Balancing Supply & Demand
What’s It Going to Take to be More Profitable in the Tree-Growing Business?
By Marshall Thomas
Spring 2021
Spring 2021
Ponce City Market’s expansion project will include a four-story building constructed with cross-laminated timber.
Southern pine lumber prices reached all-time highs recently, which in the past would have been good news for tree growers in Georgia. But not now. The linkage between lumber prices and the prices paid for the trees used to make lumber has been broken by an oversupply of those trees.
Why do we have so much oversupply today?
In the 1980s, as we harvested trees naturally established in the decades following the Great Depression, we planted trees with genetically improved stock, using herbaceous weed control. We were doubling yields. There was real excitement about making money growing trees. And in response to the collapse of the farm economy in the same period, the Conservation Reserve Program (CRP) encouraged even more planting with government subsidies to take marginal crop land out of production, put it into trees and prevent erosion.
In Georgia alone, 600,000 acres of trees were planted in the late ‘80s, early ‘90s. These trees were planted on old field sites, so they grew much faster than the trees being planted on cut-over sites. We had another surge of planting in the late ‘90s in response to the good markets and demand shifting to the Southeast after the spotted owl was listed as an endangered species.
The trees planted in the late ‘80s and early ‘90s first hit the market in the early 2000s. This huge surge of wood onto the market really depressed the pulpwood market. Then, in the late 2000s, those trees planted in the late ‘80s entered the chip and saw market. Most recently, we’ve seen those trees create a huge oversupply of saw timber. That oversupply has been exacerbated by the post-2008 decline in housing starts, less demand due to greater efficiencies in the sawmills, and increased multifamily housing, which requires less lumber than single-family housing.
Working Through the Surplus
What’s it going to take to get back to a decent level of profit?
We have to work through the surplus of saw-timber-sized trees in this state. Based on current levels of growth and harvest, it doesn’t look like it will happen any time soon. But there are a few factors that could help get us there sooner.
The housing market continues to strengthen. If these higher levels of demand persist, that will help. We also need to see a shift back to single family units. It looks like the pandemic may drive that shift, with people seeming to want to get out of the cities and multi-family living. Single-family units use more lumber than multi-family units.
The big wild card is trade with China. They are big enough to close the gap between supply and demand. The widening of the Panama Canal, completed in 2016, opened the door for us in terms of accessing that market, with big ships returning from the U.S. to China. Containers are coming from China loaded, and a lot of empty containers are going back. That is an opportunity for forestry. Trade was building up prior to the trade wars, and it was building rapidly. If we can solve our trade woes with China, and get that going again, it will certainly accelerate a return to a supply-demand balance. It is a particular opportunity for Georgia because of the serendipity of our port proximate to trees. And southern pine is actually better suited than West Coast species for concrete forming, a primary use in China.
Continued development of new products, replacing things like newsprint, should continue to exceed lost products made from small trees. Mass timber buildings have the potential to increase demand for lumber as these buildings become more popular as a replacement for steel buildings, helping fuel demand for large trees.
On the supply side, ecosystem services, in this case carbon sequestration, may be about to help. Up until now, carbon projects have required very large acreage ownerships, and even then, the prices paid for carbon sequestration (holding trees rather than harvesting them) weren’t enough to entice many southern pine tree growers to participate. Viable programs targeted towards smaller landowners are emerging. And it looks like the demand for carbon is increasing to the point that prices could move up to levels that will entice even southern pine growers to consider lengthening rotation and carrying more volume on their forest, taking carbon payments in lieu of harvest payments.
Demand always impacts supply, but ecosystem services are a form of demand that immediately removes the trees from the market without building a house or a mass timber building. It can happen now. Housing and other demand might take 10 years to work through oversupply. With ecosystem services, you sign a contract, and it’s done.
As we begin the next decade, tree-growing profitability will depend on markets — the traditional strong housing and pulp markets, of course, but also the new markets for carbon and other ecosystem services. Resumed strong trade with China may be the biggest wild card there is for saw-timber tree growers. New products such as mass timber will help maintain demand. Unfortunately, the interest in sequestering carbon also has people talking about government tree-planting programs. But we have to be careful that well-meaning politicians don’t burden us with another CRP and its unintended impact on supply 30 years later. ■
Marshall Thomas is the President of F&W Forestry, a privately owned timberland management company operating throughout the U.S., South America and Europe.
Why do we have so much oversupply today?
In the 1980s, as we harvested trees naturally established in the decades following the Great Depression, we planted trees with genetically improved stock, using herbaceous weed control. We were doubling yields. There was real excitement about making money growing trees. And in response to the collapse of the farm economy in the same period, the Conservation Reserve Program (CRP) encouraged even more planting with government subsidies to take marginal crop land out of production, put it into trees and prevent erosion.
In Georgia alone, 600,000 acres of trees were planted in the late ‘80s, early ‘90s. These trees were planted on old field sites, so they grew much faster than the trees being planted on cut-over sites. We had another surge of planting in the late ‘90s in response to the good markets and demand shifting to the Southeast after the spotted owl was listed as an endangered species.
The trees planted in the late ‘80s and early ‘90s first hit the market in the early 2000s. This huge surge of wood onto the market really depressed the pulpwood market. Then, in the late 2000s, those trees planted in the late ‘80s entered the chip and saw market. Most recently, we’ve seen those trees create a huge oversupply of saw timber. That oversupply has been exacerbated by the post-2008 decline in housing starts, less demand due to greater efficiencies in the sawmills, and increased multifamily housing, which requires less lumber than single-family housing.
Working Through the Surplus
What’s it going to take to get back to a decent level of profit?
We have to work through the surplus of saw-timber-sized trees in this state. Based on current levels of growth and harvest, it doesn’t look like it will happen any time soon. But there are a few factors that could help get us there sooner.
The housing market continues to strengthen. If these higher levels of demand persist, that will help. We also need to see a shift back to single family units. It looks like the pandemic may drive that shift, with people seeming to want to get out of the cities and multi-family living. Single-family units use more lumber than multi-family units.
The big wild card is trade with China. They are big enough to close the gap between supply and demand. The widening of the Panama Canal, completed in 2016, opened the door for us in terms of accessing that market, with big ships returning from the U.S. to China. Containers are coming from China loaded, and a lot of empty containers are going back. That is an opportunity for forestry. Trade was building up prior to the trade wars, and it was building rapidly. If we can solve our trade woes with China, and get that going again, it will certainly accelerate a return to a supply-demand balance. It is a particular opportunity for Georgia because of the serendipity of our port proximate to trees. And southern pine is actually better suited than West Coast species for concrete forming, a primary use in China.
Continued development of new products, replacing things like newsprint, should continue to exceed lost products made from small trees. Mass timber buildings have the potential to increase demand for lumber as these buildings become more popular as a replacement for steel buildings, helping fuel demand for large trees.
On the supply side, ecosystem services, in this case carbon sequestration, may be about to help. Up until now, carbon projects have required very large acreage ownerships, and even then, the prices paid for carbon sequestration (holding trees rather than harvesting them) weren’t enough to entice many southern pine tree growers to participate. Viable programs targeted towards smaller landowners are emerging. And it looks like the demand for carbon is increasing to the point that prices could move up to levels that will entice even southern pine growers to consider lengthening rotation and carrying more volume on their forest, taking carbon payments in lieu of harvest payments.
Demand always impacts supply, but ecosystem services are a form of demand that immediately removes the trees from the market without building a house or a mass timber building. It can happen now. Housing and other demand might take 10 years to work through oversupply. With ecosystem services, you sign a contract, and it’s done.
As we begin the next decade, tree-growing profitability will depend on markets — the traditional strong housing and pulp markets, of course, but also the new markets for carbon and other ecosystem services. Resumed strong trade with China may be the biggest wild card there is for saw-timber tree growers. New products such as mass timber will help maintain demand. Unfortunately, the interest in sequestering carbon also has people talking about government tree-planting programs. But we have to be careful that well-meaning politicians don’t burden us with another CRP and its unintended impact on supply 30 years later. ■
Marshall Thomas is the President of F&W Forestry, a privately owned timberland management company operating throughout the U.S., South America and Europe.
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