Commodity Update: Timber Outlook
2/4/2022
GreenStone Commodity Update: Timber Outlook
 

 

The timber industry in Michigan and Wisconsin has many segments, and some are more profitable than others. But, overall, the industry looks “decent,” said Cameron Rowe, financial services officer and timber lending specialist for GreenStone Farm Credit Services.

 

Following a few months of moderating prices last spring and summer, lumber prices are soaring once again, according to the National Association of Home Builders.

 

It might seem that tight supplies and rising demand would be good for the industry and its profitability. But, since COVID-19 hit, a lot of the profit margin is being absorbed by middlemen.

 

“Especially the mills,” Rowe said. “Not as much of that profit is going down the value stream as we had seen in the past. It’s created some frustration, because there are a lot of boots-on-the-ground loggers that feel as though they haven't seen much of a price increase in 15 years, and yet people are paying more and more for wood materials.”

 

In looking at the different segments of the timber industry, some larger sawmills have been making large investments and adding labor.

 

“There was a gigantic surge for demand with people being home during COVID-19 and taking on home improvement and expansion projects,” Rowe says. “Lumber prices soared, and a lot of these mills decided it was the time to invest.”

 

As of Dec. 29, 2021 and according to Random Lengths, a wood-products-industry tracking firm, the price of framing lumber topped $1,000 per thousand board feet — a 167% increase since late August 2021.

 

Some experts point to low interest rates and a booming housing market for the rising prices, while others say it’s caused by a broken supply chain and lack of workers. Regardless, “A lot of sawmills are making capital expenditures and investments they haven't done in 20-30 years,” he added.

 

On the pulp side, last year the Swedish packaging company BillerudKorsnas AB announced it would acquire Verso Corp, which has two large paper mills in Michigan and one in Wisconsin. The deal is expected to be finalized this year.

 

In statements, executives for the company announced a $1 billion, nearly decade-long plan to convert and upgrade the mill in Escanaba, Mich., into a producer of sustainably-made paperboard. They also announced plans to maintain operations at Verso's mill in Quinnesec, Mich.

 

“It’s a huge investment and it’s hoped that it will bring back some of their long-term contracts with customers,” Rowe said.

 

According to Northeast-Midwest State Foresters Alliance, Michigan's 20 million acres of forest land supports a diverse industry and some of the best hard maple and red oak timber in the world.

 

Wisconsin has 17 million acres of forest land that covers 49% of its land base, and most of this forest land can produce commercial timber.

 

In 2017, the latest data available, Michigan's forest products industries provided direct employment to almost 41,000 people, while Wisconsin recorded 68,000 direct jobs. Michigan ranks first and Wisconsin ranks fifth in forest land acres among the 20 Northeast and Midwestern area states.

 

Wisconsin woes
However, not all news about the Verso purchase is good. The Verso paper mill in Wisconsin Rapids, which opened in 1904, closed in June of 2020 amid COVID-19.

 

“That caused a lot of heartache and heartburn for Wisconsin loggers,” Rowe said. “They had to find a market, so some of that wood got diverted into Michigan mills. That, in turn, flooded the Michigan market and some of the smaller Michigan loggers who used to get in these mills – taking whatever was left in terms of quotas – were shut out. It caused some people to exit the industry as they're finding out there's just not as much money in it as there used to be.”

 

The transportation segment of the industry also is having difficulties.

 

“The bigger loggers who would normally buy a log truck every four or five years to stay on top of their equipment are being told there’s an 18-month or longer wait, instead of a few months,” Rowe explained.

 

The new trucks often replace trucks that are sold to smaller loggers.

 

“So, it's causing a lot of people to question whether they want to be in the industry anymore,” he said. “The supply chain disruption is making it incredibly difficult to get replacement parts. Some truck drivers are just deciding to hang it up, especially the older ones. And the younger guys are having a hard time finding quality used trucks to break into the industry.”

 

Carbon credits
Environmental, Social, and Corporate (ESC) governance is an evaluation of a firm’s collective conscientiousness for social and environmental factors. The forestry industry is being eyed as companies are looking to offset their carbon footprints by purchasing timberland.

 

Recently, an agreement was made between Michigan's Department of Natural Resources (MDNR) and Michigan's largest energy company, DTE energy, to use part of Michigan's 3.9 million acres of state forest land as carbon credits to help reduce DTE’s carbon footprint.

 

The agreement will add an estimated $10 million in revenue to assist in natural resource management.

 

“Initially, there were a lot of worries if that meant state forests could not be harvested,” Rowe explained. “However, there is an understanding that these offsetting carbon credits will not
come as a detriment to the timber industry. The timber on these lands will still be selectively managed to benefit the industry and promote healthy forests.”

 

State forest land was picked for the carbon offset program because a single tree can absorb as much as 48 pounds of carbon dioxide in a year. By the time a tree is 40 years old, it can store one ton of carbon, according to the MDNR. If these trees are then used to make wood products, the carbon they absorbed from the atmosphere is captured or "stored" within the manufactured furniture, buildings, and countless other items.

 

According to Forest2Markets, the forest value chain is well-positioned for a future that is eager to embrace natural, sustainable, and renewable solutions that help mitigate the effects of climate change. For example, 71% of global fund managers representing $12.9 trillion in assets last year said the pandemic would lead to an increase in actions designed to tackle climate change and bio-diversity losses. Some of the world’s largest brands have committed to ambitious zero carbon targets including Apple, Amazon, Unilever, Starbucks, Nike, among others.

 

Noting that timber is a renewable resource, there is increasing interest in building large timber-frame buildings, instead of steel.

 

“I know Milwaukee's put up three or four in the last couple of years and MSU has one on campus,” Rowe said. “If that area continues to grow, it's only going to be a positive for the industry.”
 

 

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