It is no secret that amid the covid-19 pandemic, the US has experienced a huge upswing in new home construction and remodeling projects.
Unsurprisingly, lumber prices have skyrocketed to historic levels, and one might logically conclude the value of timber would move in lockstep, but that has not been the case. Timber prices have only risen in the low single digits, however, but the commodity is hopefully on the cusp of a long-term uptrend. It is the next chapter of a story that has yet to be told.
The current lag in timber stumpage prices versus lumber comes from a supply issue that traces back to federal and state government funding for mass reforestation programs in the 1980s. Trees planted in the 1980s and 1990s grew to maturity and were ready for harvest following the global financial crisis in 2008, but with new home building and construction in general at a crawl, final harvesting of many timberlands was delayed.
With more trees growing to maturity in the intervening years from post-recession to present day, the timber industry has been facing a significant growth-to-drain imbalance (the number of tons grown in comparison to the number removed) of wood products for more than a decade.
Improvements in forest management are also an important part of the equation. Scientific advances now allow more trees to be planted on timberlands than in the past and they grow better, healthier and faster.
Housing market could move the needle
Today’s construction boom is so strong that US sawmills are running at full capacity and can’t fill orders fast enough. However, there is still an oversupply of timber that can only enter the market when there are enough mills to create finished products. If the housing market remains steady and lumber prices remain high, capital expenditures to build new mills and expand existing operations should follow.
In fact, Forisk’s North American Forest Industry Capacity Database shows that US mill capacity has expanded by almost 5 percent in the past 12 months, with an additional 5-plus percent increase in capacity projected by end of 2021.
Increased production of lumber and other wood products will begin cutting into the timber supply and shift the supply-demand ratio to more traditional norms. Such a shift points to long term timber price appreciation over the next five to 10 years. We are of the opinion that timber is at or near a cyclical low and stumpage pricing should benefit from a more balanced ratio as additional milling capacity comes online.
Timber as an investment
When stock markets go through periods where they are setting new record highs and equities are growing by double digits, timber generally doesn’t attract broad interest from institutions or individual investors. However, in our opinion, an immutable truth about timber as an asset class is that it has historically been a low-risk investment with almost no price volatility.
Biology plays a major and rarely mentioned role in that trees aren’t affected by what happens on Wall Street. Whether markets are booming or sliding deep into recession, trees generally grow 4 to 6 percent a year, depending on location, which we believe makes timber a stable investment with very little downside risk. For a decade, timberland investors have been getting 2 to 4 percent of their returns from the pure, passive growth of the forest.
At Domain Timber Advisors, we strive to create timely strategies that take advantage of opportunities in micro-markets to potentially produce returns in the high single digits to low double digits. As stumpage prices move higher as expected in the years ahead, we believe the overall returns in actively managed timber funds should reflect the increase and offer attractive returns.
Jack Izard is vice-president, natural resources investment for Domain Timber Advisors, serving the company as timber portfolio manager and forestry analyst.