Fall 2000 Volume 9, Number 3

REPORT AND TREND ANALYSIS

September 29, 2000

West Lafayette, IN 47907-1159

SURVEY PROCEDURES AND RESPONSE

Data for this survey was obtained by a mail survey of all known mills in Indiana who buy logs. The prices reported are for logs fob the log yards of the reporting mills. Approximate stumpage prices can be obtained by subtracting logging and hauling costs, Table 4, from the delivered sawlog and veneer log prices.

Sixty-eight mills reported useable data, compared to 112 in 1999. The number of mills contributing price data for a specific product is shown in the product entries in Tables 1 and 2. Fifty mills reported their 1999 total board foot production. The distribution by production categories is shown in Figure 1. The total production for these mills was 161.5 million board feet. The smallest mill, a custom mill, reported production of 35 MBF. The largest mill produced 20 million board feet.

For the last 16 years at least the Indiana Forest Products Price Survey has been mailed out and responses returned to the Indiana Agricultural Statistics Service (IASS). This year for the second time IASS enumerators were used to contact mills not responding to the mail solicitation. These enumerators were again familiarized with the hardwood forest products industry and this survey as part of their annual training. The decline in response despite the same level of effort remains a concern.

This report is intended to be used as an indication of price trends, not for the market appraisal of logs or stumpage. This data is collected only once a year and log prices are constantly changing. Proper appraisal techniques by those familiar with market conditions on a day-by-day basis should be used to obtain estimates of current market values.

SAWLOG PRICES

The hardwood lumber industry remained very strong over the last twelve months. Generally prices increased for the preferred species and declined for the low valued species, such as cottonwood and sycamore. Black cherry and hard maple continue to show log price increases. Black walnut also showed strength. The price increases in percentage terms for the best quality logs, prime grade, were significantly higher than for the lower grades. In some cases prime increased and No. 3 grade decreased. This is significant because in recent years the lower grades have increased more in percentage terms than the higher grades. My assumption is that over the last 5 years many mills have significantly improved their processing machinery, allowing improved recovery from lower grade logs. The gains achievable have been captured and this year mills focused on buying quality to capture more value added from the new technology.

As of the May 2000 survey date sawlog prices were generally higher than May 1999, Table 1.Prices for the premium species increased by 10 to 20 percent. Ash, hickory, white oak, and tulip poplar increased by about 10 percent for premium logs. Hard maple, black cherry, soft maple, and black walnut increased well above 10 percent for premium logs. The largest increases were for hard maple. Species decreasing included cottonwood, elm, and sycamore.

Lumber prices as of the end of September 2000, Table 2, show justification for the increase in log prices. Obviously mills buy logs based on what they expect to receive for the lumber produced from them. The weather has been wetter this summer than last, but not enough to affect log supplies. Demand for cherry, maple, and to a lesser extent oak, remains strong enough to drive up prices. But, there’s also a log supply side to the supply-demand balance. The Forest Survey report for Indiana clearly indicates a very competitive market for high grade logs of the premium species.

VENEER LOG PRICES

The number of mills reporting veneer log prices was about the same as last year, Table 3. There Is sufficient data to indicate market trends. It's not obvious, however, why the increase in prices are so large for all species except yellow poplar.

Black walnut prices were somewhat mixed, indicating disparity in how mills report prices by grade and log sizes. Many mills report prices for a segment of the size classes, not for all classes. This causes the average for a given size class to be based on prices from a different mix of reporting mills. The smaller prime logs showed the greatest increase.

The increase in red and white oak prices is hard to explain since lumber prices increased only moderately. Export markets may be a factor.

The 30 to 60 percent price increases for hard maple are easy to explain. Veneer replaces lumber in many applications. Thus, the maple price increase reflects the increase in lumber and sawlog prices.

CUSTOM COSTS AND MISCELLANEOUS PRODUCTS

An adequate number of mills reported custom costs and prices received for by-products to place some reliability in the results. The logging and hauling cost figure is suspect, however, with only five and three mills, respectively, reporting.

Custom Costs

Changes in custom costs were mixed. Custom sawing costs increased by about 14 percent. Logging stayed about the same, but hauling costs decreased. The survey was conducted well before the significant increase in fuel costs. I also believe that on average more mills and loggers are converting to semi-tractor trailer trucks. This reduces the cost per mile for a unit load.

IMPLICATIONS

The U.S. economy remains strong with inflation under control, although higher than last year. However, corporate profit reports are coming in below expectations, indicating some weakness. Profit reductions are the result of some softening of demand, but perhaps as much from increased labor costs. The important question may be when the productivity gains realized over the last decade from increased use of computers will be fully built into the cost structure of firms.

The market for logs was obviously strong this spring and remained strong over the summer. Lumber price increases appear to have topped out. Landowners with timber to sell should consider moving it now. The economy will be slowing down as the cost of fuel starts to hit the bottom line of corporations and the checkbooks of homeowners when they pay winter heating bills. The strong dollar, especially against the Euro, will continue to make US wood products more expensive to import into Europe.

INDIANA TIMBER PRICE INDEX – UPDATE

The delivered log prices collected in the Indiana Forest Products Price Survey are used to calculate the delivered log value of typical stands of timber. This provides trend-line data that can be used to monitor long-term price trends for timber. The species distribution used to calculate the weighted averages are presented in Table 6. The log quality weights used are presented in Table 7. These weights are based primarily on the 1967 Forest Survey of Indiana.

The nominal (not deflated) price, columns 3 and 6 of Table 8, are a weighted average of the delivered log prices reported in the price survey. The price indexes, columns 4 and 7, are the series of nominal prices divided by the price in 1957, the base year multiplied by 100. Thus, the index is the percentage of the 1957 price. For example, the average price in 2000 was 766.9 percent of the price in 1957. The real prices, columns 5 and 8 are the actual prices deflated by the producer price index for finished goods with 1982 as the base year, Figure 10. The real price series represents the purchasing power of dollars based on a 1982 market basket of industrial goods. It's this real price trend that is important to long-term investments like timber.

Average Stand

The nominal weighted average price increased from $389.2 in 1999 to 426.5 in 2000 for the average stand, Table 10, column 3. This is a 9.58 percent increase, Figure 2.

The new equation for the trend line for the 1957 to 2000 period is,

Avg. Stand Price = 166.14 + 2.6231 X T,

where,

T=1 for 1957, 2 for 1958, etc.

A linear trend line should be used if it's necessary to project timber prices, as discussed in greater detail in Station Bulletin No. 148. Although it's easier to simply plug the average annual compound rate of increase value into the compound interest formula (exponential rate of increase), projections much over 15 years gives unrealistic results. Real prices can't increase exponentially for long periods of time. Market adjustments, like those observed for black walnut, come into play to retard the increase and eventually reverse it.

The real price increase based on the trend line is 1.17 percent per annum for the average stand from 1957 to 200. This is up slightly from last year. This still represents a significant increase in the purchasing power of hardwood timber assets.

Quality Stand

The nominal weighted average price for the quality stand increased by 17.35 percent from 526.3 in 1999 to 617.6 in 2000, Table 10, column 6, Figure 3. The average annual compound rate of increase for the trend line increased somewhat to 1.52% per annum, Figure 16. The equation for the trend line is,

Qual. Index = 196.53 + 4.4183 X T

Thus, a quality stand provides a better rate of return than the average stand of timber in Indiana.

Table 6. Species composition of the Indiana timber price index for an average and a quality stand.

Table 7. Log quality composition of the Indiana timber price index for an average and a quality stand.

Table 8. Weighted average actual price, price index, and deflated price for an average and quality stand of timber in Indiana, 1957 to 1999.

Figure 2. Average stand of timber, nominal, deflated, and trend line price series.

Figure 3. Quality stand of timber, nominal, deflated, and trend line price series.

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