When a year draws
to a close, it is customary to look back and take stock of what has transpired.
If that is done with U.S. Southwide pine sawtimber (i.e., DBH ≥ 12.0 inches)
stumpage prices, someone might legitimately wonder if an economic recovery has
ever really arrived. Between August 2011 and November 2015, stumpage prices
have increased by 10.5% on a trend-line basis; that corresponds to a compound
annual growth rate (CAGR) of 2.5%. Yet, the 2015 year-to-date (through
November) average of total U.S. housing starts (1.102 million units SAAR) is
over 130% higher than the April 2009 low point (478,000 units). In addition,
the trended CAGR of Random Lengths' southern yellow pine lumber composite price
is up 7.7% since January 2009. So, why has the post-Great Recession stumpage price
increase been so muted?
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One reason is the Canadian dollar (CAD). A weaker CAD encourages
Canadian lumber exports to the United States, in the process capturing market
share from U.S. solid wood manufacturers and -- in turn -- reducing demand for
U.S. softwood sawtimber. U.S. imports of Canadian softwood lumber have risen at
a trend CAGR of 8.3% since January 2009.
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In the chart below, we divided total U.S. housing starts by
the CAD/USD exchange rate (HS/CAD) to suggest the degree to which the exchange
rate affects perceptions that U.S. solid wood manufacturers have regarding
housing starts. For those producers the “HS/CAD” line is a more realistic
portrayal of domestic lumber demand derived from housing starts than the
reported “TotalHS” line. Thus, while total reported housing starts have
increased at a trend CAGR of 14.4% since April 2009, HS/CAD have risen by only
11.0% -- a difference of nearly one-quarter. The increase in Canadian softwood
lumber imports has largely kept pace with the CAD-adjusted rise in U.S. housing
demand.
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A second reason is that, although total housing starts have
been rising, the share of total starts claimed by multi-family structures --
which, on average, use roughly one-third
the volume of softwood lumber per start compared to single-family homes -- has
been expanding (from an annual average of 19.5% in 2010 to 35.8% YTD through November
2015). That larger share of multi-family units also helps explain why total
housing starts were up 81% on an annual basis between 2009 and 2014, but U.S.
lumber production rose by only 34% (+37% for Southern production) during the
same period.
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Another reason is that tree growth continues to outpace the
volume harvested. With more supply "on the stump" -- particularly in
pine sawtimber, as shown in the following table -- price pressure is reduced.
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This situation has been further exacerbated by the Great
Recession’s impact on installed sawmill manufacturing capacity. As noted above,
southern lumber prices have increased at a trend CAGR of nearly 8% since January
2009; this is because -- and despite a muted recovery in lumber demand -- roughly
20% of U.S. solid wood capacity (the losses for lumber were even greater) was
shuttered as a result of the industrial downturn experienced during/since the
Great Recession. Thus, there was insufficient capacity to meet even the
comparatively anemic increase in demand as the recovery occurred, prompting
lumber prices to rise and capacity utilization rates to climb. That explains
the lumber price response, but what about stumpage prices?
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The loss of manufacturing capacity hindered the sector’s
ability to expand lumber supply in response to rising consumer market demand.
It also reduced localized geographic demand for stumpage -- both in terms of the
quantity of stumpage demanded and the number of mills competing for that stumpage.
Coupling the stumpage market situation of fewer mills and lower localized
demand with increasing log supply “on the stump” explains why the stumpage
price recovery has been muted despite steady trend improvement in lumber prices
since 2009.
Taking all of these influences
together, and given our expectations of how present trends are likely to “play
out,” we see little reason to believe a dramatic change may be coming over the
horizon.
The
foregoing comments represent the general economic views and analysis of Delphi
Advisors, and are provided solely for the purpose of information, instruction
and discourse. They do not constitute a solicitation or recommendation
regarding any investment.
