Could hurricane recovery boost US timber returns?

The third quarter of 2017 saw tepid returns in US timber markets but demand drivers could boost performance in the medium-term, according to industry insiders.

In its quarterly index, the National Council of Real Estate Investment Fiduciaries said the 0.6 percent returns posted in Q3 fell beneath both the 0.7 percent returns of the last quarter and the 0.67 percent returns the index reflected in Q3 2016.

NCREIF highlighted that income, as opposed to appreciation, continues to play a key role in driving overall timberland performance, constituting 2.7 percent of the 3.28 percent returns reported over the trailing year ending in Q3.

“After three quarters of slight appreciation, timberland experienced depreciation of 0.15 percent in the third quarter,” NCREIF said.

Jack Lutz, a Forest Research Group economist, told Agri Investor that over much of the past decade, slowing US housing markets have motivated timber owners in the south-east to build inventory while owners in the north-west, where land is roughly doubly as expensive, have derived income from exports to China and Japan.

“The west has been selling a lot, but their numerator is bigger, so it starts being a mathematical game,” he said.

Lutz observed that some US timber markets could find support in demand for wood products stemming from Hurricanes Harvey and Irma recovery efforts in the Caribbean and US south-east.

“In Florida and Texas they had flooding and you have to strip those houses down to the studs because they will mold. They probably don’t need a lot of lumber, but they will need panels,” he said. “OSB [oriented strand board] panels and plywood need to be replaced, so there will be some demand for that and the south can respond to that.”

According to Random Lengths, a trade journal devoted to North American forest products markets, the OSB Composite Price rose 20 percent from the end of August to reach $500 during the week ending October 13.

Tipping point

A timber manager active in the US market told Agri Investor that while it is too soon to know exactly what impact damaged homes in the Caribbean and US south-east will have on demand for lumber and wood products, their firm is monitoring the situation.

“The panel products have seen the quickest bump and we certainly think that the repair and remodel markets in the short term are going to be bolstered. To the extent that some of that flows back down to the timberland owners remains to be seen, but it certainly has the potential,” the manager said.

He added that because sawmills and panel producers maintain their own inventories, it would likely take at least six months for any change in demand resulting from the recovery from hurricane damage to be reflected in the NCREIF Index.

“Depending on the strength of that demand, as soon as those mills work through some of their inventory, they are going to need to replace that inventory with logs from timberland owners,” the manager said. “To the extent that supplies are fairly tight, that’s when timberland owners start to see an increase in the price of timber.”