Local Timber Markets Also Have Macroeconomic Exposures

When selling timber, timberland owners need access to well-capitalized wood-using mills located within a reasonable, economically viable hauling distance from their forests. The math of evaluating local timber markets can change with the price of diesel, the availability of loggers, and the diversity and health of available mills. That said, local timber markets and wood baskets also fit into a broader economic landscape.

Regional Housing Markets

During interviews, economist Skylar Olsen regularly says:

“We treat the housing market as if it’s one large national market, but, in fact, it’s a network of local markets loosely stitched together through mortgages rates and, over the long haul, migration and demographics and construction capacity.”

From this view, you could make the case for producing regional housing forecasts over national outlooks. At Forisk, we do something like this underneath models supporting the Forisk Research Quarterly, where we check housing starts by type, region, and status. It supports the “physical facts” narrative that, for example, the significant growth in Southern softwood lumber capacity over the past 20 years aligns with the largest regional volume and growth of housing starts in the U.S.

Where do we build new sawmills? Near forests and, to the extent possible, near the people that need the lumber to build homes.

However, for timberland investors and forest products manufacturers, the fact that we know about regional housing markets differs from the ability to do something about it. The regional aspects of housing markets improve our understanding of demand for building products and the impacts of demographic trends. They do not tell us where to invest, locally, in timberland or sawmills or other wood-using capacity.

In Forestry, We Don’t Influence Housing; We Respond to It.

As macroeconomic and political stories monopolize headlines, those of us managing and supporting forest products businesses and timber assets understand that controlling what we can means understanding local operations, risks, and opportunities.

When conducting custom market forecasts or teaching Timber Market Analysis to others, we rely on applying and sharing an organized, systematic way of (1) specifying a question related to forest industry investments or operations; (2) gathering and evaluating fundamental wood supply and demand information; and (3) using this to answer the question as best as possible to make a decision. It answers, “what matters, and what does not, in this local market or wood basket?” The process attempts to balance the volume of information with its quality and relevance to the question.

When evaluating timber markets, we put the (existing or potential) mill or timberland property at the center of the analysis. Best practices include the use of scenarios and competing data sources. Then look at how those individual markets perform as the economy changes or as end markets shift. The systematic testing of priors and models helps us avoid unsupported ideas while reinforcing decisions based on how the forest industry actually functions through the macroeconomic cycle, good and bad.