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 www.timberlandstrategies.com 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

The Vertically Integrated TIMO?

One of my readers pointed out an interesting development to me recently. As has become so obvious, the vertically integrated forest product companies (VIFPC) are almost a thing of the past due to the elimination of favorable capital gains tax rates and the high tax rates on C corporations. The pass-through tax structure for TIMOs (pension funds) and REITs has pretty well destroyed the VIFPC as a viable tax structure. So the new landowners and managers become true timberland companies unburdened by the tax structure brought by those pesky mills.

The interesting observation is that The Forestland Group has recently completed the first part of the purchase of Roy O Martin's LeMoyen, Louisiana, hardwood sawmill, 10,000 acres of hardwood timberland, and 20-year harvesting rights on an additional 138,000 acres of hardwood timberland in south Louisiana. Read more.

Now back up about two years to when Anderson-Tully "merged" with one of The Forestland Group's funds. ATCO had a huge hardwood sawmill in Vicksburg billed as the largest hardwood sawmill in North America. You can read about that transaction here.

So now we have a new acronym (we need a new acronym), the VITIMO! It will be interesting to watch this trend develop, if it is a trend. When The Forestland Group buys its first pulp mill, I'll know its for real! --Brian