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Conclusions and Implications

Our focus in this assessment of timber markets in the Southeastern United States has been on under-standing the demand and supply factors that have played out in the markets for various timber products. Below, we synthesize our findings into a listing of the significant forces driving change in markets for timber products in the South.

1. The demand for domestically produced timber products has shifted downward in the United States. Consumption of solid wood products has not grown at the same pace as housing starts, and the per capita consumption of paper has declined over the past 10 years, after being relatively stable for many years. These declines in domestic production and per capita consumption of some timber products have been coupled with a substantial decline in the off-shore demand for U.S.-produced timber products. Exports of wood chips fell from its peak in 1998 to nearly zero exports in 2003.
2. The supply of domestically produced timber products has continued to expand outward since the late 1990s. Timber supply is a function of the amount of land dedicated to forest growing and the intensity of management. The area of timberland has remained fairly constant since the 1970s, and the area of intensively managed (planted) forests continued to expand through the 1990s (that is, expansionary investment continued even after production and prices fell). Because timber is a long-lived asset, supply could continue to move outward and dampen prices for years. The effects of recent declines in planting may not be felt for several more years.
3. Fundamentals of economics indicate that a substantial downward shift in demand coupled with a constant to increasing supply leads to (a) a decline in output and (b) a disproportionately strong decline in prices. This is exactly what has been observed in pulpwood markets—especially softwood pulpwood markets—since 1998.
4. An evaluation of investment of wood products firms in manufacturing capacity within the region provides insights into futre production potential. Capacity for lumber production has remained strong, while capacity for paper production has declined since the late 1990s. Indications are, therefore, that demand for pulpwood to produce paper may not rebound to early 1990s levels in the foreseeable future. Long-term demand for solid wood products appears strong, however.
5. Persistent low prices for softwood pulpwood may indicate opportunities for the manufacture of other products from this product class. Indeed, several firms have recently announced plans to build plants to produce OSB in many of the areas where pulpmills have closed. Announced plants are not always built, but the number of announcements indicates that expansion in this sector will provide additional demand for pulpwood in the next 5 years.
6. Upward pressure on hardwood pulpwood prices and downward pressure on softwood pulpwood prices combine to provide incentives to shift industrial production toward utilization of softwoods. Indeed, after a long period of substituting hardwood for softwood in paper production, we might expect to see an increase in the share of softwood inputs.
7. Imports of hardwood chips into the South remain relatively small compared to the total consumption. However, it appears that if hardwood chip prices rise above thresholds already reached in parts of the region, e.g., in Florida, then imports from South America become a viable alternative to domestic production. The existence of this backstop supply of plentiful eucalyptus chips indicates that future hardwood pulpwood prices may have a ceiling in the region.

Concerns about southern timber markets have necessarily shifted from a focus on supply issues to a focus on demand issues. Forest investment, driven by both market forces and tree-planting programs, has produced plentiful and sustainable timber supplies and supported a more than doubling of timber production over a 30-year period. Forecasting models (e.g., Prestemon and Abt 2002) indicate that the region can readily supply even more timber. While some uncertainties regarding supply may be indicated by the divestiture of forest industry lands, they are at least partially quelled by a surge of investment capital into the sector from pension funds and other sources.

The big question is, how will demand respond in the future? We find little evidence that there will be a strong rebound in demand for pulpwood for paper production or a return of chip export markets. Increased production of OSB and other engineered wood products may increase demand for pulpwood-sized materials, but this effect has not yet fully offset declines in demand from the paper sector. This means that softwood pulpwood prices are not likely to rebound to mid-1990s levels anytime soon. Emergence of biomass energy markets may affect demand in the future but this is highly uncertain at this time.