June 2013 DNR Economic and Revenue Forecast

money tree economic forecastU.S. Economy and Housing Market. The U.S. economy continues its sluggish and long-drawn-out recovery from the Great Recession. The unemployment rate, which peaked at 10.0 percent in October 2009, is down to 7.6 percent as of May. GDP growth remains modest at below two percent over the last four quarters ending in March. The housing market continues to show positive signs: new housing starts in the first four months of 2013 averaged 935,000 (seasonally adjusted annual rate) and average U.S. housing prices have increased in each of the last 13 months through February. The U.S. economy still faces significant challenges. There are still too many unemployed workers; the financial crisis in Europe is improving but several European countries are in recession; China’s economy has slowed; and sequestration of federal spending is now in place and Congress remains unable to take constructive economic action.

Log and Lumber Prices. Log and lumber prices are up in 2013. Pacific Northwest log prices were fairly flat for 2011 and most all of 2012. The price for a ‘typical’ DNR log delivered to the mill averaged $483/mbf in 2011 and $479/mbf in 2012. Log prices have jumped to an average of $559/mbf in the first five months of 2013, an increase of 23% over the $476/mbf average in the same period in 2012. West Coast lumber prices have also moved up sharply: the Random Lengths’ Coast Dry Random and Stud composite lumber price averaged $270/mbf in 2011 and $309/mbf in 2012 and has moved up to an average $407/mbf in the first four months of 2013. Lumber prices softened in May and are not expected to return to the recent highs during the rest of this year, but there will likely be considerable volatility.

Timber Sales Volume. Compared to the March Forecast, projected timber sales volumes for FY 2013 are reduced by 38 mmbf, by 22 mmbf for FY 14, and by about 88 mmbf per year in FYs 2014-2017. Timber sales volumes are now predicted to be 497 mmbf for FY 2013, 540 mmbf for FY 2014, and about 500 mmbf for each of the outlying years.

Timber Sales Prices. Predicted timber sales prices are revised up for FY 2013 and barely changed in each subsequent year of the forecast period. The FY 2013 average sales price is now predicted to be about $334/mbf, up from $323/mbf; weighted by volume, sales prices have averaged $335/mbf in the first eleven months of the fiscal year. Based on increasing confidence in a genuine recovery in the U.S. housing market, timber sales prices are estimated to be about $375/mbf in FY 2014, $408/mbf in FY 2015, $412/mbf in FY 2016, and $416/mbf in FY 2017.

Timber Removal Volume and Prices. Moderate changes in DNR timber purchasers’ harvest plans for volume currently under contract, combined with the significant reduction in projected timber sales volume discussed above, lead to reductions in timber removal volumes in most years of the forecast period. Removal volumes for FYs 2013-2017 are forecast to be 467 (-44), 567 (+4), 566 (-18), 525 (-76), and 499 (-88) mmbf respectively. Projected timber removal prices are very similar to the March Forecast at $297 (+$2.4), $326 (-$0.2), $366 (-$1.7), $400 (+$4.0), and $412 (+$1.8) per mbf for each fiscal year in the forecast period. These removal prices follow from—and lag behind—the changes projected timber sales prices.

Bottom Line for Timber Revenues. Accounting for the anticipated drop in timber sales volumes, a moderate change in the timing of removals, and the minor changes in predicted sales prices, anticipated timber revenues have decreased throughout the forecast period. The timber revenue projection for the 2011-2013 Biennium is revised downward four percent from $317.9 million to $306.2 million. For the 2013-2015 Biennium, the projected revenue from timber removals is revised downward two percent from $398.8 million to $392.5 million. Revenues for the 2015-2017 Biennium are predicted to be $415.7 million, down thirteen percent from $478.7 million.

Total Revenues. Total 2011-2013 Biennium revenues are projected to be $449.5 million, down $8.8 million (four percent) from the March Forecast. For the 2013-2015 Biennium total revenues are projected to be $526.4 million, down $6.3 million (one percent) from the previous projection. Revenues for the 2016-2017 Biennium are expected to total $551.2 million, down $64.8 million (eleven percent) from the March estimate.

Risks to the Forecast. Although significant curtailments in timber sales volumes have been assumed in this Forecast, further reductions due to potential environmental, operational, and policy issues (e.g., riparian management areas and continued timber harvest deferrals pending implementation of a long-term marbled murrelet conservation strategy) remain a risk to the Forecast. This risk is particularly heavy for FYs 2015-2017. While there is a downside risk to timber sales prices—and therefore to subsequent removal prices—there is also upside potential if the nascent recovery in the U.S. housing market strengthens sooner than anticipated. Also on the downside are the many challenges to U.S. economic recovery cited in the opening paragraph above.