Disrupting the Forest Industry and Understanding the U.S. South
By: Brooks Mendell, Ph.D, Forisk Consulting November 20, 2018
We see and hear so much about consolidation in the forestry industry. As forest landowners and others in the industry develop business and investment strategy, how should we think about trends and changes in the forest industry? And where have recent trends left forest owners and wood-using mills in Georgia and the U.S. South?
Consolidation has increased in most forest industry sectors over the past ten years based on Forisk industry analysis. With the exception of plywood, all forest industry sectors across geographic regions have consolidated (Figure A).
Consider softwood lumber and the concentration of investment in the South. By the end of 2008, headed intothe housing crisis, southern softwood lumber capacity totaled near an alltime high of 19.5 billion board feet. Mill closures in 2009 and 2010 trimmed capacity to below 17 billion board feet (and utilization rates around 67 percent) before beginning a long recovery. In 2017, this capacity finally exceeded its 2008 total and continues to climb steadily (Figure B).
Investments in U.S. timberland or wood-using capacity occur in either established forests with mature wood markets or in areas that require development of the forests and/or wood markets. Forisk analysis of forest industry softwood capacity of nearly 1,700 wood-using mills in North America reveals that the U.S. South has clear advantages in the forest products end markets it serves.
People mistake forest investments as allocating capital to trees when you’re really betting on the work, needs andpreferences of people. We find that most of the “frictions” in timber markets are man-made: trade disputes, tax policy changes and immigration inconsistencies. As a result, we want to track and stay on top of confirmable physical facts to test ideas and our forest investment decisions. Simple frameworks for testing these ideas and identifying those which may prove most impactful help us manage risk, prioritize resources and communicate what we need from others.
How to Think About Disruptions
On October 10, Category 4 Hurricane Michael hit the Gulf Coast of Florida and moved through Georgia. The storm damaged more than 2 million acres of timberland at an estimated value of $763 million.
In August 2005, Hurricane Katrina, a Category 5 event, struck the Gulf States, brutally affecting homes, forests and infrastructure. In more than a decade since, we’ve anticipated — and sometimes experienced — many storms on Georgia’s coast. Such natural disasters can have both positive and negative impacts on timber markets. So how do we think about them?
Two simple questions rooted in economic fundamentals can help anyone in the forestry industry consider how disruptions might impact cash flows:
BIG OR SMALL? In other words, how impactful, whether positive or negative, would we expect this disruption or change to be on forest supplies or wood demand?
LONG OR SHORT? What is the likely duration, whether positive or negative, of this disruption or change on supplies or demand (in the market or industry)?
A small disruption in the overall market can have a big impact for a single forest owner. Disruptions that get handled on the ground via operations tend to qualify as shorter or smaller in this framework, while anything that requires a board meeting or an act of Congress better reflects longer-term disruptions affecting future capital allocation and strategic advantage.
Consider the two questions in the context of a hurricane:
BIG OR SMALL? Big event locally; devastating to some forests and damaging to many.
LONG OR SHORT? Short-term increase in supplies; negative impact on value.
A single Category 5 disruption degrades current values through temporarily flooding the local market with damaged timber. Research indicates the impact on stumpage values works its way through the system in 12 to 24 months. The event is short term because it did not change the long-term fundamentals of wood demand or forest ownership.
Brooks Mendell is the president and CEO of Forisk Consulting. He has more than 25 years of consulting, operating and research experience in the forest product and timber industries.
Georgia Forestry Magazine is published by HL Strategy, an integrated marketing and communications firm focused on our nation's biggest challenges and opportunities. Learn more at hlstrategy.com