September 2013 DNR Economic Forecast

David Chertudi, Lead Economist 

U.S. Economy and Housing Market. The U.S. economy continues to improve, albeit it slowly. The unempmoney tree economic forecastloyment rate, which peaked at 10.0 percent in October 2009, is down to 7.3 percent as of August. GDP growth remains modest at below two percent over the last four quarters ending in June. The housing market continues to show positive signs: new housing starts in the first seven months of 2013 averaged 912,000 (seasonally adjusted annual rate) and average U.S. housing prices have increased in each of the last 12 months through June. The U.S. economy still faces significant challenges. There are still too many unemployed workers, though some reentered the workforce after having left; the financial and economic crises in Europe are improving, but several European countries remain in recession; China’s economy has slowed; and the U.S. government has still not implemented a coherent, growth-driven economic policy.

Lumber and Log Prices. Lumber and log prices are up in 2013. The Random Lengths’ Coast Dry Random and Stud composite lumber price hit $414/mbf in April 2013, an impressive 44 percent year-over-year increase, before falling off steeply to $322/mbf in June. Predicted by forest economists, this drop was due to the uneven response of bringing lumber production back online and is interpreted as a temporary setback and not the beginning of a long-term downward price trend. There will be considerable price volatility moving forward. Pacific Northwest log prices have also moved up sharply after being fairly flat for 2011 and most all of 2012. The price for a ‘typical’ DNR log delivered to the mill climbed dramatically to a nominal high of $587/mbf in April, the highest price since 2000. The log price has fallen off a bit in August to $564/mbf, mimicking the recent drop in lumber prices.

Timber Sales Prices. The FY 2014 average sales price is now predicted to be about $340/mbf, down about nine percent from the $375/mbf predicted in June. Weighted by volume, sales prices have averaged $246/mbf in the first two months of the fiscal year. The lowered price expectations for this year are due primarily to higher proportion of thinning sales than previously anticipated. Based on continued confidence in a genuine recovery in the U.S. housing market, future timber sales prices are still estimated to be about $408/mbf in FY 2015, $412/mbf in FY 2016, and $416/mbf in FY 2017.

Bottom Line for Timber Revenues. Accounting for the anticipated drop in FY 2014 timber sales prices and moderate changes to the timing of removals, anticipated timber revenues have decreased throughout the forecast period. The timber revenue projection for the 2013-2015 Biennium is revised downward four percent from $392.5 million to $375.1 million. Revenues in the 2015-2017 Biennium are predicted to be $406.5 million, down two percent from $415.7 million.
Risks to the Forecast. Although significant curtailments in timber sales volumes have been assumed in the June 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 real risk. This risk is particularly heavy for FYs 2015-2017.
While there are downside risks to the demand-side influences of 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. Supply-side influences of stumpage price—such as timber mix and quality—are difficult to estimate in future years, but are assumed to be about average. Also on the downside are the many challenges to U.S. economic recovery cited in the opening paragraph above.