Wednesday, December 28, 2011

CellFor Files for Bankruptcy

CellFor, a producer of varietal loblolly pine showing impressive gains in growth, straightness and disease resistance, has filed for bankruptcy in Canada and for protection from creditors in the U.S.

The housing decline has resulted

Sunday, October 30, 2011

Some Timberland Transactions and Other Stuff

I've had several requests for an update on issues surrounding timberland investments and transactions to date for 2011 so I am posting a chart of the transactions of which I am aware. I will also make a comment or two on conservation easements and on who is

Monday, March 28, 2011

More Thoughts on Foreign Investments in Timberland

My last post generated a couple of comments that referenced FIRPTA (Foreign Investment in Real Property Tax Act) and the likely impact that the law would “keep Asian demand in U.S. timberland muted”. The law has been around since 1981 so I thought that I would take a look at what the impact of foreign investment on timberland has been to date.

At last weeks Timberland Investment Conference, Stephen Schrock with Manning, Morris & Martin, discussed the Agricultural Foreign Investment Disclosure Act which requires “Foreign investors who buy, sell or hold a direct or indirect interest in U.S. agricultural land must report their holdings and transactions…” Agricultural land includes timberland as well. Penalties for not reporting can be very severe (25% of the fair market value of the land). The USDA Farm Service Agency compiles the data and produces an annual report summarizing the data.

Two comments from the summary of the current report:

  • “Forestland accounted for 59% of all foreign held agricultural acreage…”
  • “Foreign holdings of U.S. Agricultural land were relatively steady from 1999 through 2006; between 2006 and 2007, there was a significant 3.6 million acre increase and between 2007 and 2008, there was an increase of 1.4 million acres. Between 2008 and 2009, there was an increase of 1.3 million acres.”

The total numbers can somewhat mask what has happened with timberland alone but the graph below tells the story pretty clearly.

Trends in Foreign Holdings of Agricultural Land by Type of Use For the Period 1999-2009

I have to interpret the graph as saying that FIRPTA may have an impact but that it certainly does not prevent foreign investment in U.S. timberland. You can read the entire report here.

So that’s the past. What does the future hold?

From my own personal experience, I can assure you that there remains a strong foreign interest in U.S. timberland by both European pension funds and Asian investors. I suspect that the acquisition of pulp and paper mills by the Chinese will continue and I suspect a few sawmills will get thrown into the mix too. And I can’t imagine that the option of vertical integration of pulping operations is not on the table and that timberland ownership will not be the result. Is that good or bad for us? Ask the employees of the pulp and paper mills in Woodland, Maine, Halsey, Oregon and Potsdam, New York. The Asians supply the capital and the markets and we get the jobs. It might not set well at first blush but that’s a reversal of the way things have been and that’s not such a bad thing.

And remember, as we have seen domestically during the past year, all investors are not institutional or industrial! There are some very large investments coming from the high net worth individuals and families that have changed the market. We MAY be on the edge of another significant change in the ownership of U.S. timberland and whatever implications that may bring. --Brian
Visit my Timberland Strategies web site

Wednesday, February 9, 2011

Will the Chinese Start Buying Timberland?

In a conversation surrounding timberland investments with Steve Wilent, editor of The Forestry Source, a couple of days ago, the subject of foreign investment in timberland came up. It's pretty well known that there are significant investments being made by the European pension funds. But what about the Chinese that are going all over the world tying up commodities. The Chinese have put a very high priority on vertical integration to assure they have the raw materials necessary to supply their industries.

It is estimated that the gap between China's domestic wood supply and total demand will reach 150 million cubic meters (roundwood equivalent) by 2015. For perspective, that is more than the entire Canadian harvest. Where will the wood come from? They have greatly expanded their domestic paper mill production but where will the pulp come from? We ship them a lot of waste paper but that is not going to do the job.

So..., will they move production to the U.S. and vertically integrate their operations (paper mill to pulp mill to timberland)? If so, when does it start? Just in case you were not watching, it already has begun! Following are extracts from three news releases. --Brian

From the Bangor Daily News, Dec. 21, 2010: 

New Woodland mill owners investing in facility’s future

WOODLAND, Maine — The new owners of Woodland Pulp LLC, formerly Domtar, are investing in new energy efficiencies at their pulp mill using state and federal funds, Gov. John Baldacci said Tuesday.
Baldacci stopped in to visit the mill Tuesday morning, and offered whatever assistance the state could provide to assist the new owners, IGIC of China and Taiwan, to ensure the mill’s security and expand.
The facility’s director, Bert Martin, said the company’s future was finally secured with the change in ownership. “Christmas actually came here on October 1,” he said, referring to the date the mill was sold.
“We now have an owner that wants this mill,” he said. “This lets our people know they will have a job next week, next month and next year. I think the mill today is in a very good position.”
Martin said 300 people now work at the mill and that up to 10 more people will be hired at the start of the new year.
“This mill was in jeopardy of closing,” Baldacci said after a private meeting with company officials. “Domtar had made it very clear the mill was not part of their core mission and had been actively pursuing other investors and new owners.”
Baldacci called the mill “the lifeblood of Washington County” and said that each mill job represents another three or four jobs in the region, such as clerks, waiters and bank employees. “The ripple effect is huge,” he said, noting the mill has an annual payroll of $20 million to $25 million.
Martin said that the mill is using 1.5 million tons of fiber annually, pulled from every region of Maine and New Brunswick. “We generate jobs all over the state,” he said.
From, Feb 4, 2010

Hong Kong corporation buys Oregon pulp mill

 A Chinese company hoping to expand into the North American forest products business has purchased Cascade Pacific Pulp, LLC, a pulp mill at Halsey in the lower Willamette Valley. 
The sale to Hong Kong-based International Grand Investment Corporation could be a first in Oregon, which has not seen many foreign owners in the wood products industry. 
The Halsey mill had been owned by one of Oregon's most storied forest products companies, Pope & Talbot, which went bankrupt in May 2008 after 160 years. 
"I'm not aware of any other mill with owners in China," said Ray Wilkeson, president of the Oregon Forest Industries Council, an industry trade group. "It would not be surprising to see more of that in the future." 
The purchase of the mill, for an undisclosed price, is also a first for the Hong Kong company. It mainly has acted as a trading company, buying pulp from all over the world to sell to customers in China, Wayne Henneck, president of Cascade Pacific Pulp, said Wednesday. 
It could signal a new shift in the industry as China's growing demand for paper products fills a void left by a shrinking market in the United States. Sales to Asia now make up about one-half to two-thirds of the Halsey mill's business, Henneck said. 
"The (Hong Kong) company is integrating vertically," said Henneck, who will remain president. "The Asian markets have been very hot. This is the first mill they'll own in North America. It may not be the last." 
International Grand Investment Corporation was just incorporated in Delaware in December 2009. 
In the past two years, the Halsey mill has gone through a roller coaster of ownership changes, creating uncertainty for its 170 workers in an area with some of the state's high unemployment. In Linn County, the jobless rate was 13.5 percent as of December 2009. 
But Henneck says he sees the sale as providing some stability for the mill, which is seeing an uptick after spells of downtime during the recession. The mill produces over 180,000 tons of bleached and unbleached pulp per year for use in various paper products and building materials. 
The mill's previous owners, a Minnesota private equity firm called Wayzata Investment Partners, won the mill for $31.2 million in an auction in June 2008. But it refused to recognize the union for months, creating workplace tensions. 
"The private equity firm always intended to buy distressed companies, get them on their feet and sell them," Henneck said. "They were not interested in pulp and paper. These are strategic owners who are interested in what we do." 
Union leaders said no workers will be affected by the ownership change because of a protective clause in their contract. Rumors had been flying for months that a new owner was on the way. 
"Everyone's feeling good," said Ernie Lamoureux, a staff representative for the United Steelworkers. "The pulp market is still pretty good. They're selling a lot of it to China." 
Wilkeson said that China's continuing growth will likely shape the forest products industry in Oregon and the United States for years to come. 
"There's no question they're going to be a big dog," Wilkeson said. "It's a competitive world, but there's another side to the coin. There's also a lot of demand."
Potsdam paper mill exporting products, technology
Tuesday, August 3, 2010 - 12:01 pm
UNIONVILLE – Potsdam’s century-old paper mill is working to develop new technology that its owner may use in paper plants in China.
Meanwhile, Potsdam Specialty Paper General Manager Ron Charette says the plant worked through a drop in sales that swept the whole industry, and is now back to pre-2008 production levels running three shifts with four crews.
Seafront Specialty Paper, which bought the mill from MeadWestvaco two years ago and dubbed it Potsdam Specialty Paper Inc., is a holding company based in the British Virgin Islands. Seafront has offices in Hong Kong, New York and Toronto, and is chaired by Kenny Chang, also a major stockholder. The Potsdam mill is on Sissonville Road along the Raquette River.
One of Seafront’s major aims is to develop products and procedures that would be put into use in paper mills it plans to acquire in China.

Friday, February 4, 2011

Weyco Earnings and Timberland Sale

Weyerhaeuser finally announced the results of the sale of the 82,000 acre block in SW Washington. The buyer is HTRG which payed about $200 million or $2,439 per acre. Weyerhaeuser says "While the land sold is high-quality, productive timberlands, it no longer fits our long-term strategic plan." Apparently the the species composition is low to Doug Fir, which is managements focus, and that is why this particular block was selected for sale. I suspect that the fact that the sale brought in $200 million with $150 million going to the bottom line was the real critical driver behind the sale. It has been a tough time for Weyco and they need to convince investors that they can pay a consistent and reliable dividend. Read the news release here.

Weyco also posted earnings this morning. Net earnings for Q4 were $171 million which illustrates just how significant the $150 million gain on the land sale is (note that the gain will not show up in the financials till Q1 of 2011). Earnings for the year were about $4.00 per share but a full 83% of that came from tax adjustments resulting from the conversion to the REIT. 

It looks as if Weyerhaeuser has turned the corner. It has been hard to analyze the numbers due to all of the asset sales, charges and REIT conversion but it does seem that they are now actually profitable. The timberland segment is slowly improving - mainly from improved stumpage prices in the Northwest. Wood products remain the major earnings drag but losses have been reduced somewhat. They have contained the bleeding from the Real Estate segment and are producing solid profits from the Cellulose Fibers group. Here are links to the earnings announcement and some supporting slides for the conference call.

Land sales will remain the ace in the hole to assure dividends but I am going to guess that Weyerhaeuser will play it sparingly. --Brian

Visit me at Timberland Strategies.

Tuesday, January 25, 2011

A Big Conference and a Big Timberland Transaction

The Conference:
Every other year the University of Georgia's Warnell School of Forestry and Natural Resources hosts, what in my opinion, is the best conference out there that deals with timberland investment. The speakers are always excellent and represent the full spectrum of views and perspectives on the future outlook for timberland investments. This year's conference will focus on global wood markets and trade and the opportunities that have been created for both international and domestic timberland investment.  Another focus will be the impact of the domestic housing market.

    Topics for this year's Timberland Investment Conference include:
  • The Affects of the Housing Market Recovery on Wood Demand
  • Global Timberland Investments & Markets
  • Back to Basics Timberland Management
  • Timberland Appraisals Issues
  • Legal Considerations for Forestland Ownership
  • Global Trade Developments
The conference dates are March 23 - 25 with an optional tour to be held on Plum Creek's land on the 22nd. If you are interested in attending, information on speakers, etc. and registration info can be found here. I hope to see you there.

The Timberland Transaction:
Maine's "Bangor Daily News" is reporting that the 900,000 acres of former I-P land that went to GMO is getting ready to change hands again. The reported buyer is BBC Land LLC which is controlled by John Malone of Englewood, Colorado. He is "chairman of Liberty Media, an Englewood-based company with diverse media interests that include the cable channel QVC, the travel website, the Atlanta Braves baseball team and Sirius XM satellite radio."

He reportedly already owns 1.2 million acres of which 68,000 acres is in Maine. The deal is expected to close on Feb.1. Read the entire story here.

Best Wishes. --Brian

Sunday, July 18, 2010

Seeing the Forest for Its Hedges

Under the category of shameless self promotion, here is a link to an article in last Sunday's New York Times written by Tim Gray and entitled "Seeing the Forest for Its Hedges".  It discusses different options for investing in timberland (TIMOs, REITs, ETFs and direct investment of smaller tracts). --Brian

Thursday, July 1, 2010


In discussions with newcomers considering investments in timberland or the publicly traded timber REITs, I frequently find that there is substantial misunderstandings about what a TIMO is and what the TIMO role is in the investment community. This backgrounder is intended to answer those questions. For a much deeper understanding of TIMOs, here is a link to an outstanding and in depth report prepared by Cliff Hickman with the U.S. Forest Service. It was prepared in early 2007 so some of the numbers are out of date but, other than that, it is the best researched report on TIMOs and REITs that I have seen.

What is a TIMO?

A Timberland Investment Management Organization. Note that the first word is timberland, not timber as it is so often written. There is a big difference. Timber refers to trees, timberland is land with trees on it! Many news articles in well-known financial news publications (WSJ, Barron's) have confused the two in recent years, which has led to significant confusion surrounding pricing and values of timberland. The second key point is that TIMOs do not own land; they buy land, manage it and sell it for their clients. They have teams experienced in both forest management and portfolio management. For this advice and service, they charge a fee.

Some history…

During the 1980’s, institutional investors began recognizing the value of adding timberland to their portfolios. By the early to mid 1990’s, there was a call by many analysts in the investment community for the pulp and paper companies to monetize their timberlands to reduce debt. More favorable federal income tax rates and accounting policies applied to the TIMO’s clients than the pulp and paper companies, which made the timberland more valuable for the former compared to the latter. Growth of the TIMOs was rapid as investors sought to acquire timberland and the pulp and paper companies sought to dispose of it. The companies that did not sell their land generally converted to the REIT form of corporate structure to provide higher after-tax returns for their shareholders.

Who are the TIMO’s clients?

They are large institutional investors with a focus on financial objectives, many of which are tax exempt. Specifically:
  • Pension funds
    • Public retirement systems (CalPERS, the California public employee retirement system, was one of the first and largest timberland investors). European pension funds invest in U.S. timberland also and U.S. funds own timberland in other countries.
    • Corporate pension funds
  • University endowments (Harvard and Yale were among the first institutional timberland investors)
  • High net worth individuals and families
  • Hedge funds
  • Foundations

Note that the clients are all large investors.  The largest clients generally acquire land in separate accounts while some of the smaller clients participate in accounts with commingled funds. TIMOs are not structured to accommodate most individual investors (there are other good options for individuals though).

How do TIMOs differ from the so-called Timber REITs?

TREITs, or Timber Real Estate Investment Trusts, own the timberland, TIMOs do not. The publicly traded TREITs are Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and soon to be Weyerhaeuser (WY). The tax structure for REITs allows the profits to be passed through to the shareholders avoiding the double taxation associated with the C corporations. That tax efficiency is why Weyerhaeuser is converting to a REIT.

How much timberland do the TIMOs manage?

The TIMOs manage approximately 25 million acres worth more than $30 billion. The three REITs (not counting Weyerhaeuser) own about 11 million acres worth about $15 billion. Including Weyerhaeuser, the REITs own about 17 million acres worth about $28 billion.

Who are some of the TIMOs?

Below is a list, in alphabetical order, of some of the largest TIMOs. All of them have web sites that you can google to get additional information about them.
  • Conservation Forestry
  • Forest Capital Partners
  • Forest Investment Associates
  • Forest Systems
  • Global Forest Partners
  • GMO Renewable Resources
  • Hancock Timber Resources Group
  • Lyme Timber Company
  • Molpus Woodlands Group
  • ORM/Pope Resources
  • Resource Management Services
  • RMK Timberland Group
  • The Campbell Group
  • The Forestland Group
  • Timberland Investment Resources
  • TimberVest
  • Wagner Forest Management

Are there differences between TIMOs?

Yes. They have different investment philosophies that appeal to investors with differing objectives. For example, The Forestland Group invests primarily in natural forests, particularly hardwood. The Hancock Timber Resources Group puts an emphasis on forest technology to improve timber yields and financial returns. Some TIMOs focus on acquiring “conservation land” or land that can have “conservation easements” quickly sold and separated from the fee ownership. Some TIMOs have good information systems with strong financial controls and some do not. Some conduct field audits, some do not. Some have outstanding technical groups in-house, some contract it outside. Some manage the timberland themselves and some contract with consulting foresters. All of these issues should be weighed by investors and the right TIMO selected based on the objectives of the investor.


Monday, June 21, 2010

New Timberland Transaction Update

The pace of timberland transactions is still pretty slow but they are occurring (about 500,000 acres since my update last fall) and prices do not appear to have dropped below those of late last year. I think the 10% - 15% decline estimate (from the peak)  is still pretty solid. In some places it is more than that, some locations, less. The NCREIF index continues to show declining timberland values but the total decline from the peak is only about 7% as of the end of Q1. The capital appreciation component of the index, which measures change in market value, fell 6.17% last year and another 0.84% in Q1. Given the lagging and "smoothing" nature of the index, we will probably see it continue to decline modestly.
The list below represents the significant transactions since my last update.

Changing discount rates used by buyers and sellers are the key to changing timberland valuations. As discount rates go up, valuation goes down.

The 2009 Q4 Brookfield Global Timberlands Research Report, distributed by Forestweb, stated that "Most appraisers are currently applying discount rates of + 6.0% (real) ...  This represents an increase of 25 - 100+ bps Y/Y which should equate to a 4 - 15 percent reduction in timberland values when using a discounted cash flow analysis." In a presentation earlier this month by Plum Creek at the NAREIT Institutional Investor Forum, they estimated that discount rates have increased by about 1% which would put it right at the 15% reduction. On the other hand, a recent article discussing office building REITs suggested that discount rates were actually beginning to move down!

The graph below, which shows the relationship between discount rates and timberland prices, was produced by Jim Rinehart with R&A Investment Forestry.

Jim cautions that there are some inherent weaknesses in the individual data points due to the way the data was constructed. Be that as it may, the value of the graph is in the trend lines. And the trend is clear. The graph was taken from a paper titled "U.S. Timberland post-recession. Is it the same asset?" The paper is well worth reading and can be downloaded from his web site here.

The clear point is that there remains uncertainty in the market about discount rates and the direction of timberland values. My personal opinion is that we will not see big shifts in either direction in the short run but you had better pay attention to what is happening. Remember, timberland is not a very liquid investment as has been borne out by the limited transactions being reported.

If I have missed any sales, or have any errors, please send me an email at As always, comments and differing opinions are appreciated (especially when supported by facts!). --Brian

Visit my web site at

Wednesday, June 16, 2010

A Matter of Perspective

Forestweb reported today on some new statistics from the UK Statistics Authority/Forestry Commission. The total area of woodland in the UK is 2.85 million hectares.

To put that in perspective, the total woodland area of England, Wales, Scotland and Northern Ireland is roughly the same size as Plum Creek's timberland holdings in the U.S.

Think about that from the perspective of where the wood will come from in the future. --Brian

Thursday, February 18, 2010

National Forest Timber Management: Problems and Solutions

 Today's post is by a guest author who will expound upon my last post concerning the management of our National Forests. Mac McConnell is an "old time" forester who graduated from Penn State/Mont Alto back in 1943 (not a typo) and  spent the next 30 years with the U.S.Forest Service, working  in the southeast and specializing in timber management.  Following his retirement, Mac got a couple of advanced degrees (Urban and Regional Planning and Sociology) and spent time with the Peace Corps in South America.  As a consultant in Energy Biomass Management, he maintains his interest in Forest Service doings and considers himself a "constructive critic" of that organization. --Brian

National Forest Timber Management Problems and Solutions
W.V. (Mac) McConnell, U.S. Forest Service Ret.  (1943-’73) 

This website’s recent comments on the drastic decline in National Forest (NF) timber harvesting over the past 30 years has raised a few eyebrows and prompted some of us to look at what’s happening in our own backyards.  For those of you who missed that post, here’s the graphic showing the NF harvesting  record.

 My “home” forest, the Apalachicola NF, is the largest (576,000 ac.) of the three National Forests in Florida, and timber management problems are typical of those in the entire NF system.  They include insufficient funding and manpower, endangered species concerns, excessive environmental studies, and over-detailed environmental assessments.  Unlike many forests, they have a solid market for all products (including 2 operating biomass-fueled power plants), an extensive prescribed burning program (947,000 ac. in the past 10 years), and cordial relations with the environmental community.  With these favorable conditions, you’d expect at least modest timber production.  Not so!  Here’s what happened during the ten year planning period that just ended.

This failure to perform has had many of the expected social and economic impacts: stressed local governments and schools,   jobs lost, and families disrupted.  Silvicultural impacts have been significant; timber stand mortality has increased and quality growth has decreased.

One unexpected environmental effect has been the decline of the endangered red-cockaded woodpecker.  This bird requires open park-like stands of older pine trees.  The imbalance of growth and harvesting shown in the previous graphic has resulted in increasing stand density and an estimated decrease of some 67,000 acres of high-quality habitat.  Here’s what the record shows.

Other forests have had similar problems with endangered species and other valued wildlife.   On The Ocala NF, failure to harvest has resulted in a 10,000 acre decrease in early successional habitat in the sand pine type.  This habitat is critical to the nesting of the scrub jay, an endangered species found only in Florida and especially on the Ocala.  In North Carolina, on the Pisgah and Nantahala NFs, ruffed grouse populations have declined as habitat has dwindled, (see graphic).

What to do?  Here are some suggestions that could help solve the problem.

  • Simplify Environmental Impact Statements (EAs). (probability of success  - excellent)
  • Outsource field work and writing of EAs and sale prep. (prob. - good to high)
  • Reorder forest priorities and shift funds. (Prob. - unknown) 
  • Secure Congressional approval for NFs in Florida and other selected forests to test the feasibility of timber program self-financing as is now done on DOD land (Title 10, USC 2665.) (Prob. unknown) 
  • Secure adequate congressional funding. (prob. - zero to very low)

When all else fails: 

  • Transfer/sell manageable timber land to other federal, state, NGO, or private entities with restrictive covenants and convey the balance to the State or U.S. Park Service. 
  • In my opinion, the most promising long-term solution lies in the 4th bullet above: a system of self-financing for the timber sale program.  Here are some Pro and Con arguments that have been advanced.  Remember: These are arguments.  They may or may not be factual.  They may or may not be relevant.
    • Will provide the means, not now available, for the U.S. Forest Service to follow Congressional direction for resource management as expressed in the National Forest Management Act of 1976, the Endangered Species Act of 1973, and related legislation.
    • Will help insure continued economic survival of N.F. dependent counties after the expiration, in the year 2011, of the Secure Rural Schools and Community Self-Determination Act of 2000.
    • Will create jobs and stimulate the economy.
    • Will allow increased local participation in decision making through Resource Advisory Councils.
    • Will provide an incentive for efficient management and will be budget neutral or positive.
    • A trial run of the program on selected forests will allow an assessment of its impacts on the Federal budget and returns to the treasury, on the social and economic condition of counties, communities and forest industries, and on the quality of resource management.   
    • The concept is simple, easy to apply, and has been thoroughly tested on timberlands managed by the Department of Defense.
    • Will reduce Congressional oversight over National Forest management and control over the expenditure of federal monies. 
    • Will result in negative “scoring” in returns to the treasury and in an increase in the public debt.
    • Will encourage continued dependency of Forest Counties on the Federal Government and discourage self-sufficiency and problem-solving through private enterprise.
    • Will promote unrestrained, irresponsible logging and massive resource damage.  
    • The concept is non-traditional to and untested by the Forest Service. 

In conclusion: 
While conditions on the Apalachicola National Forest are representative of the National Forest System and the basic management principles involved are applicable nationwide, the adverse economic, social, and mortality (fire and insect) impacts of under-management on Western National Forests have been much greater than on those in the East.

For those wishing to research conditions on their local Forest, growth and mortality data for all National Forests are available on-line from the U.S.F.S. Forest Inventory and Analysis program.  Your local Forest Supervisor can provide information on planned and harvested volumes.

This post is a condensation of Timber Resource Management: A Look at the Record a presentation that can be downloaded here in Powerpoint format.

Thursday, February 4, 2010


The following post was originally published by Timber-Mart South 4th Quarter 2009 -- Vol. 14, No. 4, January 2010
I was recently asked to speak at the North Carolina Forestry Association’s annual meeting in Myrtle Beach on the above captioned topic. Before agreeing to the talk, I had to think about it for a while. The quote “Its tough to make predictions, especially about the future” attributed to Yogi Berra, as most quotes are, hung in my mind for a few days. But I took a shot at it and later agreed to share some of those thoughts with TMS readers.

First, there has to be a basis for the prediction. The basis that I chose was to look at the changes occurring in the forest industry and to look at what I thought the future economic environment might look like.

The three key changes in progress are:

1.    Changing Timberland Ownership
2.    Biomass for Energy
3.    Global Industrial Revolution

Timberland Ownership: The shift in ownership (from forest industry to institutional) is well documented and well underway so there is no need to spend time on it (maybe a couple of comments!). Due to the housing/lumber market collapse, timberland owned by the sawmill industry is following in the footsteps of that formerly owned by the pulp and paper industry. This is illustrated by the timberland ownership shifts of Allegheny Wood Products and Anthony Forest Products to TIMOs. Survival can be tough. The second point is that the institutional owners have no allegiance to a mill so the wood will flow to the highest bidder.

Biomass for Energy:  This is not a new thing but its impact is changing and the magnitude of the issue is not universally well understood so it merits significant discussion. There are three drivers pushing the biomass market shift.

  1. Renewable Energy: The desire to shift to energy sources that we cannot “run out” of. Many states already have legislated renewable energy targets and biomass, particularly in the Southern states, is playing a key role toward the advancement of those goals.
  2. Climate Change: The desire to shift away from energy sources that add to the perceived problem of man caused global warming. Burning wood is carbon neutral when viewed from a carbon cycle perspective. This appears to be more of a political issue than a scientific one but that is irrelevant to the outcome. Pellet exports from the U.S. to Europe increased over ten fold last year fueled by carbon taxes in EU countries. If Cap and Trade is passed here, expect to see an even greater shift from coal to biomass by utilities.
  3. Energy self-sufficiency: This is the most important concern from my perspective. It is significant from both national defense and economic security points-of-view.

So where will this biomass come from? The primary sources of woody biomass are manufacturing residues, harvest residues, urban waste (construction, etc.), pulpwood and short rotation crops grown specifically for biomass. I have looked at available manufacturing residues for multiple clients and there is just not a significant amount available. It is virtually ALL being used and most of it is used by the forest industry to produce products or energy. Harvest residues are there BUT, as the pulp and paper industry knows, harvesting residues is expensive, they have a negative impact on mill processing and they produce a product of inferior quality and value. These traits are equally true for pellets and pulp. I don’t know much about urban waste but there is less of it with the housing market decline. So that leaves pulpwood and that is where the bulk of the woody biomass resource will come from.

To better understand the magnitude of potential biomass demand, let’s look at some of the new facilities.

A Pellet Mill: The pellet mill in Cottondale, Florida started up in April 2008 as the largest pellet production facility in the world. One hundred percent of the plant’s production is for export to Europe where the pellets are mixed with coal to reduce carbon emissions in the production of electricity. The driver behind it is the European carbon tax applicable to coal but not the carbon neutral wood pellet. The plant produces 560,000 tons of pellets annually and consumes about 1,000,000 green tons of wood. The resource used is not “residue” - it is pulpwood. This facility is the equivalent of a new pulp mill.

Cogeneration: This is certainly not new in the forest industry as our pulp mills have been doing this for a long time. What is new is the magnitude of the projects. Industry is expanding the use of cogeneration, schools are installing the systems and one village in Pennsylvania is building a system to use the steam to heat all of the houses in the village as well as supplying the electricity to them. An industrial example is the Sonoco / Peregrine Energy Corporation plan to develop a new $135 million woody biomass-fueled cogeneration plant in South Carolina. Plans are for Peregrine to construct a new 50-megawatt capacity facility that will be capable of generating enough electricity to power approximately 14,000 homes. The new biomass-fueled cogeneration facility will replace Sonoco's existing coal-fired boilers. Peregrine intends to sell the entire electrical output and all renewable energy certificates associated with the plant to Progress Energy Carolinas, Inc., and low pressure steam from the plant to Sonoco for use in the manufacture of recycled paperboard and other converted products. “The project would benefit the regions' forestry industry by utilizing pre-commercial thinnings and waste logging residues as the woody biomass fuel for the project.”

As a rule of thumb, a 100-megawatt plant will consume about a million green tons so this facility will consume about one-half of that but that is still a lot of precommercial thinnings!

A Coal Fired Power Plant: This one really caught my attention. The power companies are struggling with the renewable energy standards. In the East, there is limited opportunity for wind, solar or geothermal so biomass is about the only alternative left (hydro is out for a multitude of reasons). FirstEnergy at Shadyside, Ohio has announced its conversion from coal to biomass. The largest proposed development to date had been Yellow Pine Energy's 110 MW project in GA, a million-plus ton/year wood consumer. FirstEnergy’s is 312 MW and will consume 3 million green tons! This is on a par with the South’s largest pulp and paper mills.

The sheer quantity and magnitude of the announced facilities similar to the examples above is staggering from a resource consumption viewpoint. Not all of them will come to pass but it is very clear that enough of them will reach production levels that will greatly impact the future supply/demand picture for forest products.

Global Industrial Revolution:  The third key change, the global industrial revolution, is well under way but it may never be realized. All of the developing nations have ambitions to reach the standard of living with which we are blessed but the commodities, the natural resources, are just not there to reach that level on a global basis. Commodity shortages, particularly oil and other transportation energy sources, will prevent the world from reaching the level that we have obtained and, more than likely, those same shortages will prevent us from maintaining that level. Escalating transportation costs will cause us to revert back to a society much more dependent on manufacturing. It is significantly less expensive to ship dried lumber than logs.

The three key changes mentioned above combine with a couple of additional economic factors to create the drivers that define my view of our economic future. The drivers are:

  • Social drive for renewable energy, energy self-sufficiency and climate change
  • High energy costs- The key cost escalator
  • High Inflation Rate (perhaps hyperinflation) driven by:
        * Very high government spending
        * Very high oil prices
        * Commodity shortages, including timber
  • Declining Value of Dollar (see Figure 1)

 The Future of the Pulp Mill: Domestic paper demand will continue its downward trend but I am not as pessimistic about the industry’s future as most people are. The continuing decline in the dollar, although very bad for the consumer, will have a positive impact on the pulp and paper industry. The export market will be much brighter. A great deal of capacity has already been taken out of the market. Although bio-refinery economics are very unclear at this time, more capacity may come out as some mills are converted from pulp to production of “of ultra-clean, renewable motor fuels”. As the energy transportation costs rise, it may be cheaper to burn pulpwood for energy and to convert black liquor to transportation fuels. The key driver is the future price of oil and that may be considerably higher than the current consensus. The major downside for the pulp and paper industry will be the competitive demand for wood. Wood is both its raw material and its energy source and the power companies are going to be very tough competitors.

The Future of Sawmills: Despite the doom and gloom about future housing, domestic lumber demand driven by housing demographics still looks good after the excesses have been worked off. The Global Industrial Revolution combined with a weaker dollar will create a very positive manufacturing and exporting environment for sawmills. Global housing and lumber demand will be high and the U.S. will be one of the key suppliers. Very high energy costs make it more cost effective to ship lumber than logs to export markets, reversing the current norm.  There will be a much more competitive market (higher prices) for mill residues. Consistent and steady demand from biomass consumers will provide a steady supply of logs from producers. Things couldn’t look much better assuming there is a mill somewhere that survives the current crisis! It’s always darkest before the dawn.

The Future of Biomass Consumption:  Biomass utilization is a game changer in the forest industry because of the sheer quantity of biomass that will be utilized. Many schools in cold climates are heating with wood chip boilers today and they are saving money without any subsidies (and this is spreading to the warmer South as well). European villages have moved in that direction and some Canadian and U. S. villages are capitalizing on their experiences. The developing demand by the power companies seems so huge as to be unsustainable. Transportation cost increases will work against the large biomass programs such as the 3 million G ton Ohio facility. Power facilities with less output and shorter haul distances will be more cost effective (diseconomies of scale). If the “man-caused” global warming issue does not result in tax legislation, if consumers scream too loudly about electrical cost increases, government may back off and the power companies will be able to revert to coal to produce electricity more economically. That would take the pressure off biomass and still provide energy self-sufficiency to a degree. But even that scenario will not change the shift to biomass for energy. Oil is a finite resource and more energy must be expended to get each additional barrel. Like it or not, oil prices are on the wrong end of the power curve and that means that transportation costs are too. There WILL come a point, I don’t know when, where cellulosic ethanol (or one of the other wood-based transportation fuels) is less expensive than oil. When that happens, the forest industry is changed forever.

The Future in the Forest: Recent economic drivers supporting longer rotations are creating a “wall of wood” in the sawlog size class. Institutional investors have lengthened rotations from the pulpwood size-class to the sawtimber size-class to capitalize on the price differential. Sawtimber sales have been deferred as a result of poor markets, so harvest followed by planting has slowed (Figure 2).

The graph shows a significant decline in planting, which is troubling to some folks, but more likely reflects increased thinnings and significant reductions in clearcutting. Short rotation energy plantations close to market will happen IF wood costs go up significantly OR planners fail to anticipate increases in transportation costs. There will be more “in-woods” operations (chippers, biomass harvesting, biochar, and perhaps mobile methanol) – all driven by higher oil costs. Biomass harvests will be incorporated into conventional tree planting prescriptions. Much more competitive markets will mean higher stumpage prices for biomass and pulpwood. The current growth/drain ratios are very favorable (Figure 3) but sustainability will probably become a political issue if not a real one.

Changes in Wood Supply Chain: It is the same basic Wood Supply Chain, but…
  • Harvest residues will be added, probably more mechanized
  • Biomass demand brings more stable wood demand
    • No monthly (weekly, daily) shifts in mill consumption
    • No shifts in species needed
  • Annual contracts for wood producers become practical for biomass production – good news for loggers!
  • May force the same for pulpwood and sawlog buyers
  •  Logging will become a more robust, stable and competitive market segment
My Synopsis of the Future Forest Industry
  • Biomass/Power companies will be a key part of the industry.
  • There will be more “in-woods” operations (chippers, biomass harvesting, biochar, and perhaps mobile methanol).
  • A smaller pulp and paper industry will survive and exporting will play a larger role.
  • Sawmills: Demographics still favor housing and lumber export market will become significant. Imports less competitive.
  • Logging contractors will have a more stable operating environment. Annual production contracts.
  • Stumpage market will be more competitive and more stable.
  • Plantation establishment will consider energy market.
  • Timberland ownership will be a good place to be!

So that’s the way I see it. A global economy responding to a failed energy policy built on unsustainable oil production. This view of the future may not be right but it is worth considering as you go forward.
Differing views welcome, especially if rational is explained. --Brian

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Thursday, January 21, 2010

National Forest Harvest

Over the past 20 years there have been many changes impacting the output of our nation's timberland but none have impacted it as much as the management of our National Forests. First, let’s talk big numbers and try to put the whole thing into perspective. There are about 750 million acres of forestland in the United States. About two-thirds of that is classified as “timberland” which is defined as “Forest land that is producing or capable of producing crops of industrial wood and not withdrawn from timber use by statute or administrative regulation”. That definition cuts the area in timberland from 750 million acres to about 500 million acres. Much of the reduction results from set asides such as the National Parks and the designated Wilderness Areas on National Forests. So now we have 2/3 of our forests left to produce wood products.

Second, let’s look at that two-thirds or 500 million acres of timberland. Who owns it?

Even after setting aside our forested parks, Wilderness Areas and forest preserves, public ownership still accounts for almost 30% of our timberland. Public ownership is more than twice that of Forest Industry and about one-half of that owned by Non-Industrial Private Owners. Due to the historical method of “keeping score”, TIMO and REIT ownership is somewhat befuddled and some shows up in the NIPF category and some shows up in Forest Industry. The point I want to make here is that any shift in the way that the 150 million acres of Public timberland is managed has far reaching implications for output of building materials, pulp and paper and biomass utilized for renewable energy. The vast majority of the Public timberland falls under the management of the National Forest System (NFS) so that is where we need to look for change. I have watched these changes occur over time but it wasn’t until I came across the following graph that the total impact was driven home to me.

 There are two points on the graph, both designated with arrows, which will be discussed. The first arrow highlights the peak of NFS harvest as well as the beginning of the impact of the Spotted Owl controversy. The corresponding pie graph sets an interesting baseline. Even though the timber harvest has peaked, only one half of the growth was being harvested and one-quarter of the growth was actually being added to the timber inventory! The second pie graph shows the impact of a forest policy that reduced the harvest to 1/6th of what it had been. The result is that less than 6% of growth is being harvested, 58% is being added to inventory and a staggering 36.5% of growth is dying! We are growing trees for bugs and fire. So who is to blame? Public forests are managed by public policy.

To my mind, this is a terrible trend but it is good for owners of timberland. --Brian

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Thursday, December 17, 2009

The Trend in Timberland Prices

The current issue of Forest Landowners Magazine published an article that I wrote a few months ago that looks at the trend in timberland prices over the last decade. It examines the changes, data sources and some transactions during the first half of this year. It also tries to answer the following questions:
  • What has caused timberland prices to stay up while timber prices and most investments have declined in value?
  • What would cause prices to decline?
  • So what does the future hold?
If you are interested in reading the article, here is a link to it on my web site. --Brian

Monday, November 16, 2009

Anthony Forest Products Sells 93,360 Acres

The pressure from low product demand and low selling prices continues to hammer the sawmills. Companies that have been long-term owners and managers of timberland are continuing to be forced to liquidate landholdings to stay in business. Anthony Forest Products is the most recent with the sale of 93,360 acres of conservatively managed timberland in Arkansas, Texas and Louisiana being sold to a client of the Molpus Woodlands Group for $173,150,000 or $1,895 per acre. There is a wood supply agreement between Anthony and the new owner as a part of the sale agreement.

The Molpus Woodlands Group continues to build itself into a stronger and well diversified TIMO (850,000 acres in 11 states). Read the entire news release here.

Friday, October 30, 2009

Timberland Transaction Update

Major timberland transactions have slowed considerably but some continue to close. I wrote an article for Forest Landowners Magazine (THE TREND IN TIMBERLAND PRICES) that was supposed to be published in October but the publishing date was postponed until late November so I thought I would do a little update on transactions to date for this year. From the list below, you can see that there are quite a few transactions but relatively few large ones.

Here is an insightful comment from Plum Creek's 3rd Quarter Earnings Conference Call.  "We have not noted any significant changes to our rural land markets since the last quarter's call. In general, rural land values were off approximately 25% in higher value regions such as Florida, portions of Georgia, and Montana. Rural land sales in lower priced markets such as Mississippi and Northern Wisconsin remain fairly active. Prices in these markets have been more resilient and appear to be off 15% or less from their peaks." The comment is supported by the Rayonier sale above for $1,200 per acre which is a conglomerate of sales showing that Florida is definitely a soft area. Some of the other companies are reporting very little decline in the rural/recreational market.

In spite of these stated declines, there remains little sale activity supporting significant declines in institutional timberland values. Several of the larger timberland sales were at a solid price but there are too few to say prices have not declined. Perhaps the most interesting thing about this list is the names of the sellers. They are almost ALL public companies selling land to try to protect their dividends (or in Forestar's case, the entire company!). The one TIMO sale was at a very good price.

If I have missed any sales, and I probably have, send me an email to As always, comments and differing opinions are appreciated (especially if supported by facts).

My last post had an error in a link. Click here if you would like to see the PDF of the presentation The Forest Industry of the Future: What will it look like. . --Brian

Thursday, October 22, 2009

The Future Forest Industry

I was recently asked to speak at the North Carolina Forestry Association’s annual meeting in Myrtle Beach. The topic was to be “THE FOREST INDUSTRY OF THE FUTURE, What will it look like?” Before agreeing to the talk, I had to think about it for a while. The quote “Its tough to make predictions, especially about the future.” Attributed to Yogi Berra (as most quotes are) hung in my mind for a few days. But I agreed to take a shot at it and gave the talk earlier this month. I thought I would share a few of the points with you.

First, there has to be a basis for the prediction. The basis that I chose was to look at the changes occurring in the forest industry and to look at what I thought the future economic environment might look like.

The Three Key Changes in Progress

• Changing Timberland Ownership
  • Shift from forest industry to institutional and other owners
  • Well under way and well documented
• Biomass for Energy
  • Not a new thing but impact is changing
  • Sourcing moving from residue to pulpwood
  • Sheer magnitude is not well understood
• Global Industrial Revolution

The shift in timberland ownership is well documented so I didn’t spend any time on that whereas the magnitude of the biomass issue is not universally well understood and merited significant discussion. Slides focused on the biomass drivers, sources (Residues or pulpwood? Answer: pulpwood), nationwide energy sources and biomass utilization examples. There is also one slide on the cost of alternative transportation fuel costs (including cellulosic ethanol) relative to the cost of oil. It is a somewhat complex slide but the story it tells is that as oil goes up in price and as research brings costs of alternative fuels down, demand for biofuels grows in leaps. When I gave the talk less than two weeks ago, oil had settled into a trading range around $70. It is now approaching $80.

My view of the drivers behind the economic future looks like this:

• Social drive for renewable energy, energy self-sufficiency and climate change
• High energy costs- The key cost escalator
• High Inflation Rate (perhaps hyperinflation) Driven by:
  • Very high government spending
  • High oil prices
• Declining Dollar
• Global Industrial Revolution
• Commodity Shortages (natural resources)

There is a series of slides supporting my economic assumptions followed by a series painting my opinion of the future for sawmills, pulpmills, the wood supply chain and the future forest. A brief synopsis follows:

•Biomass/Power companies will be a key part of the industry.
•There will be more “in-woods” operations (chippers, biomass harvesting, biochar, and perhaps mobile methanol).
•A smaller pulp and paper industry will survive and exporting will play a larger role.
•Sawmills: Demographics still favor housing and lumber export market will become significant. Imports less competitive.
•Logging contractors will have a more stable operating environment. Annual production contracts.
•Stumpage market will be more competitive and more stable.
•Plantation establishment will consider energy market.
•Timberland ownership will be a good place to be!

If you would like to see all of the slides, you can go to and navigate to the “Articles” page. The presentation is in html format, which destroyed the “Build” on a key slide (oil prices). I will be adding that one slide as a Powerpoint presentation with the build to make it easier to understand. Run slideshow. Objective is to show how oil prices and cellulosic ethanol (and, by inference, other wood based transportation fuel) costs are converging. Comments, thoughts and differing views are welcome. --Brian