At times, when developing timber forecasts or reviewing timberland valuation models, we find that inflation is misunderstood. A single rising price of a single product or commodity is not inflation. Sawmills are making more money this year because lumber prices are higher than last year, not because of inflation, which tracks the overall price level. And yet, the real, relative costs and revenues affecting timberland investments and wood-using facilities do change over time at different rates and times. While cash flow estimates used to value potential investments include projections of future prices, we find honest confusion and common mistakes continue to plague the use of real and nominal rates and prices.
In developing timber forecasts in the U.S., we recommend quantifying historic relationships using nominal (stated) prices that include inflation, and then adjusting for inflation if necessary. Why? Because the basis of market clearing transactions and real-time negotiations between wood buyers and timber sellers at any point are the prices as known and stated at that time in each and every local timber market given the known and available supplies and technology. As noted by timberland appraiser Jeff Wikle, “Yesterday’s (timber) price is based on yesterday’s technology.” Based on our understanding of forestry markets, this is exactly correct.