997 1998

Survey Year

Cap

acity

(M

illio

n C

ubic

Met

ers)

Southern Pine Plywood OSB Particleboard MDF

Domestic Demand--PanelsDomestic Demand--Panels

► No indication of No indication of decreasing decreasing demand demand

► Total southern Total southern panel production panel production stablestable

► OSB production OSB production grew 8.1% per grew 8.1% per year from ‘96 to year from ‘96 to ‘04‘04

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Mill

ion S

quare

Feet

Plywood Production OSB Production

Southern Panel Production

Domestic Demand--SummaryDomestic Demand--Summary

► Demand, as measured by capacity, is stable Demand, as measured by capacity, is stable for most products, with the notable for most products, with the notable exception of pulpwood.exception of pulpwood.

► Southern pulpwood capacity has declined in Southern pulpwood capacity has declined in both absolute terms (declined 16% since both absolute terms (declined 16% since 1998), and relative to total US capacity.1998), and relative to total US capacity.

► Demand by pulp mills somewhat offset by Demand by pulp mills somewhat offset by increasing demand for OSB and, to a lesser increasing demand for OSB and, to a lesser degree, engineered products.degree, engineered products.

Trade--Wood PulpTrade--Wood Pulp

► US exports roughly US exports roughly equal to imports in equal to imports in recent yearsrecent years

► US southern ports US southern ports export ~7 times export ~7 times importsimports

► Southern imports Southern imports however have however have increased to 2-3% increased to 2-3% of total southern of total southern wood pulp wood pulp productionproduction

-1,000

0

1,000

2,000

3,000

4,000

5,000

1989 1991 1993 1995 1997 1999 2001 2003

$U

SD

(m

illio

ns)

US exports South exports South imports US BOT

US Trade in Wood Pulp

Trade--Wood Chips--ImportsTrade--Wood Chips--Imports

► Brazilian imports Brazilian imports of eucalyptus of eucalyptus wood chips much wood chips much higher since 2002higher since 2002

► But, only 0.9% of But, only 0.9% of total southern chip total southern chip productionproduction

► Addressing local Addressing local scarcity of scarcity of hardwoodhardwood

0

100

200

300

400

500

600

700

800

1989 1991 1993 1995 1997 1999 2001 2003

To

ns (

1,00

0's)

Total Canada Brazil

Southern US Wood Chips Imports

Trade--Wood Chips--ExportsTrade--Wood Chips--Exports

► Near complete Near complete loss of exports to loss of exports to JapanJapan

► Would account for Would account for ~9% of southern ~9% of southern chip production in chip production in 19961996

► Significant Significant reduction in reduction in domestic demanddomestic demand

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1989 1991 1993 1995 1997 1999 2001 2003

$US

D (

1,00

0's)

Total Japan

Southern US Wood Chips Exports

Trade--Lumber--ImportsTrade--Lumber--Imports

► Canada by far Canada by far leading importer leading importer of lumber into USof lumber into US

► However, little However, little direct impact on direct impact on southern lumber southern lumber demanddemand

► Imports from S.A. Imports from S.A. small but risingsmall but rising

-8,000,000

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

$U

SD

(1

,00

0's

)

Total Canada S. America Balance

Softwood Lumber Imports and BOT

Trade--Lumber--Southern Trade--Lumber--Southern ExportsExports

► Lumber exports Lumber exports from US South from US South small and have small and have declined over timedeclined over time About 2 percent of About 2 percent of

southern southern production in 1995production in 1995

<1 percent in <1 percent in 20042004 0

50

100

150

200

250

300

350

400

450

500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

mill

ion

boar

d fe

et

Southern Softwood Lumber Exports

Trade-Hardwood Lumber-US Trade-Hardwood Lumber-US ExportsExports

► Increased by about Increased by about 50% between 1989 50% between 1989 and 2004and 2004

► Canada is most Canada is most important trading important trading partnerpartner

► Big increase in Big increase in shipments to China shipments to China offsetting declines in offsetting declines in shipments to other shipments to other countries in Asiacountries in Asia

0500000

100000015000002000000250000030000003500000

1989

1991

1993

1995

1997

1999

2001

2003

cubic

mete

rs

EUROPEAN UNION - 25 EAST ASIA

NORTH AMERICA All Other

Trade--Panel ProductsTrade--Panel Products

► Import nearly all Import nearly all from Canadafrom Canada

► Imports rising Imports rising significantly since significantly since 20022002

► No exports to No exports to speak ofspeak of

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04$U

S (

mill

ion

s)

Total Canada Balance

Imports of Plywood, OSB, Waferboard

Trade--SummaryTrade--Summary

► Loss of southern softwood chip exports to Loss of southern softwood chip exports to JapanJapan At peak, 9% of 2002 southern chip productionAt peak, 9% of 2002 southern chip production Reduction in domestic demand for pulpwoodReduction in domestic demand for pulpwood

► Imports of raw material (wood chips) are Imports of raw material (wood chips) are currently small but could rise in response to currently small but could rise in response to local scarcitylocal scarcity

► Increases in panel imports such as OSB Increases in panel imports such as OSB dampen domestic demand for smaller dampen domestic demand for smaller diameter wooddiameter wood

Supply--Land UseSupply--Land Use

► Historically, southern US forest area Historically, southern US forest area relatively stable since 1940’srelatively stable since 1940’s Except for 5% loss in 1970’s due to ag Except for 5% loss in 1970’s due to ag

conversionconversion► Future forest area may change from no net Future forest area may change from no net

loss to a loss of up to 31 mm acres by 2040loss to a loss of up to 31 mm acres by 2040 Depends upon ag vs. forest returnsDepends upon ag vs. forest returns

► Net loss of forests due to urbanization in Net loss of forests due to urbanization in some areassome areas Particularly along coasts and PiedmontParticularly along coasts and Piedmont

Supply—Land UseSupply—Land Use

► SFRA findingsSFRA findings► ““Weak” demand Weak” demand

scenarios (EH and scenarios (EH and EL)EL) Reduction in forest Reduction in forest

land (2020)land (2020) Both planted and Both planted and

nonplanted forestsnonplanted forests

0

10

20

30

40

50

60

70

Current IH IL EH EL

scenario

mil

lio

n h

ecta

res

Timberland Area

Non-plantation Area

0

10

20

30

40

50

60

Current IH IL EH EL

scenarios

mil

lio

n h

ecta

res

Non-plantation Area

Supply--InvestmentSupply--Investment► Plantations have grown Plantations have grown

from 0 to 32 mm acres from from 0 to 32 mm acres from 1945-19991945-1999 16% of all timberland16% of all timberland

► Industry has highest share Industry has highest share of plantingsof plantings 45-70%45-70%

► Non-industry plantings Non-industry plantings significantly higher during significantly higher during Soil Bank and CRP programsSoil Bank and CRP programs

► Strong expansionary Strong expansionary investment through the investment through the 90’s90’s

► Sharp decline in investment Sharp decline in investment since 2001 since 2001

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

acre

s0%

10%

20%

30%

40%

50%

60%

70%

Total Industry Industry share

Acres Planted in US South

Supply--OwnershipSupply--Ownership

► Current ownership breakdownCurrent ownership breakdown 69% non-industrial private, 20% industry, 14% other69% non-industrial private, 20% industry, 14% other

► Divestiture of industry lands with high share of Divestiture of industry lands with high share of forest capitalforest capital

► Shift toward TIMOsShift toward TIMOs► Increasing urbanization may shift margin Increasing urbanization may shift margin

between physical and economic availability of between physical and economic availability of timber suppliestimber supplies Increased parcelization, fragmentation in some casesIncreased parcelization, fragmentation in some cases Long run effects on timber supply unknownLong run effects on timber supply unknown

Supply--InventorySupply--Inventory

► Overall, softwood Overall, softwood inventory stableinventory stable Growth=removalsGrowth=removals Market responsiveMarket responsive

► Hardwood inventories Hardwood inventories increasingincreasing Growth>removalsGrowth>removals availabilityavailability

► Local effects Local effects importantimportant Shifting productionShifting production

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1953 1963 1982 1989 1999m

mcf

Softwood Hardwood

Forest Growing Stock in the US South

Supply--InventorySupply--Inventory

Hardwood

0

1000000

2000000

3000000

4000000

5000000

6000000

1952 1962 1976 1986 1991 1996 2002

Growth Removals Mortality

Softwood

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

1952 1962 1976 1986 1991 1996 2002

Growth Removals Mortality

Growth, removals, and mortalityRPA Data Base, including most recent data (2002)

Supply--ConclusionsSupply--Conclusions

►Long period of investments in softwood Long period of investments in softwood plantations implies no short to medium plantations implies no short to medium term reductions in supplyterm reductions in supply Supply is a slow moving factorSupply is a slow moving factor

►Recent declines in plantation Recent declines in plantation investments indicate long run investments indicate long run adjustment to supplyadjustment to supply

►Localized inventory declines are likelyLocalized inventory declines are likely Urban and urbanizing areasUrban and urbanizing areas

ConclusionsConclusions

ConclusionsConclusions

► Markets are NOT going Markets are NOT going awayaway South has advantage in South has advantage in

USUS► Southern timber Southern timber

markets are in a markets are in a period of adjustment period of adjustment after rapid growth in after rapid growth in the 1990’sthe 1990’s This is demand drivenThis is demand driven

► Important changes in Important changes in perspective and perspective and rhetoricrhetoric From scarce to plentifulFrom scarce to plentiful

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

S. Sawtimber S. pulpwood H. pulpwood other

Key Finding no. 1Key Finding no. 1

►Demand growth has declinedDemand growth has declined Consumption of solidwood has not kept Consumption of solidwood has not kept

pace with growth in housing startspace with growth in housing starts Per capita consumption of paper has Per capita consumption of paper has

declineddeclined Demand for exports has declinedDemand for exports has declined

►Especially chip exportsEspecially chip exports

Long run—population growth will fuel Long run—population growth will fuel expanding demand at a lower rateexpanding demand at a lower rate

Key Finding no. 2Key Finding no. 2

►Domestic timber supply continues to Domestic timber supply continues to expandexpand Area of timberland roughly constant since Area of timberland roughly constant since

70’s70’s Intensive management expanded Intensive management expanded Expansionary investment continued Expansionary investment continued

through the 1990’sthrough the 1990’s Supply adjusts with a long lag timeSupply adjusts with a long lag time

Key Finding no. 3Key Finding no. 3

►Net effect of demand contraction and Net effect of demand contraction and strong supply is a disproportionately strong supply is a disproportionately large decline in price relative to large decline in price relative to harvests.harvests. Observed in pulpwood markets since 1998Observed in pulpwood markets since 1998 Short run: likely to remain low unless Short run: likely to remain low unless

demand expands considerablydemand expands considerably Long run: contraction of softwood Long run: contraction of softwood

investment leads eventually to decline in investment leads eventually to decline in economic inventory and price increaseseconomic inventory and price increases

Key Finding no. 4Key Finding no. 4

►Patterns of investment in processing Patterns of investment in processing do not indicate growth in demanddo not indicate growth in demand Solidwood capacity is stableSolidwood capacity is stable Paper production capacity has declined Paper production capacity has declined

since the late 1990’s since the late 1990’s ►16% reduction in southern pulping capacity 16% reduction in southern pulping capacity

since 1997 indicates a sustained decline in since 1997 indicates a sustained decline in demanddemand

Pulpwood prices may not rebound to mid-Pulpwood prices may not rebound to mid-90’s levels in foreseeable future90’s levels in foreseeable future

Key Finding no. 5Key Finding no. 5

►Low relative prices for pulpwood Low relative prices for pulpwood defines opportunities for producing defines opportunities for producing other products in the regionother products in the region Ample supply of material for OSB and Ample supply of material for OSB and

other engineered wood productsother engineered wood products Downturns lead to restructuring of Downturns lead to restructuring of

industry and increased efficiency (creative industry and increased efficiency (creative destruction)destruction)

Key Finding no. 6Key Finding no. 6

► Increasing hardwood pulpwood prices Increasing hardwood pulpwood prices and decreasing softwood prices and decreasing softwood prices encourage substitution in paper encourage substitution in paper productionproduction Reversal of long trend toward hardwood in Reversal of long trend toward hardwood in

paper productionpaper production Already observed in some operationsAlready observed in some operations

Key Finding no. 7Key Finding no. 7

► Imports of hardwood chips indicate a Imports of hardwood chips indicate a backstop price for hardwood pulpwood backstop price for hardwood pulpwood in the regionin the region Price that draws exports from South Price that draws exports from South

AmericaAmerica Has this ceiling been reached?Has this ceiling been reached? Will discourage intensive management of Will discourage intensive management of

hardwoodshardwoods

Forest Management Forest Management Implications Implications

► Landowners need more information Landowners need more information regarding risksregarding risks Physical AND market risksPhysical AND market risks Especially TIMO’sEspecially TIMO’s

► Rapid changes indicate need for effective Rapid changes indicate need for effective monitoring monitoring

► Afforestation strategies are alteredAfforestation strategies are altered Marginal cropland—effective conversions?Marginal cropland—effective conversions? Restoration strategies?Restoration strategies? Defining low cost approaches that yield Defining low cost approaches that yield

ecosystem benefitsecosystem benefits

Program ImplicationsProgram Implications

► Importance of rhetorical changesImportance of rhetorical changes►Without concerns for timber supply—Without concerns for timber supply—

different perspectives on the role of different perspectives on the role of forestryforestry Effects on program support?Effects on program support? Who supports programs?Who supports programs?

►Loss of support for a large portion of Loss of support for a large portion of forestry researchforestry research Long term effects on competitiveness?Long term effects on competitiveness?

Key UncertaintiesKey Uncertainties

►TradeTrade Exchange rates—strength of the dollarExchange rates—strength of the dollar International demandsInternational demands

►Housing MarketsHousing Markets►Electronic media (the next generation)Electronic media (the next generation)► Industry structureIndustry structure►Ag policiesAg policies

Response of land to reduction in subsidiesResponse of land to reduction in subsidies

Thank YouThank You

►Thanks to our economics task forceThanks to our economics task force UGAUGA Texas A&MTexas A&M Mississippi StateMississippi State FloridaFlorida NC StateNC State US Forest ServiceUS Forest Service