VARDAMAN VIRTUAL FORESTRY COMPANY

WILL TIMBER PRICES RISE, FALL, OR STAY THE SAME?

No question is asked by more timberland owners more often than this one: "What will the price of my timber be next month, next year, 20 years from now?" We at JMV&CO realized decades ago that we were no good at answering such questions, so we quit trying. But all timberland owners must make price assumptions about the future, and past experience often gives some clues about what will happen. To learn what factors cause price changes and what an expert thinks about the future, we interviewed Dr. Roger A. Sedjo, Resources for the Future, Washington, DC, a leading forest economist. Here's how it went:

JMV:	For most of the 1980's timber prices in the south stayed the same or fell, but recently they've suddenly jumped a noticeable amount. Do recent events herald a new trend?
RAS:	They may. We may be witnessing a confluence of forces that could precipitate a significant upward trend of timber prices. The recent increases in timber prices in the south are, almost surely, an outgrowth of the politically mandated reductions in timber harvest in the Pacific Northwest, generated by environmental concerns. Timber harvests in in the west are declining dramatically due to restrictions imposed because of a host of environmental concerns that include, but are not limited to, the spotted owl. Other factors include new restrictive state forest practices acts. The regional short-falls in the west are likely to be exacerbated by harvest reductions in British Columbia that are also being triggered by political concerns precipitated by environmental factors. Of course, short-falls in western harvests imply a tightening of supply throughout North America and beyond. Analysts are now beginning to predict that next year will see an increase in economic activity in the US and perhaps in parts of the Pacific Basin. The outcome of a modest increase in economic activity together with the very substantial supply reduction in the west will almost surely be seen in price increases for wood well in excess of general inflation, at least for a time. In the longer term, however, I believe that it is unlikely that such price increases will persist since higher prices will encourage increased wood supplies from other sources.
JMV:	What has been the long-term trend of timber prices in the past?
RAS:	Timber prices, adjusted for inflation, exhibited a long-term upward trend for at least a hundred years before stabilizing in the early 1950's. The trend is documented in the 1962 book TRENDS IN NATURAL RESOURCE COMMODITIES, by Potter and Christy and confirmed by the 1976 work of Robert Manthy in his book NATURAL RESOURCES COMMODITIES - A CENTURY OF STATISTICS. Manthy noted in his study that the trend in timber prices appeared to have stabilized after the early 1950's. This stabilization was upset during the 1970's, a decade in which a number of resource prices that had maintained stability for decades showed sharp upward movement. You may recall that during this period the "oil shocks" caused many observers to suggest that the earth was running out of many natural resources. In the 1980's, however, not only did these upward trends fail to persist for almost all resources, but the prices of most natural resources exhibited very sharp drops. This period saw industrial wood real prices return to the levels of the 1950's. Today, for very different reasons than in the 1970's, we appear to be poised for another substantial, but probably temporary, run-up in wood prices.
JMV:	Do timber prices keep pace with inflation? If they do, can't investors planning to regenerate their tracts be concerned only with real prices?
RAS:	The data suggest that since the early 1950's timber prices have roughly kept pace with inflation, albeit with a substantial degree of variability. My own view is that the most appropriate price assumption for timber investors is that future real prices will be constant, i.e., assume that price rises will cover inflation but no more.
JMV:	Are any published studies available to investors who want to pursue these questions in depth?
RAS:	There are a number of studies that project supply and demand for timber. Among these are the Timber Market Assessment Model (TAMM) of the Forest Service; the Global Trade Model developed by the International Institute for Applied Systems Analysis (IIASA) and now being used by CINTRAFOR at the University of Washington; and our own Timber Supply Model (TSM), which is presented in our book entitled THE LONG-TERM ADEQUACY OF WORLD TIMBER SUPPLY* by Roger A. Sedjo and Kenneth S. Lyon. All of these models are oriented toward the long-term trends and therefore are not, in themselves, particularly well suited to forecasting changes associated with the business cycle. However, Resource Information Systems Incorporated of Bedford, MA does do some short-term forecasting.
JMV:	Some confidently predicted that oil prices would reach $100 per barrel. What will keep timber prices from steadily climbing to the sky?
RAS:	Economists usually explain the cap on natural resources prices by something called the "backstop technology." In the case of oil, the erosion of prices was due largely to the ability of alternative sources to come on stream. For timber, the cap on prices also provided by a backstop technology that has been manifest in a number of ways. Technology has been wood-creating, wood-saving, and wood-extending. Wood-creating technologies not only include silvicultural techniques, fertilizer, and so forth, but also are found in intensively-managed forest plantations. For example, as technology has developed, investors have found it profitable to undertake a variety of wood-creating activities including establishing high-yielding plantations in regions that have not traditionally been important wood producers, e.g., New Zealand, Brazil, and Chile. Wood-saving techniques allow a given volume of wood to produce more useful products. Examples include pulping techniques that require lower fiber inputs and computer sawmilling that captures value and reduces waste. Finally, wood-extending technology allows greater utilization of inferior resources. Examples include the use of short-fiber in pulp production and the development of waferboard and oriented strand board (OSB) that used previously unutilized species such as Lake States aspen. A more immediate cap on prices than technology has been provided by timber from old-growth sources such as those of the Pacific Northwest and Canada. With political considerations placing limits on important old-growth supplies, short-term price rises are likely, even in an environment of relatively weak demand. One old-growth source that could provide the wood to offset the declines in western North American would be eastern Russia. Although infrastructure and other considerations suggest that constraints on timber harvests in Russia are severe, higher short-term prices for timber will provide added incentives for major development of the timber resources of this region.
JMV:	If our understanding is correct, the general trend of all commodity prices have been down for decades. Will this happen to timber?
RAS:	I believe that it is probably more accurate to say that the general trend of most commodity real prices has been flat for many decades. The situation simply reflects the fact that supply side technology has kept pace with society's needs for natural resources. Although I believe that the data support the view that timber has been experiencing an essentially flat price trend that began in the early 1950's and the long-term trend will remain essentially flat, for the reasons discussed above, I anticipate that, in the near- and perhaps intermediate-term, timber prices will rise above that long-term trend.

*Published by Resources for the Future, 1616 P St. NW, Washington, DC 20036-1400 and available at $30.00 plus $3.00 shipping and handling per order.