How the Surge in
Lumber Prices is Affecting Landowners
by Stephen J. O’Shea
COLLEGE STATION, Texas —
Lockdowns from the pandemic have led to some unexpected economic consequences,
one of which has been a surge in lumber prices. Sawmills shut down at the onset
of the pandemic, while Americans across the country – forced to work from home
– found the time and energy to remodel, renovate and, in many cases, relocate.
The result has been a case study in forest economics. Demand for lumber went
up, but supply went down: consequently, costs have skyrocketed over 300%.
In a simpler world, this would mean that everyday landowners
who grow and harvest timber on their property have become the beneficiaries of an
unexpected boon. But, as it turns out, timber prices (i.e. the price of felled trees
sold to sawmills as logs) haven’t changed at all.
“The struggles that landowners had in 2019 went into 2020,
and are now going into 2021,” said Jordan Herrin, an East Texas forester for
Texas A&M Forest Service. “Really, life for your timber producer hasn’t
changed much. It’s just been pretty steady.”
While steady might seem like a blessing in the wake of a
global pandemic, timber prices in Texas have been the same for almost two
decades. And that’s without taking into account inflation and other adjusted costs.
Sawtimber prices plummeted in 2008 from the housing market crash, and they’ve
flatlined nationally at about $25 a ton ever since. In Texas, that price has
crept up to an average of almost $30 a ton – approximately the same price for
timber in 2011 according to THIS report by Texas A&M Forest Service.
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THE CAUSE OF THE
DISPARITY
This divergence between the cost of timber and the cost of
lumber is counter-intuitive, to say the least; but the reality is that both are
part of incredibly complex, and surprisingly different, markets. Consumers set
the price of lumber based on the demand for processed wood and single-family
homes, while sawmills set the price of sawtimber based on what landowners are
willing to get paid.
The problem for forest landowners is the abundance of
ready-to-harvest timber. Mature trees being harvested in East Texas today are
likely between 30 and 35 years old. Thirty-five years ago, the U.S. was in the
middle of a government subsidized tree-planting initiative.
The Conservation Reserve Program was signed by President
Reagan in 1985 to “re-establish valuable land cover, help improve water
quality, prevent soil erosion, and reduce loss of wildlife habitat,” according
to the U.S.
Department of Agriculture. Working forests also sequester carbon, reduce the
impact of flooding, provide mental and physical health benefits for human
beings, and – once those trees are harvested – the land is reforested, so that
new trees can come in and provide all those same benefits time and again.
Despite all these advantages, the surplus of harvestable
trees is just one of many factors contributing to the flatline in timber prices,
according to Rob Hughes, the Executive Director of the Texas Forestry
Association.
“Landowners have been struggling to get their timber harvested
for a while,” said Hughes. “The mills are producing more wood than they have
before, but it’s still not to the capacity of how much timber is being grown in
their areas.”
A part of this divergence began with the housing crisis of
2008. Sawmills across the south had already been consolidating into fewer, more
efficient locations – but with the sudden pitfall in demand, the number of
sawmills were practically cut in half. In 1997, Texas had a total of 168 active
sawmills across the state. Today, Texas has about 50.
A simple solution to this disparity would be to increase
production capacity at current sawmills, and to increase the number of sawmills
across Texas and the south. However, the realization of that solution isn’t so straightforward.
Sawmills today are technical titans of industry that can take up to five years
to build. One mill recently constructed in Lufkin, Texas, is estimated to have
cost $200 million.
“It takes a lot of 2x4s to pay back a $200 million
investment,” said Hughes, referencing the mill in Lufkin. “If you’re going to
spend that much on a new sawmill, you’ll want to know that the demand is going
to last until you can start making money.”
Texas sawmills are currently operational. However, many are
struggling to operate at full capacity due to an unanticipated worldwide
shortage in computer chips, OSB glue and other things like machinery maintenance
parts. There has been a backlog of demand due to labor shortages, factory
shutdowns due to COVID tracing and an overall lag in mill-to-market production.
HOW IT’S AFFECTING
LANDOWNERS
The result is a buyer’s market. Landowners are competing
with each other not only to sell their timber for a reasonable price, but to have
their timber harvested in the first place.
“A lot of what these mills consume is coming from TIMO
(Timber Investment Management Organization) or REIT (Real Estate Investment
Trust) properties – basically, private investment groups,” said Herrin. “Those
really push out a lot of smaller landowners.”
Investment and industrial properties control around 38% of
working forestland in East Texas. But because they set a revenue target for the
year, many of them will continue to harvest through lower timber prices in
order to reach those targets. Since they have such large volumes of timber,
smaller landowners are left merely to supplement what the industry giants put
in.
“There are a lot of private landowners, especially on our
western fringe and in Northeast Texas, that are struggling to find a market for
their wood,” said Hughes.
Landowners without a market for their wood, or landowners
who don’t want to accept the low payments for their timber, are left with very
few options – and most of those aren’t promising.
OPTIONS FOR SMALL
TIMBERLAND OWNERS
A simple and obvious alternative for landowners is to wait.
Trees will continue to grow, and the larger the timber, the more it should theoretically
be worth – which is exactly what many landowners are counting on. However, that’s
not quite how it works in the modern timber industry.
“Sawmills are built for a certain size log, now,” explained
Hughes. “Once you grow it out of that size, there are fewer mills that will
take those logs. So it kind of exacerbates your issues, because you actually
limit your market the older and bigger your trees get.”
Hughes isn’t just speculating. This catch-22 has played out for
small timberland owners before. After the housing market crash of 2008, timber
prices plummeted, and many landowners who would’ve sold their timber delayed
harvest. The result was a surplus of bigger trees on the market, which caused
the price of those trees to drop, furthering
the cycle of the stunted timber market.
Some landowners do have another option, though – to
supplement their harvests by delaying them through carbon
markets. Carbon credits are bought by companies or governments to offset
greenhouse gas emissions. Typically, one carbon credit is issued for one metric
ton of CO2 – about the same amount of CO2 that one tree will absorb in 40
years.
The catch, however, is that those credits can only be issued
to timberland owners if their trees wouldn’t otherwise be there – i.e. if the
forest is at risk of being harvested. Then there’s the issue of carbon credit
contracts, which can restrict landowners from harvesting their timber for decades.
“There are a few contracts now that are just a one-year deal,”
said Hughes. “These seem more tolerable to the production-minded forest
landowners that we’ve talked with. You defer your harvest, and you get paid for
that amount of carbon as you sequester it.”
As these short-term deals become more popular, Hughes sees
them as a more viable option for landowners who want to supplement the price of
their timber.
The third option is for landowners to try and harvest their
timber now. For those with large tracts of land and staggered harvesting
periods, this may be the best option. But for small landowners who might only
harvest once in their lifetime, it’s a hard decision to justify – especially
when they’re struggling to sell their timber at all.
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LOOKING TO THE FUTURE
There is some hope, though. Sawmills across the south are
expanding their capacity to match the rising demand, and there have been
several announcements of new mills to be built. As these new mills become
larger and more efficient, they might match the demand for lumber across the
country – but it’s going to take time.
Even then with these expansions, there still might not be
enough production to correct the price of timber. The surplus of harvestable trees
has existed for decades now, and demand isn’t likely to climb high enough to
match that surplus. Rob Hughes, however, is staying optimistic.
“I think there is a light at the end of the tunnel,” said
Hughes. “It’s called ‘Commercial Mass Timber.’”
Mass timber is the use of engineered wood products as the
primary frame and structure for tall, commercial-style buildings. One category
of mass timber, cross-laminated timber (CLT), is so promising that it is
boasted to be as strong as steel, but lighter, more resistant to fire, easier
to install, and carbon-neutral. Cement alone contributes up to 8% of total
greenhouse gas emissions worldwide, according to think tank Chatham
House. Steel production, meanwhile, requires the burning of coal.
Several buildings in Texas have recently been constructed
out of mass timber, including the Soto
in San Antonio, Hotel Magdalena in
Austin, and a classroom building at San
Jacinto College – which will be the largest mass timber instructional
building in the nation. The largest mass timber building in the world, Mjøstårnet in Norway, is 18
stories tall and built entirely out of cross-laminated timber.
“If just a small percentage of the commercial building
market was mass timber, like CLT, then we would have to double the number of
sawmills in the south just to keep up with that demand,” said Hughes,
referencing a report by the Environmental Protection Agency.
The spread of mass timber wouldn’t just help the price of logs
for landowners – it would also help the environment. A higher incentive to grow
timber would lead more investors and entrepreneurs to forest land that might
have otherwise been used for commercial or residential purposes. This would
lead to more trees planted, which would contribute to overall carbon
sequestration, water and air purification, and the countless other benefits
that working forests provide.
Mass timber isn’t a new concept, though. It’s been around in
one form or another for decades. Hughes is simply hoping that advancements in new
technology, and the rise of CLT as an alternative to steel and concrete, might
help give the timber industry the boost it’s been waiting for since 1985.
If you’re a Texas timberland owner, contact a consulting
forester or your local Texas A&M Forest Service office for help and information
about carbon markets. You can also read the full report by the Forest Analytics
department at Texas A&M Forest Service HERE.
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Contact:
Jordan Herrin, Regional Forester, Texas A&M Forest
Service, jherrin@tfs.tamu.edu, (936)
564-9276
Rob Hughes, Executive Director, Texas Forestry Association, TFA@texasforestry.org, (936) 632-8733
Stephen O’Shea, Writer and Communications Specialist, Texas
A&M Forest Service, stephen.oshea@tfs.tamu.edu,
(979) 458-6649