Timber and mill investors readjust sights amid diverging US state fortunes

For timber investors, a sophisticated understanding of macro trends is crucial – but local knowledge is also paramount.

That is the message conveyed by the latest research produced by Forisk, a consultancy, which zooms in on price dynamics in Southern US states.

At one end of the spectrum, the company puts the Gulf states of Mississippi and Alabama, where it predicts sawtimber inventories to grow by up to 40 percent in the next 10 years, before stabilizing in 15 years.

At the other end are states of the Southeast – Florida, Georgia, South Carolina – and Louisiana, where inventories are expected to plateau, or even decline. In the middle are South Central and Atlantic states (Arizona, Texas, North Carolina and Virginia), with 10-year increases averaging 17 percent.

This will play out in rather different fashion for various kind of investors. In the Southeast, lower sawtimber overhangs will ease pressure on prices, benefiting timber investors. Elsewhere, in contrast, large surpluses will depress prices, favoring mill investors. Two of the largest manufacturers, GP and Interfor, have already moved to tap the opportunity by planning new mills.

In affected states, the overhang is set to last. “The recession reset the ‘normal’ relationship of supplies to removals in the South. Returning to pre-recession levels of inventory to removals requires Southern softwood lumber production to increase 50 percent beyond Forisk projections,” the firm said. “This would be roughly equivalent to the current lumber production of the entire US.”

In a performance update released this week, Forisk said its FTR index, which tracks four publicly traded timber REITs, had returned 18.05 percent in 2017, versus 19.42 percent for the S&P 500.