U.S. Economy and Housing Market
Finally, after years of depressing economic news, there are some glimmers of hope and increasing confidence. The U.S. unemployment rate has been steadily moving down and now stands at 8.3 percent in January. There are 1.8 million more jobs in the U.S. than a year ago. New housing starts may at long last be moving out of the deep trough they entered over three years ago (although existing home prices continue to fall). However, the recovery is weak and the economy remains fragile—there are still too many unemployed workers, foreclosed residential properties will weigh down the housing market for years to come, and there is downside vulnerability from the continuing European financial crisis, a slowdown in China’s economy, and political gridlock in Washington DC.
Log and Lumber Prices
Pacific Northwest log prices held relatively steady throughout 2011. During the year, the average price for a “typical” DNR log delivered to the mill was $481/mbf, varying in a narrow range between a high of $503/mbf in March and a low of $466/mbf in the most recent month of December. This was higher than the average annual log prices in the three prior years at $409, $316, and $413/mbf. Regional log prices held up in 2011 because of the increased level of log exports to China from private forestlands. West Coast lumber prices show a similar pattern, with the Random Lengths’ Coast Dry Random and Stud composite lumber price averaging $270/mbf for 2011, compared with $209, $190, and $264/mbf for the three prior years. The composite lumber price was lower in the last quarter of 2011, when it averaged $254/mbf.
Timber Sales Prices
Through the first seven months of FY 2012 DNR timber sales prices have averaged $329/mbf, compared with the $282/mbf projected for the entire fiscal year in the November Forecast. The $282/mbf annual average sales price is left unchanged in this Forecast because log prices are projected to fall over the next five months–the unexpected strength in log prices in this period in the previous two years is not expected this year. Since a significant recovery in the U.S. housing market is not foreseen over the next several years, we are holding the projected FY 2013 timber sales price at $274/mbf and the FY 2014 and 2015 prices at $300/mbf. An earlier housing recovery would pull DNR’s timber sale prices higher and a fall-off in Pacific Northwest log exports to China from their recent high levels would pull them lower.
Timber Sales Volume
Projected timber sales volumes are revised downward to 656, 667, and 667 mmbf respectively for FYs 2012, 2013, and 2014. A downward adjustment of 12 mmbf in each of those years results from updating actual Westside timber sales volume data for the first seven years of the FY 2005-2014 sustainable harvest decade against the 5,500 mmbf timber sales target level for the decade. An additional downward adjustment of 11 mmbf is made in FY 2012 to account for a lower Eastside timber sales level. Timber sales volume for FY 2015, which is in the next sustainable harvest decade, is left unchanged at 597 mmbf. In the first seven months of FY 2012, DNR has sold 274 mmbf, or 42 percent, of the projected annual sales volume of 656 mmbf.
Timber Removal Volume and Prices
Based on changes to the projected timber sales levels and based on the results of our timber purchasers’ survey on the timing of their harvesting of timber currently under sales contract, forecast timber removal volumes are adjusted down by 65 and 36 mmbf for FY 2012 and 2013 respectively from the November Forecast. Projected removals are up by 23 mmbf in FY 2014 as a result of timber purchasers moving their planned harvests further out into the future. The largest adjustment to projected timber removal prices during the Forecast period is in FY 2012, with a two percent increase up to $309/mbf.
Bottom Line for Timber Revenues
Because there are only very minor revisions to forecast timber removal prices, changes to projected timber revenues follow the pattern of changes to projected timber removal volume. The projection for the 2011-2013 Biennium is revised down seven percent from $361.5 million to $336.2 million. For the 2013-2015 Biennium, the projected revenue from timber removals is revised up one percent to $389.1 million from the $384.9 million figure in the previous Forecast.
Uplands and Aquatic Lands Lease (Non-Timber) Revenues
In addition to revenue from timber removals on state lands, DNR also receives sizable revenues from leases on uplands and aquatic lands. FY 2012 revenues from agricultural leases are increased by $1.0 million because of better than expected revenues from irrigated crop leases. FY 2013 revenues are reduced by $2.5 million because of lowered expectations on the proceeds from a proposed disposition of communication site improvements. FY 2012 aquatic lands revenue is left unchanged because of uncertainty about how much additional geoduck auction volume will fall within the fiscal year.
Altogether, current 2011-2013 Biennium revenues from leases on uplands and aquatic lands are projected to be $123.9 million, down one percent from $125.4 in the November 2011 Forecast. For the 2013-2015 Biennium these revenues are projected to be unchanged at $121.4 million.
Risks to the Forecast
The downside potential to the overall forecast is greater than the upside potential primarily due to the downside risks to timber sales volume–and therefore timber removal volume–due to potential environmental and policy issues. In addition, the uncertain and volatile economic conditions in the United States and the world continue to make economic forecasting challenging at this time.