# Presentation: 048614

## Rapid Assessment of Market Change in the South

- Douglas Carter and Dave Wear
- Assoc. Prof., SFRC, Univ. of FL
- and
- Project Leader, Economics Work Unit,
- USFS SRS

## Problem

- Perception that there has been a loss of markets in southern region to foreign competition
- Declining returns to investment as indicated by declining stumpage prices
- Unclear future of the southern forest resource

## Objective

- Analyze recent structural changes in markets using best available data
- harvests and prices
- demand and supply factors
- Consider potential implications for the future of the southern forest sector

## What Has Happened?--Harvests--

- Steady growth ’62-’98
- Declining harvests  ’98-’01
- Softwood and hardwood pulpwood harvests declined 11% and 21% from ’98-’01
- Softwood sawtimber harvests were more stable

- Southern US Timber Harvests

## Harvests (continued)

- Yellow bars indicate recession years
- This is the first decline in production not associated with a recession
- Structural changes are indicated

## What Has Happened?--Prices--

- Biggest declines were in softwood pulpwood since ‘98.
- Softwood sawtimber not impacted as severely.
- Hardwood pulpwood more volatile but regained strength since 2000.

- Southern US Stumpage Prices

## Softwood Pulpwood MarketsMost Impacted

- Softwood Pulpwood MarketsMost Impacted

## Summary of Changes

- _Moderate Growth Phase (1977-1986)_
- Harvests increased at a moderate rate
- Prices constant or declining for all three products (soft. pulp., hard. pulp, soft saw.)
- Consistent with demand and supply expanding
- _Rapid Growth Phase (1986-1998)_
- Harvests increasing at a faster rate
- Prices increasing at a higher rate than harvests
- Consistent with strong outward shift in demand

## Summary of Changes

- _Adjustment Phase (1998-2002)_
- Both harvests and prices declining for pulpwood
- Consistent with demand contraction for pulpwood, especially
- For sawtimber, harvests leveled off with declining prices
- Consistent with expansion of sawtimber supplies

## Market Factors Examined

- Demand Factors
- Competing products--substitution and technical change
- Domestic demand
- Capacity data
- International trade
- Supply Factors
- Land use
- Investment
- Ownership
- Inventory

## Domestic Demand--Pulpwood

- Southern pulping capacity down 16% since 1998 and down relative to US production
- No indications of increasing domestic demand
- Per capita use of paper products declines
- Capacity expanding in other countries
- e.g., Chile, Brazil, Finland
- Loss of comparative advantage in new markets (costs)

- Pulp Mill Capacity

## Average Distance to Pulpmills and Chipmills in the South

## Domestic Demand--Lumber

- Southern softwood lumber capacity increasing 1997-2003
- No indication of decreasing demand overall
- Even given increases in engineered wood products

- Softwood Sawmill Capacity

## Average Distance to Sawmills

## Domestic Demand--Panels

- Panel capacity grew strong through 1997
- Shift from solid wood raw material to chips and fiber

- Southern Panel Capacity

## Domestic Demand--Panels

- No indication of decreasing demand
- Total southern panel production stable
- OSB production grew 8.1% per year from ‘96 to ‘04

- Southern Panel Production

## Domestic Demand--Summary

- Demand, as measured by capacity, is stable for most products, with the notable exception of pulpwood.
- Southern pulpwood capacity has declined in both absolute terms (declined 16% since 1998), and relative to total US capacity.
- Demand by pulp mills somewhat offset by increasing demand for OSB and, to a lesser degree, engineered products.

## Trade--Wood Pulp

- US exports roughly equal to imports in recent years
- US southern ports export ~7 times imports
- Southern imports however have increased to 2-3% of total southern wood pulp production

- US Trade in Wood Pulp

## Trade--Wood Chips--Imports

- Brazilian imports of eucalyptus wood chips much higher since 2002
- But, only 0.9% of total southern chip production
- Addressing local scarcity of hardwood

- Southern US Wood Chips Imports

## Trade--Wood Chips--Exports

- Near complete loss of exports to Japan
- Would account for ~9% of southern chip production in 1996
- Significant reduction in domestic demand

- Southern US Wood Chips Exports

## Trade--Lumber--Imports

- Canada by far leading importer of lumber into US
- However, little direct impact on southern lumber demand
- Imports from S.A. small but rising

- Softwood Lumber Imports and BOT

## Trade--Lumber--Southern Exports

- Lumber exports from US South small and have declined over time
- About 2 percent of southern production in 1995
- <1 percent in 2004

- Southern Softwood Lumber Exports

## Trade-Hardwood Lumber-US Exports

- Increased by about 50% between 1989 and 2004
- Canada is most important trading partner
- Big increase in shipments to China offsetting declines in shipments to other countries in Asia

## Trade--Panel Products

- Import nearly all from Canada
- Imports rising significantly since 2002
- No exports to speak of

- Imports of Plywood, OSB, Waferboard

## Trade--Summary

- Loss of southern softwood chip exports to Japan
- At peak, 9% of 2002 southern chip production
- Reduction in domestic demand for pulpwood
- Imports of raw material (wood chips) are currently small but could rise in response to local scarcity
- Increases in panel imports such as OSB dampen domestic demand for smaller diameter wood

## Supply--Land Use

- Historically, southern US forest area relatively stable since 1940’s
- Except for 5% loss in 1970’s due to ag conversion
- Future forest area may change from no net loss to a loss of up to 31 mm acres by 2040
- Depends upon ag vs. forest returns
- Net loss of forests due to urbanization in some areas
- Particularly along coasts and Piedmont

## Supply—Land Use

- SFRA findings
- “Weak” demand scenarios (EH and EL)
- Reduction in forest land (2020)
- Both planted and nonplanted forests

**Notes:**
Current Value is about 72 million hectares.

## Supply--Investment

- Plantations have grown from 0 to 32 mm acres from 1945-1999
- 16% of all timberland
- Industry has highest share of plantings
- 45-70%
- Non-industry plantings significantly higher during Soil Bank and CRP programs
- Strong expansionary investment through the 90’s
- Sharp decline in investment since 2001

- Acres Planted in US South

## Supply--Ownership

- Current ownership breakdown
- 69% non-industrial private, 20% industry, 14% other
- Divestiture of industry lands with high share of forest capital
- Shift toward TIMOs
- Increasing urbanization may shift margin between physical and economic availability of timber supplies
- Increased parcelization, fragmentation in some cases
- Long run effects on timber supply unknown

## Supply--Inventory

- Overall, softwood inventory stable
- Growth=removals
- Market responsive
- Hardwood inventories increasing
- Growth>removals
- availability
- Local effects important
- Shifting production

- Forest Growing Stock in the US South

## Supply--Inventory

- Growth, removals, and mortality
- RPA Data Base, including most recent data (2002)

## Supply--Conclusions

- Long period of investments in softwood plantations implies no short to medium term reductions in supply
- Supply is a slow moving factor
- Recent declines in plantation investments indicate long run adjustment to supply
- Localized inventory declines are likely
- Urban and urbanizing areas

## Conclusions

## Conclusions

- Markets are NOT going away
- South has advantage in US
- Southern timber markets are in a period of adjustment after rapid growth in the 1990’s
- This is demand driven
- Important changes in perspective and rhetoric
- From scarce to plentiful

## Key Finding no. 1

- Demand growth has declined
- Consumption of solidwood has not kept pace with growth in housing starts
- Per capita consumption of paper has declined
- Demand for exports has declined
- Especially chip exports
- Long run—population growth will fuel expanding demand at a lower rate

## Key Finding no. 2

- Domestic timber supply continues to expand
- Area of timberland roughly constant since 70’s
- Intensive management expanded
- Expansionary investment continued through the 1990’s
- Supply adjusts with a long lag time

## Key Finding no. 3

- Net effect of demand contraction and strong supply is a disproportionately large decline in price relative to harvests.
- Observed in pulpwood markets since 1998
- Short run: likely to remain low unless demand expands considerably
- Long run: contraction of softwood investment leads eventually to decline in economic inventory and price increases

## Key Finding no. 4

- Patterns of investment in processing do not indicate growth in demand
- Solidwood capacity is stable
- Paper production capacity has declined since the late 1990’s
- 16% reduction in southern pulping capacity since 1997 indicates a sustained decline in demand
- Pulpwood prices may not rebound to mid-90’s levels in foreseeable future

## Key Finding no. 5

- Low relative prices for pulpwood defines opportunities for producing other products in the region
- Ample supply of material for OSB and other engineered wood products
- Downturns lead to restructuring of industry and increased efficiency (creative destruction)

## Key Finding no. 6

- Increasing hardwood pulpwood prices and decreasing softwood prices encourage substitution in paper production
- Reversal of long trend toward hardwood in paper production
- Already observed in some operations

## Key Finding no. 7

- Imports of hardwood chips indicate a backstop price for hardwood pulpwood in the region
- Price that draws exports from South America
- Has this ceiling been reached?
- Will discourage intensive management of hardwoods

## Forest Management Implications 

- Landowners need more information regarding risks
- Physical AND market risks
- Especially TIMO’s
- Rapid changes indicate need for effective monitoring
- Afforestation strategies are altered
- Marginal cropland—effective conversions?
- Restoration strategies?
- Defining low cost approaches that yield ecosystem benefits

## Program Implications

- Importance of rhetorical changes
- Without concerns for timber supply—different perspectives on the role of forestry
- Effects on program support?
- Who supports programs?
- Loss of support for a large portion of forestry research
- Long term effects on competitiveness?

## Key Uncertainties

- Trade
- Exchange rates—strength of the dollar
- International demands
- Housing Markets
- Electronic media (the next generation)
- Industry structure
- Ag policies
- Response of land to reduction in subsidies

## Thank You

- Thanks to our economics task force
- UGA
- Texas A&M
- Mississippi State
- Florida
- NC State
- US Forest Service