Spring 2006

2005 INDIANA FOREST PRODUCTS

Data for this survey was obtained by a mail survey of all known mills in Indiana who buy logs. This list is maintained in cooperation with the Forest Products Utilization & Marketing Program, Indiana Division of Forestry. The prices reported are for logs delivered to the log yards of the reporting mills. Approximate stumpage prices can be obtained by subtracting logging and hauling costs from the delivered sawlog and veneer log prices, however, see Caution below.

The number of mills contributing price data for a specific product is shown in the fourth column in Tables 2 to 5. Fifty-four mills reported their 2004 total board foot production, compared with 43 reporting 2004 production. The distribution by production categories is shown in Figure 1. The total production for these mills was 204 million board feet. The smallest mills, custom mills, reported production of 0.5 MBF or less. The largest mill produced 18 million board feet in 2004. The price statistics don't include much data from these small custom mills (left bar in Figure 1) because most do not buy logs. They report the cost of custom sawing.

Caution: This report is intended to be used as an indication of price trends, not for the 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 dayby- day basis should be used to obtain estimates of current market values for particular stands of timber or lots of logs. Because of the small number of mills reporting logging costs, "stumpage prices" estimated from delivered log prices by deducting the average logging and hauling costs must be used with caution.

Hardwood lumber prices generally declined over the summer into fall. No species, however, had a major price increase or decrease. Basswood, beech, and hickory were up slightly. White woods continued to be more in demand than darker species for furniture and cabinets. The recovery made by black walnut starting in 2001, Figure 2, continued for the lower grades of lumber, No. 1 and 2 Common, but not the top grade FAS. Figure 2 also shows walnut lumber prices adjusted for inflation with 1982 as the base year. Note that from 1990 to 2005 the real price of FAS and No. 1 Common declined, while the real price of No. 2 Common increased. Oak prices declined slightly over the past 6 months, but continued strength in the hardwood flooring market kept demand high for No. 2 Common.

Sawlog prices, Table 2, generally reflect lumber price trends; however, sawlog prices change proportionally more than lumber prices. Thus, e.g. if lumber prices go down 1 percent, sawlog price would go down 2 percent. Species declining were basswood, black cherry, elm, red oak, black oak, and sycamore. Hard maple was the only species that increased significantly, 13 percent, averaged over the four grades. Two other white woods also increased, cottonwood by 10 percent on average, and soft maple, up 15.7, 7.4, 4.4, and 3.8 percent for Prime through No. 3 grades. Black walnut was up modestly for the three top grades, but up 17 percent for the lowest grade, No. 3. This is consistent with the real price increase for low grade walnut lumber. Furniture manufacturers have developed more efficient "rough mills," where defects are cut out of lumber and the defect free pieces edge glued into panels. The "dimension parts" needed for furniture production are cut to size from these edge-glued panels.

Interest in softwood increased further this year, see the bottom of Table 2. Eight mills reported pine prices, compared to 5 last year. The average pine price was $251 per MBF, an increase from $221 per MBF Doyle log scale last year. The average cedar price was $369 per MBF this year, compared to $358 last year. Some mills process only white pine. Increased interest in softwood is due to increased cost of lumber brought in from Canada, SPF dimension lumber, and the increase in Indiana's softwood timber inventory. According to the U.S. Forest Service Forest Inventory Analysis the volume of softwood sawtimber was 240.1 million board feet, Doyle log rule, in 1986 and 533 million board feet in 1998. Softwoods comprise 3.1 percent of total sawtimber volume.

The number of mills reporting veneer log prices decreased this year, Table 3. This segment of the industry is "restructuring." Although there have been a few start-ups, there have been more shut-downs and moves offshore. North Carolina took a bigger hit than Indiana, but Indiana's veneer industry remains more vulnerable than the lumber segment. The cost to move veneer logs overseas for processing is a smaller percentage of the cost of logs than for sawlogs. And freight rates are relatively low for logs since they are "backhauled" in containers on ships that brought the multitude of consumer goods we import from Asia.

Only two species showed any strength. Prime white oak in the larger diameters, 21 inches inside bark at small end (dib) and larger was up 10 to 20 percent. Eight mills report prices for yellow poplar, compared to 1 or 2, over the last decade. The large price increase shown for smaller prime logs is due in large part to having only one mill reporting in 2004. Nevertheless, the larger number of mills slicing this species indicates increased demand. Yellow poplar constitutes over 13 percent of Indiana's sawtimber inventory. Log availability and continuing advances in wood finishing technology bode well for this species. Hard maple was up modestly. Black walnut declined by as much as 23 percent for large prime logs, less for smaller low grade logs.

We haven't added black cherry veneer logs to the survey under the assumption that almost all of the cherry sliced in Indiana comes from logs procured in Pennsylvania and New York, where the premium quality cherry is found.

The economy was stronger in 2005 than the proverbial man-on-the-street thought, over 4 percent growth in GDP in the fourth quarter. Large plant closings make the headlines, but the hundreds of startups, usually much smaller operations and in different sectors of the economy than the closing, are news only in the business press. New housing and rehab expenditures were both strong, although increasing interest rates are expected to slow these segments going into 2006. The "McMansion" segment of housing appears to be rolling along. These are residential structures in the $1 million and above price range that use lots of real wood, hardwoods for flooring, paneling, and trim. The furniture industry continues to do well, even if an increasing percentage of product is manufactured in Asia. We need to pay attention, however, to increased use of Asian species in place of temperate hardwood species.

As discussed in last year's report, the real factor affecting timber prices is the worsening squeeze on margins for sawmills, and veneer mills. The price of lumber at best just keeps pace with inflation, but as this report has shown over the years, the price of logs has increased somewhat faster than inflation. This can't continue forever, and was possible in the past only because of the dramatic increase in standing timber volumes and improved conversion efficiency in lumber processing. It appears that a major adjustment period has started. Sawmill capacity has more than caught up with the supply of logs that the timber base can support. The easy, i.e. affordable, improvements in conversion technology have come on-line. There is still more to squeeze out, but the marginal gains available are getting smaller. A major technological advance, such as log scanning, is needed to put the profit back into the sawmill business. The dream of a kerfless system remains, but is much further into the future.

On the supply side the fragmentation of forest land has to be reducing the portion of standing inventory available for sale at any price. In most of Indiana, forests are more valuable for amenity-based uses than "commercial" timber production. There is no "magic bullet", other than a major economic depression, that will change this trend. Hardwood timber price increases have been great enough to attract billions of dollars to investment grade hardwood holdings, i.e. well stocked tracts in the 10,000 acre and larger category. This opportunity doesn't exist in Indiana. Timber buyers have to establish practices that accommodate the values of the owners of ever smaller tracts. This means procurement and sawmill margins. The reason that the hardwood industry has "thrived" for the last century is its ability to adjust. It will survive by making ever bigger adjustments.

Looking at all this from the standpoint of timberland owners who are considering selling timber, the previous comments should make it clear that buyers are hungry for your timber. But, of necessity they will be more careful about how much they put on the table. The trendlines in Figures 2 and 3 indicate that prices overall are just slightly below the long-run trend, but you also need to consider that the trend line has been pivoting down slightly each year for the last 5 years. Thus, your decision to sell should be based as much on what's good for the long-run health of your timber stands as on the potential for significant price increases in the next five or so years. The latter is highly unlikely, except for adjustments in the price of specific species. The health of your forest is ignored at your peril considering the increased occurrences of the Emerald ash borer and other uninvited insect pests. And, setting aside the argument of what is causing it, the increase in average temperature makes it necessary for plant communities to adjust. Stands of mixed species with vigorous growth, i.e. healthy forests, will do much better at meeting your needs, even aesthetic ones, than stagnated stands.

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 information that can be used to monitor long-term price trends for timber.

The nominal (not deflated) price are a weighted average of the delivered log prices reported in the price survey. The price indexes 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 2005 was 800.5 percent of the price in 1957. The real prices are the nominal prices deflated by the producer price index for finished goods with 1982 as the base year. The real price series represents the purchasing power of dollars based on a 1982 market basket of finished producer goods. It's this real price trend that is important to long-term investments like timber.

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