rapid assessment of market change in the south...trade--wood chips--imports brazilian imports of...

Rapid Assessment of Market Rapid Assessment of Market Change in the SouthChange in the South

Douglas Carter and Dave WearDouglas Carter and Dave Wear

Assoc. Prof., SFRC, Univ. of FLAssoc. Prof., SFRC, Univ. of FLandand

Project Leader, Economics Work Unit, Project Leader, Economics Work Unit, USFS SRSUSFS SRS

ProblemProblem

►►Perception that there has been a loss of Perception that there has been a loss of markets in southern region to foreign markets in southern region to foreign competitioncompetition

►►Declining returns to investment as indicated Declining returns to investment as indicated by declining stumpage pricesby declining stumpage prices

►►Unclear future of the southern forest Unclear future of the southern forest resourceresource

ObjectiveObjective

►►Analyze recent structural changes in Analyze recent structural changes in markets using best available datamarkets using best available data

harvests and pricesharvests and pricesdemand and supply factors demand and supply factors

►►Consider potential implications for the future Consider potential implications for the future of the southern forest sectorof the southern forest sector

What Has Happened?What Has Happened?----HarvestsHarvests----

►► Steady growth ’62Steady growth ’62--’98’98►► Declining harvests Declining harvests

’98’98--’01’01►► Softwood and Softwood and

hardwood pulpwood hardwood pulpwood harvests declined 11% harvests declined 11% and 21% from ’98and 21% from ’98--’01’01

►► Softwood sawtimber Softwood sawtimber harvests were more harvests were more stablestable

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

mm

cf

S. Sawtimber S. pulpwood H. pulpwood

Southern US Timber Harvests

Harvests (continued)Harvests (continued)

►► Yellow bars Yellow bars indicate recession indicate recession yearsyears

►► This is the first This is the first decline in decline in production not production not associated with a associated with a recessionrecession

►► Structural changes Structural changes are indicatedare indicated

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

S. Sawtimber S. pulpwood H. pulpwood other

What Has Happened?What Has Happened?----PricesPrices----

►► Biggest declines were Biggest declines were in softwood in softwood pulpwood since ‘98.pulpwood since ‘98.

►► Softwood sawtimber Softwood sawtimber not impacted as not impacted as severely.severely.

►► Hardwood pulpwood Hardwood pulpwood more volatile but more volatile but regained strength regained strength since 2000.since 2000.

0

0.5

1

1.5

2

2.5

3

3.5

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

inde

x (1

977=

1)

H Saw H Pulp S Saw S Pulp

Southern US Stumpage Prices

0

500

1000

1500

2000

2500

3000

1977 1980 1983 1986 1989 1992 1995 1998 2001

mm

cf

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Inde

x (1

977=

1)

Harvest Price

Softwood Pulpwood MarketsSoftwood Pulpwood MarketsMost ImpactedMost Impacted

Summary of ChangesSummary of Changes

►►Moderate Growth Phase (1977Moderate Growth Phase (1977--1986)1986)Harvests increased at a moderate rateHarvests increased at a moderate ratePrices constant or declining for all three Prices constant or declining for all three products (soft. pulp., hard. pulp, soft saw.)products (soft. pulp., hard. pulp, soft saw.)Consistent with demand and supply expandingConsistent with demand and supply expanding

►►Rapid Growth Phase (1986Rapid Growth Phase (1986--1998)1998)Harvests increasing at a faster rateHarvests increasing at a faster ratePrices increasing at a higher rate than harvestsPrices increasing at a higher rate than harvestsConsistent with strong outward shift in demandConsistent with strong outward shift in demand

Summary of ChangesSummary of Changes

►►Adjustment Phase (1998Adjustment Phase (1998--2002)2002)Both harvests and prices declining for pulpwoodBoth harvests and prices declining for pulpwoodConsistent with demand contraction for Consistent with demand contraction for pulpwood, especiallypulpwood, especiallyFor sawtimber, harvests leveled off with For sawtimber, harvests leveled off with declining pricesdeclining prices►►Consistent with expansion of sawtimber suppliesConsistent with expansion of sawtimber supplies

Market Factors ExaminedMarket Factors Examined

►► Demand FactorsDemand FactorsCompeting productsCompeting products----substitution and technical changesubstitution and technical changeDomestic demandDomestic demand►►Capacity dataCapacity data

International tradeInternational trade

►► Supply FactorsSupply FactorsLand useLand useInvestmentInvestmentOwnershipOwnershipInventoryInventory

Domestic DemandDomestic Demand----PulpwoodPulpwood

►► Southern pulping Southern pulping capacity down 16% capacity down 16% since 1998 and down since 1998 and down relative to US productionrelative to US production

►► No indications of No indications of increasing domestic increasing domestic demanddemand

Per capita use of paper Per capita use of paper products declinesproducts declines

►► Capacity expanding in Capacity expanding in other countriesother countries

e.g., Chile, Brazil, Finlande.g., Chile, Brazil, Finland

►► Loss of comparative Loss of comparative advantage in new advantage in new markets (costs)markets (costs)

0

20

40

60

80

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Tons

(m

illio

ns)

Total U.S. South

Pulp Mill Capacity

Average Distance to Average Distance to PulpmillsPulpmills and and ChipmillsChipmills in the Southin the South

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pulp & chip distance1 - 50 51 - 100101 - 250251 - 500501 +

# Pulpmills_chipmills

500 0 500 1000 Miles

N

EW

S

Domestic DemandDomestic Demand----LumberLumber

►► Southern softwood Southern softwood lumber capacity lumber capacity increasing 1997increasing 1997--20032003

►► No indication of No indication of decreasing demand decreasing demand overalloverall

Even given increases Even given increases in engineered wood in engineered wood productsproducts

38

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45

46

1997 1998 1999 2000 2001 2002 2003Survey Year

Mill

ion

cubi

c m

eter

s

U.S.-South U.S.-West

Softwood Sawmill Capacity

Average Distance to SawmillsAverage Distance to Sawmills

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sawmill distance1 - 50 51 - 100 101 - 150

# Sawmills_south

500 0 500 1000 Miles

N

EW

S

Domestic DemandDomestic Demand----PanelsPanels

►► Panel capacity grew Panel capacity grew strong through 1997strong through 1997

►► Shift from solid Shift from solid wood raw material wood raw material to chips and fiberto chips and fiber

Southern Panel Capacity

0

5

10

15

20

25

30

35

40

1965 1970 1975 1980 1985 1990 1995 1996 1997 1998

Survey Year

Cap

acity

(Milli

on C

ubic

Met

ers)

Southern Pine Plywood OSB Particleboard MDF

Domestic DemandDomestic Demand----PanelsPanels

►► No indication of No indication of decreasing demand decreasing demand

►► Total southern panel Total southern panel production stableproduction stable

►► OSB production grew OSB production grew 8.1% per year from 8.1% per year from ‘96 to ‘04‘96 to ‘04

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Milli

on S

quar

e Fe

e

Plywood Production OSB Production

Southern Panel Production

Domestic DemandDomestic Demand----SummarySummary

►► Demand, as measured by capacity, is stable for Demand, as measured by capacity, is stable for most products, with the notable exception of most products, with the notable exception of pulpwood.pulpwood.

►► Southern pulpwood capacity has declined in both Southern pulpwood capacity has declined in both absolute terms (declined 16% since 1998), and absolute terms (declined 16% since 1998), and relative to total US capacity.relative to total US capacity.

►► Demand by pulp mills somewhat offset by Demand by pulp mills somewhat offset by increasing demand for OSB and, to a lesser increasing demand for OSB and, to a lesser degree, engineered products.degree, engineered products.

TradeTrade----Wood PulpWood Pulp

►► US exports roughly US exports roughly equal to imports in equal to imports in recent yearsrecent years

►► US southern ports US southern ports export ~7 times export ~7 times importsimports

►► Southern imports Southern imports however have however have increased to 2increased to 2--3% of 3% of total southern wood total southern wood pulp productionpulp production

-1,000

0

1,000

2,000

3,000

4,000

5,000

1989 1991 1993 1995 1997 1999 2001 2003

$US

D (m

illio

ns)

US exports South exports South imports US BOT

US Trade in Wood Pulp

TradeTrade----Wood ChipsWood Chips----ImportsImports

►► Brazilian imports of Brazilian imports of eucalyptus wood eucalyptus wood chips much higher chips much higher since 2002since 2002

►► But, only 0.9% of But, only 0.9% of total southern chip total southern chip productionproduction

►► Addressing local Addressing local scarcity of hardwoodscarcity of hardwood

0

100

200

300

400

500

600

700

800

1989 1991 1993 1995 1997 1999 2001 2003

Tons

(1,0

00's

)

Total Canada Brazil

Southern US Wood Chips Imports

TradeTrade----Wood ChipsWood Chips----ExportsExports

►► Near complete loss Near complete loss of exports to Japanof exports to Japan

►► Would account for Would account for ~9% of southern ~9% of southern chip production in chip production in 19961996

►► Significant reduction Significant reduction in domestic demandin domestic demand

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1989 1991 1993 1995 1997 1999 2001 2003

$USD

(1,0

00's

)

Total Japan

Southern US Wood Chips Exports

TradeTrade----LumberLumber----ImportsImports

►► Canada by far Canada by far leading importer of leading importer of lumber into USlumber into US

►► However, little direct However, little direct impact on southern impact on southern lumber demandlumber demand

►► Imports from S.A. Imports from S.A. small but risingsmall but rising

-8,000,000

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004$U

SD

(1,0

00's

)

Total Canada S. America Balance

Softwood Lumber Imports and BOT

TradeTrade----LumberLumber----Southern ExportsSouthern Exports

►► Lumber exports from Lumber exports from US South small and US South small and have declined over have declined over timetime

About 2 percent of About 2 percent of southern production southern production in 1995in 1995<1 percent in 2004<1 percent in 2004

0

50

100

150

200

250

300

350

400

450

500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

milli

on b

oard

feet

Southern Softwood Lumber Exports

TradeTrade--Hardwood LumberHardwood Lumber--US ExportsUS Exports

►► Increased by about Increased by about 50% between 1989 50% between 1989 and 2004and 2004

►► Canada is most Canada is most important trading important trading partnerpartner

►► Big increase in Big increase in shipments to China shipments to China offsetting declines in offsetting declines in shipments to other shipments to other countries in Asiacountries in Asia

0500000

100000015000002000000250000030000003500000

1989

1991

1993

1995

1997

1999

2001

2003

cubi

c m

eter

s

EUROPEAN UNION - 25 EAST ASIANORTH AMERICA All Other

TradeTrade----Panel ProductsPanel Products

►► Import nearly all Import nearly all from Canadafrom Canada

►► Imports rising Imports rising significantly since significantly since 20022002

►► No exports to speak No exports to speak ofof

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004$U

S (m

illio

ns)

Total Canada Balance

Imports of Plywood, OSB, Waferboard

TradeTrade----SummarySummary

►► Loss of southern softwood chip exports to JapanLoss of southern softwood chip exports to JapanAt peak, 9% of 2002 southern chip productionAt peak, 9% of 2002 southern chip productionReduction in domestic demand for pulpwoodReduction in domestic demand for pulpwood

►► Imports of raw material (wood chips) are currently Imports of raw material (wood chips) are currently small but could rise in response to local scarcitysmall but could rise in response to local scarcity

►► Increases in panel imports such as OSB dampen Increases in panel imports such as OSB dampen domestic demand for smaller diameter wooddomestic demand for smaller diameter wood

SupplySupply----Land UseLand Use

►► Historically, southern US forest area relatively Historically, southern US forest area relatively stable since 1940’sstable since 1940’s

Except for 5% loss in 1970’s due to Except for 5% loss in 1970’s due to agag conversionconversion

►► Future forest area may change from no net loss to Future forest area may change from no net loss to a loss of up to 31 mm acres by 2040a loss of up to 31 mm acres by 2040

Depends upon Depends upon agag vs. forest returnsvs. forest returns►► Net loss of forests due to urbanization in some Net loss of forests due to urbanization in some

areasareasParticularly along coasts and PiedmontParticularly along coasts and Piedmont

SupplySupply——Land UseLand Use

►► SFRA findingsSFRA findings►► “Weak” demand “Weak” demand

scenarios (EH and EL)scenarios (EH and EL)Reduction in forest land Reduction in forest land (2020)(2020)Both planted and Both planted and nonplantednonplanted forestsforests

0

10

20

30

40

50

60

70

Current IH IL EH EL

scenario

mill

ion

hect

ares

Timberland Area

Non-plantation Area

0

10

20

30

40

50

60

Current IH IL EH EL

scenarios

mill

ion

hect

ares

Non-plantation Area

SupplySupply----InvestmentInvestment►► Plantations have grown from 0 Plantations have grown from 0

to 32 mm acres from 1945to 32 mm acres from 1945--19991999

16% of all timberland16% of all timberland►► Industry has highest share of Industry has highest share of

plantingsplantings4545--70%70%

►► NonNon--industry plantings industry plantings significantly higher during Soil significantly higher during Soil Bank and CRP programsBank and CRP programs

►► Strong expansionary Strong expansionary investment through the 90’sinvestment through the 90’s

►► Sharp decline in investment Sharp decline in investment since 2001 since 2001

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

acre

s0%

10%

20%

30%

40%

50%

60%

70%

Total Industry Industry share

Acres Planted in US South

SupplySupply----OwnershipOwnership

►► Current ownership breakdownCurrent ownership breakdown69% non69% non--industrial private, 20% industry, 14% otherindustrial private, 20% industry, 14% other

►► Divestiture of industry lands with high share of Divestiture of industry lands with high share of forest capitalforest capital

►► Shift toward TIMOsShift toward TIMOs►► Increasing urbanization may shift margin between Increasing urbanization may shift margin between

physical and economic availability of timber physical and economic availability of timber suppliessupplies

Increased Increased parcelizationparcelization, fragmentation in some cases, fragmentation in some casesLong run effects on timber supply unknownLong run effects on timber supply unknown

SupplySupply----InventoryInventory

►► Overall, softwood Overall, softwood inventory stableinventory stable

Growth=removalsGrowth=removalsMarket responsiveMarket responsive

►► Hardwood inventories Hardwood inventories increasingincreasing

Growth>removalsGrowth>removalsavailabilityavailability

►► Local effects importantLocal effects importantShifting productionShifting production

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1953 1963 1982 1989 1999m

mcf

Softwood Hardwood

Forest Growing Stock in the US South

SupplySupply----InventoryInventory

Hardwood

0

1000000

2000000

3000000

4000000

5000000

6000000

1952 1962 1976 1986 1991 1996 2002

Growth Removals Mortality

Softwood

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

1952 1962 1976 1986 1991 1996 2002

Growth Removals Mortality

Growth, removals, and mortalityRPA Data Base, including most recent data (2002)

SupplySupply----ConclusionsConclusions

►►Long period of investments in softwood Long period of investments in softwood plantations implies no short to medium term plantations implies no short to medium term reductions in supplyreductions in supply

Supply is a slow moving factorSupply is a slow moving factor

►►Recent declines in plantation investments Recent declines in plantation investments indicate long run adjustment to supplyindicate long run adjustment to supply

►►Localized inventory declines are likelyLocalized inventory declines are likelyUrban and urbanizing areasUrban and urbanizing areas

ConclusionsConclusions

ConclusionsConclusions

►► Markets are NOT going Markets are NOT going awayaway

South has advantage in South has advantage in USUS

►► Southern timber Southern timber markets are in a period markets are in a period of adjustment after of adjustment after rapid growth in the rapid growth in the 1990’s1990’s

This is demand drivenThis is demand driven►► Important changes in Important changes in

perspective and rhetoricperspective and rhetoricFrom scarce to plentifulFrom scarce to plentiful

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

S. Sawtimber S. pulpwood H. pulpwood other

Key Finding no. 1Key Finding no. 1

►►Demand growth has declinedDemand growth has declinedConsumption of Consumption of solidwoodsolidwood has not kept pace has not kept pace with growth in housing startswith growth in housing startsPer capita consumption of paper has declinedPer capita consumption of paper has declinedDemand for exports has declinedDemand for exports has declined►►Especially chip exportsEspecially chip exports

Long runLong run——population growth will fuel population growth will fuel expanding demand at a lower rateexpanding demand at a lower rate


►►Domestic timber supply continues to expandDomestic timber supply continues to expandArea of timberland roughly constant since 70’sArea of timberland roughly constant since 70’sIntensive management expanded Intensive management expanded Expansionary investment continued through the Expansionary investment continued through the 1990’s1990’sSupply adjusts with a long lag timeSupply adjusts with a long lag time


►►Net effect of demand contraction and strong Net effect of demand contraction and strong supply is a disproportionately large decline supply is a disproportionately large decline in price relative to harvests.in price relative to harvests.

Observed in pulpwood markets since 1998Observed in pulpwood markets since 1998Short run: likely to remain low unless demand Short run: likely to remain low unless demand expands considerablyexpands considerablyLong run: contraction of softwood investment Long run: contraction of softwood investment leads eventually to decline in economic leads eventually to decline in economic inventory and price increasesinventory and price increases


►►Patterns of investment in processing do not Patterns of investment in processing do not indicate growth in demandindicate growth in demand

SolidwoodSolidwood capacity is stablecapacity is stablePaper production capacity has declined since Paper production capacity has declined since the late 1990’s the late 1990’s ►►16% reduction in southern pulping capacity since 16% reduction in southern pulping capacity since

1997 indicates a sustained decline in demand1997 indicates a sustained decline in demand

Pulpwood prices may not rebound to midPulpwood prices may not rebound to mid--90’s 90’s levels in foreseeable futurelevels in foreseeable future


►►Low relative prices for pulpwood defines Low relative prices for pulpwood defines opportunities for producing other products opportunities for producing other products in the regionin the region

Ample supply of material for OSB and other Ample supply of material for OSB and other engineered wood productsengineered wood productsDownturns lead to restructuring of industry and Downturns lead to restructuring of industry and increased efficiency (creative destruction)increased efficiency (creative destruction)


►►Increasing hardwood pulpwood prices and Increasing hardwood pulpwood prices and decreasing softwood prices encourage decreasing softwood prices encourage substitution in paper productionsubstitution in paper production

Reversal of long trend toward hardwood in Reversal of long trend toward hardwood in paper productionpaper productionAlready observed in some operationsAlready observed in some operations


►►Imports of hardwood chips indicate a Imports of hardwood chips indicate a backstop price for hardwood pulpwood in backstop price for hardwood pulpwood in the regionthe region

Price that draws exports from South AmericaPrice that draws exports from South AmericaHas this ceiling been reached?Has this ceiling been reached?Will discourage intensive management of Will discourage intensive management of hardwoodshardwoods

Forest Management Implications Forest Management Implications

►► Landowners need more information regarding Landowners need more information regarding risksrisks

Physical AND market risksPhysical AND market risksEspecially Especially TIMO’sTIMO’s

►► Rapid changes indicate need for effective Rapid changes indicate need for effective monitoring monitoring

►► AfforestationAfforestation strategies are alteredstrategies are alteredMarginal croplandMarginal cropland——effective conversions?effective conversions?Restoration strategies?Restoration strategies?Defining low cost approaches that yield ecosystem Defining low cost approaches that yield ecosystem benefitsbenefits

Program ImplicationsProgram Implications

►►Importance of rhetorical changesImportance of rhetorical changes►►Without concerns for timber supplyWithout concerns for timber supply——

different perspectives on the role of forestrydifferent perspectives on the role of forestryEffects on program support?Effects on program support?Who supports programs?Who supports programs?

►►Loss of support for a large portion of Loss of support for a large portion of forestry researchforestry research

Long term effects on competitiveness?Long term effects on competitiveness?

Key UncertaintiesKey Uncertainties

►►TradeTradeExchange ratesExchange rates——strength of the dollarstrength of the dollarInternational demandsInternational demands

►►Housing MarketsHousing Markets►►Electronic media (the next generation)Electronic media (the next generation)►►Industry structureIndustry structure►►Ag policiesAg policies

Response of land to reduction in subsidiesResponse of land to reduction in subsidies

Thank YouThank You

►►Thanks to our economics task forceThanks to our economics task forceUGAUGATexas A&MTexas A&MMississippi StateMississippi StateFloridaFloridaNC StateNC StateUS Forest ServiceUS Forest Service

rapid assessment of market change in the south...trade--wood chips--imports brazilian imports of...

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