Timberland Investment

Every so often, a Presidential tweet sparks a worthwhile conversation on the national stage. While President Trump is constantly criticized for his choice of words on the digital platform, two of his latest messages in question centered on the cause of the devastating wildfires that have ravaged portions of California:
“There is no reason for these massive, deadly and costly forest fires in California except that forest management is so poor. Billions of dollars are given each year, with so many lives lost, all because of gross mismanagement of the forests. Remedy now, or no more Fed payments!”
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Under any other circumstances, the entire US forest value chain would applaud the President for raising awareness about a topic that is so often dismissed at the legislative level.
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However, in this particular case, the President’s remarks were simply ill-informed and ill-timed. While many of the devastating wildfires in the Pacific Northwest (PNW) and much of California do indeed originate in poorly-managed forests, the current blazes that are decimating California did not start in a forest. Rather, they were sparked in a “wildland-urban interface,” which are areas where suburbs abut undeveloped wildlands—in this case grasslands. Aided by strong Santa Ana winds, the fires have quickly spread to engulf huge swaths of the state.

The President’s tweets also implied that the state’s forest management is to blame; however, the majority of California’s forests are federally owned.
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The single largest contributing factor to the dangerous state of western forests has not been climate change; rather, it is almost entirely an artifact of the way that our national forests—millions of acres of timberland—have been managed since the mid-1970s. The controversy and senseless litigation that has surrounded harvesting activities on publicly-owned lands has long prevented the US Forest Service (USFS) and the Bureau of Land Management (BLM) from taking a common sense, science-based approach to managing forests to control for naturally-occurring, catastrophic events like forest fires, insect damage and disease.

To be clear, cyclical changes in climate undoubtedly impact western forests. Precipitation, snowpack/snowmelt, temperature, soil moisture, the density of trees, shrubs and other potential fuel—as well as the health of these trees and shrubs—all contribute to the conditions that create favorable wildfire scenarios. All of these factors are also impacted by climate variability. But in the case of the devastating fires that have grown in scale over the last few decades, it is a widely-held belief that the mismanagement of western national forests is the primary cause for the unprecedented destruction.

In a separate blog post we published earlier this year, we noted that forest mortality now far exceeds forest growth in western national forests. In 2017, forest growth was 48 percent of mortality while timber harvests were a mere 11 percent of what is dying annually—and this trend is on the rise. The USFS estimates that 6.3 billion dead trees were standing in 11 western states in 2015, up from 5.8 billion in 2010. Regardless of the climate variability in the region, this accumulation of dead timber is a tremendous problem that has resulted in a very dangerous situation.

The good news is that a successful model for managing forests to minimize devastating mega fires and disease risk already exists. We need only look to privately-owned working forests to find a solution. Working forests are managed for production and health and, while fires and infestations do occur in these forests, overwhelming incidents like those currently ravaging California are rare.

At a landscape level, working forests are made up of a patchwork of smaller timber tracts that are thinned and harvested at different intervals. Due to this hands-on management, the landscape-level forest has multiple characteristics that prevent catastrophic damage:

Because they are thinned at regular intervals, these forests do not contain as much fuel as forests that are unmanaged, and the remaining trees stand farther apart.
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Due to rotating harvest schedules, working forests are also of different age classes. Planting and harvesting tracts of timber at varying periods helps to slow down—and sometimes even stops—the spread of fire or disease.
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Simply cloning a management style from region to region is unrealistic, as there are a number of key differences between western and southern forests. Timberland acres and tree species are dissimilar, as are the soil and terrain, elevations, climatic trends and precipitation norms just to name a few. However, key forest management practices such as regular thinnings, harvests and prescribed burns—rigorous monitoring and reacting to health issues—are pretty universal in application. For example, a 2015 study by The Nature Conservancy and the USFS showed that a 12,000-acre “doughnut hole” within a major western fire zone remained untouched by the massive Carlton Complex fire in Washington. The area survived, the researchers believe, because it had previously undergone a thinning and prescribed burn.

The Jaguar Pension Plan has invested in agriculture and timber funds in a bid to diversify its portfolio and develop its exposure to opportunistic private markets.

According to its latest investment report, the £3.7bn scheme invested $16.5m (£12.3m) in an agriculture fund managed by Boston-based specialist Folium Capital in the year to April 5 2018. It invested the same amount in a timber fund run by the same asset manager.
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However, the Jaguar scheme has blamed diversification for recent underperformance. Losses from “diversifying assets, hedge funds and emerging markets” mean the fund lagged expectations, according to its accounts, which did not disclose the portfolio’s performance as of April 5. It said its performance over the year was led by investments in real estate and infrastructure.

Experts praise agriculture and timber investment for their diversifying benefits and inflation linkage, but say the governance burden of these investments and a small market largely restrict them to bigger funds.
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Research by consultancy Mercer indicates that in 2018, 2 per cent of European pension schemes held part of their exposure to real assets in timberland or agriculture. Of these schemes, the average asset allocation stood at 2 per cent. The Jaguar plan sits in a range of large UK schemes with exposure to agriculture and timber.
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Timber funds invest largely in freehold land, according to Edward Daniels, a director in real asset investment manager FIM’s forestry team. Some investors own the right to the timber, as well as the land underneath it. Alternatively, they may just own the rights to the crop.
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According to reports, Folium Capital is run by former managers of the Harvard Management Company, which operates Harvard University’s $37.1bn endowment fund.
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Timberland has received more institutional investment than agriculture because of the “fragmented nature of the agriculture market”, according to McAleer.

“It is mostly larger schemes that access these asset classes,” she added, “and that’s predominantly because of the governance burden”.

Australasia and South America are two key markets for these investments. Timberland and agriculture are, however, “very US-centric”, McAleer said.

A U.S. judge struck down a California law challenged by the Trump administration that aimed to give the state power to override the sale of federal lands.

The law unconstitutionally regulates the U.S. government and discriminates against people seeking to buy federal public land, Judge William Shubb in Sacramento ruled Thursday.

State lawmakers who passed the law — SB50 — last year cited concerns that the Trump administration would allow more logging, oil drilling or development on some of the 46 million acres owned by the federal government in California.

Gov. Jerry Brown signed the law a year ago, and it went into effect in January. The U.S. Department of Justice filed its lawsuit in April — one of several the administration has filed against California as the state seeks to thwart President Donald Trump’s policies.
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The law sought to give the commission the first right to purchase federal lands or to arrange for a specific buyer and included fines for failing to do so.

The DOJ argued in its lawsuit that California had no power to interfere with federal land sales, citing the Constitution and the 1850 act of Congress that admitted California to the union.It said the state law was delaying land sales — even for projects that had been in the works for years — and was depressing their value.
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Shubb rejected the state’s argument that the law regulated land buyers, not the federal government.

The law “trespasses on the federal government’s ability to convey land to whomever it wants,” the judge said.

It also singles out people who do business with the federal government, Shubb said, subjecting them to a “level of uncertainty and potential delay that all others are spared from.”

Hurricane Michael is continuing to have a severe impact on Georgia’s timber industry. 

The latest damage estimate has more than doubled from last week’s numbers. About a week ago, Georgia Forestry Commission officials estimated the state’s timber loss at more than $374 million. 

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Now, the damage estimate is at more than $762 million.

Georgia Agriculture Commissioner Gary Black, who also released the latest data, calls the assessment “unfortunate” for the state’s forestry community.

“This number went in the wrong direction and will undoubtedly have a significant impact on the industry for years to come,” he said, in a statement. “As more information continues to be gathered regarding Hurricane Michael’s impact on Georgia’s diverse agricultural economy, we will continue to pray and work for all the communities impacted by this catastrophic storm.”

Georgia is one of the top states in the nation for timber exports.

Executives
Michael Covey - Chairman and CEO
Jerry Richards - VP and CFO
Eric Cremers - President and COO

Analysts
John Babcock - Bank of America Merrill Lynch
Paul Quinn - RBC Capital

Michael Covey
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We expect lumber demand will continue to grow faster than supply and that industry operating rates will remain healthy. Factors on the demand side that give us confidence include a healthy rate of household formation, strong employment and wage growth, higher consumer and homebuilder confidence and the fact that houses remain affordable relative to historic levels.

It's important to keep in mind that there been a significant amount of noise in the recent housing start statistics including the effect of two major hurricanes and torrential rainfall in Texas. The largest homebuilding market in the country, single family housing units which use about three times as much lumber as multi-family units are up almost 5% year-over-year.

In addition, the repair and remodel market segments should remain strong through the old age of U.S. housing stocks and strong home prices. The repair and remodel segment has been growing in the mid to high single digits and accounts for about 40% of lumber demand which is a bit more in new home construction.

On the supply side of the equation, it appears that Canadian producers have meaningfully reduced the supply overhang caused by transportation issues in the first quarter. Over the longer-term, fiber availability will constrain Canada's ability to supply the U.S. market.

Continuing with a supply theme that is well documented, the lumber capacity additions in the U.S. south will be measured. There are only two major sawmill equipment suppliers and each is requiring deposits to secure a place in line. As we think about the demand and supply dynamics, fundamentals appear much stronger than the current lumber pricing environment.

We expect improvement once we move past what is seasonally the weakest part of the year as well as recent weather disruptions. Field inventories are low which should support pricing recovery.
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John Babcock

Okay. Thank you. And I was wondering more on the topic of lumber and pricing trends and the fundamentals there, if you could talk first about -- first of all about where inventory stand in the supply chain now versus where they were about a month or two ago? And then also just generally how market conditions look right now and what you think it will take for lumber prices to change directions?

Eric Cremers

Yeah, John. This is Eric. Our sense of it talking to our customers is that the inventories in the supply chain are relatively low levels, yet there's plenty of demand and order books are relatively strong. I think there was a Forest products conference that [indiscernible] had out in San Francisco here not too long ago and they reported that inventories were at incredibly low levels, a half months of supply compared to what typically might be one and a half months of supply.

So our sense of it is that inventories are relatively low, which gives us optimism going forward that once the seasonal slowdown in housing turns the corner and demand picks back up again that order books with them being strong will get some firming of prices. You're also starting to see some curtailments out in the West, several mills have announced downtime which ought to help the supply demand balance. So like most pundits who were forecasting prices are up I think 10% Q1 versus Q4 that's roughly our outlook as well.

So we think we're as Jerry said earlier, we're at or near the bottom in lumber prices and we think we're about to turn the corner.
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Paul Quinn

Yeah, that's pretty helpful. Maybe just maybe on that timber, we've seen interest rates come up, what are you seeing in that market especially in the U.S.?

Michael Covey

Well, we just we just closed on a couple of thousand acre acquisition here a couple weeks ago and what I'd tell you discount rates are we got what we think we got a very attractive transaction here it was a 6% discount rate, but with some 1031 like kind exchange tax benefits it turns out to be about a 9% discount rate. So I don't know that anything is materially changed though if you compare to where we were a year or two ago. We also lost that transaction a couple of months ago that had what we think was a discount rate of 3.5 %. So timber still a highly sought after asset in the South in particular.

Paul Quinn

What is driving that strong demand in the U.S. I mean it's obviously got to be disappointing over the last decade. We haven't seen any material increase in sawlog prices on the selling of pine side, so what is driving that demand?

Michael Covey

Well, you're right. There haven't been any price increases over the last decade. It has disappointed industry observers. But we talked about a little bit earlier that there's a lot of mill capacity that's going to be coming online in the next those two, three, four years. Our estimates that sawlog demand is going to go up anywhere from 15 to 20 million tons per year that should put the South back into supply demand balance. And when that does you'll see price movements, the same opportunity isn't there on the West Coast or in other parts of the country. I think that's where the opportunity is in the U.S. South.

Maine's trucking industry is booming, helped by a strong economy and industries with an increased need for trucking services. But there's one serious impediment to trucking's continued growth.

"The driver shortage is the very No. 1 issue in the trucking industry right now, bar none, hands down," says Brian Parke, president and CEO of the Augusta-based Maine Motor Transport Association.

Two of Maine's biggest trucking companies, both based in Bangor with additional facilities elsewhere in and out of Maine, are on the lookout for drivers. Hartt Transportation could use 55 to 60 more in Maine and more in other regions, up to 100 overall. Pottle's Transportation could use five or six more. Pottle has 230 drivers and 183 tractor-trailers in Maine and South Carolina.

"We need to be able to fill our trucks and continue to grow, because the business climate in Maine, over the last few years, has grown tremendously, with more businesses opening up, expanding and having the need for us to provide our services," says Hartt President Jeff Castonguay. "The problem is, we can't find enough qualified drivers. The other big issue is lack of mechanics. We have to make sure our equipment is well-maintained."
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The shortage of drivers and mechanics is tied to demand for trucking services, and that is a product of a strong economy.
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Maine's situation reflects the nation's. By 2026, the nation will need 175,000 more drivers, according to the state trade association.

The volume of timber cut from Northwest national forests is increasing due to collaborative planning and growing state involvement in logging projects, according to an Oregon forest supervisor.

For example, the Willamette National Forest — Oregon’s foremost timber producer and a regular top contender nationally — aims to generate 100 million board-feet in 2020, up from about 75 million to 80 million board-feet in 2018, said Tracy Beck, the forest’s supervisor.

Last year, 66 million board-feet were harvested from the forest, according to federal statistics.

Contrary to the common belief that federal logging projects are being tied up in litigation, lawsuits have only been a filed against a handful of the hundreds of projects in the area, Beck said at a recent timber industry tour in Corvallis, Ore.

“We’re winning most of those cases,” he said. “I really feel like collaboration has helped keep us out of court.”

Collaboratives are groups, such as nonprofits, that help steer the federal government’s thinking on logging and thinning projects and build agreement among the timber industry, environmental groups and others.

Another recent tool that’s expected to increase timber volume from national forests is the “good neighbor” authority granted by Congress in 2014 that allows state governments to carry out projects on federal land.

While such logging projects are still subject to federal environmental laws, states have more flexibility with contracting rules and are able to carry out projects more effectively, said Mike Cloughesy, forestry director of the Oregon Forest Resources Institute, which organized the tour.

Federal contracting regulations are more complicated and have set wages for certain jobs — such as road crews — whereas state regulations allow for more cost-efficiency, he said.

Developer New Land Enterprises, Korb + Associates Architects and the Milwaukee office of engineering firm Thornton Tomasetti unveiled the design for a proposed 21-story, 410,000 square-foot, mixed-use mass timber tower in downtown Milwaukee.

At 238 feet tall, Ascent is poised to become the tallest timber structure in the Western Hemisphere. Currently in the planning stages, construction is anticipated to begin in fall 2019. The team was invited to present at the prestigious Council on Tall Buildings and Urban Habitat Conference in Dubai on October 20 to share the plans with architects, engineers and planners from around the world.

As cities continue to grow taller and material resources become more precious, the demand for new technologies and sustainable materials continues to rise. The advantages of mass timber are well documented, but only recently have U.S. building codes opened the door for this revolutionary high-rise structural system.

Mass timber performs as well as, or better than, traditional materials in fire, earthquake and wind conditions. The laminated timber beams, slabs and columns in mass timber structures can be one of the world’s greatest man-made storehouses of CO2, absorbing as much carbon dioxide as produced by 2,100 cars or saving enough energy to power 1,000 homes per year. The building industry is a leading contributor to carbon emissions, and the use of mass timber as a construction material can lead to positive change in the environment.

Hurricane Michael’s enduring legacy could include long-term damage to Florida’s timber industry.

While experts try to get a handle on the carnage, state Agricultural Commissioner Adam Putnam said Friday that preliminary estimates peg it at $1.3 billion across nearly 3 million acres. The storm also damaged pulp mills, sawmills and other production facilities in 11 Panhandle counties.

"This is a catastrophic loss to the forest industry in the Florida Panhandle," Putnam said.

The storm snapped trees like so many matchsticks. Some could be salvaged for pulp, but many will be left where they fell, which raises another concern.

"As the downed forest debris dries, the potential for wildfire conditions increase," said Jim Karels, state forester and director of the Florida Forest Service. "It is critical for the Florida Forest Service to continue clearing trees and hurricane debris from roadways to reestablish fire lines and accessibility to timberlands."

Florida has more than 17 million acres of forestland, mostly in the northern half of the state. Almost two-thirds is privately owned, with most of the rest split nearly evenly beat state and federal governments.

Timber employs about 120,000 people and contributes $25 billion to the state’s economy, according to the Florida Forestry Association.

The North American softwood lumber market ended October 2018 at a low point for the year—a complete reversal compared to its record-setting performance earlier in 2018, which also came on the heels of solid performance in 2H2017.
Throughout Canada, inventories still remain heavy, customers are quiet, producers are just starting to announce seasonal downtime and secondary suppliers have an abundance of wood on hand. At sawmills, log supply has been plentiful and small orders of fill-in lumber are about the only sales tasks that need to be addressed.

Market conditions for North America softwood lumber products—the supply-demand balance—has changed drastically in recent weeks. The slowdown in US construction activity has caused lumber producers to pump the brakes just a few months after surging demand drove price levels to new highs.

At the start of 4Q, suppliers quickly found themselves with overflowing inventories and more manufacturing booked to come online quickly. Buyers, meanwhile, have backed off almost entirely and prices have responded accordingly.

An unexpected predicament recently manifested itself in the form of labor action for producers in British Columbia (BC); the United Steelworkers Union, representing sawmill workers across Canada, is currently in negotiations with two BC employer groups that have been hit by rotating strikes at select operations. In response, several individual operators have announced seasonal curtailments and downtime. This sudden uncertainty is hitting at a time when lumber demand is soft and prices are lower than earlier in the year, so the impact to production has not yet been felt in the market.

The plunge in lumber prices is probably over, Resolute Forest Products Inc. Chief Executive Officer Yves Laflamme said in an interview.

The market is “close” to a bottom, though prices probably won’t rebound to this year’s highs, Laflamme said. Last week, lumber futures tumbled to a 28-month low and have plunged 50 percent from the record in May. That spurred Interfor Corp. to announce plans to reduce output by 20 percent at its British Columbia sawmills. Canfor Corp. on Thursday said it will to cut production 10 percent in British Columbia in the fourth quarter.

Montreal-based Resolute reduced shifts at some mills in Thunder Bay, Ontario, and Quebec to adjust log inventory, Laflamme said in the telephone interview. “That’s the way we’re managing right now, and if we need to do more, we’ll do more,” he said.

Tight supplies, trade disputes and transport bottlenecks sent lumber futures higher earlier this year. As a Canadian rail logjam eased, the outlook for U.S. housing started to trail some expectation, and the lumber “market started to collapse,” Laflamme said.

Even if prices have bottomed, fourth-quarter results for lumber “won’t be that great” after the slump and the persistent dispute between Canada and the U.S. over softwood lumber, Laflamme said.

Resolute will pay about $88 million in import duties to the U.S. by the end of the year, and neither side appears to have “any interest” in a deal, he said.

On the outlook for lumber prices, “I’m not expecting to go back to where we were because that was the exception,” though the market will be “better in the next few months.”

The far-reaching consequences of the escalating trade tensions between the US and China are also a concern for the timber product export industry, according to new Malaysian Timber Council (MTC) chairman Datuk Low Kian Chuan. While manufacturers of furniture, wood-based panels and commodities like rubber and palm oil may benefit from the diversion of investment and demand from the two countries, there is the potential that excess Chinese timber products may be dumped into export markets that Malaysia currently supplies to, like Europe and Japan, Low said.

“For example, Chinese plywood may potentially flood the Japanese market, which is currently the largest market for Malaysian plywood. [There is also the] potential risk of dumping of China-made wooden products and furniture into Malaysia, which affects companies focusing on the domestic market, though this will provide more choices for domestic users,” he told The Edge Financial Daily in a recent interview.

Hence, with Malaysia’s open economic policy, Low urges stronger trade relations with both China and the US, focusing on attracting foreign direct investment from these countries.

Still, trade tensions notwithstanding, Low foresees that Malaysia will be able to achieve its target of RM25 billion export value by 2020 under the revised National Timber Industry Policy. To achieve this, he said, Asia will be the focus region for Malaysia’s exports of timber and timber products in the next few years.

U. S. Attorney Mike Hurst released the following statement tonight, posted verbatim:

Jackson, Miss. – Arthur Lamar Adams, 58, of Jackson Mississippi, was sentenced today to 235 months in federal prison for wire fraud involving a large, multi-state Ponzi scheme involving more than one hundred million dollars and hundreds of victims spanning a number of years, announced U.S. Attorney Mike Hurst and FBI Special Agent in Charge Christopher Freeze.

United States District Judge Carlton Reeves sentenced Adams to serve nineteen and a half years in prison, followed by three years of supervised release, on a charge of wire fraud involving a scheme and artifice to defraud investors in connection with a Ponzi scheme using Madison Timber Properties, LLC, a company wholly owned by Adams. Judge Reeves ordered full restitution to be paid to the victims of the scheme. During the last year of the scheme, Adams fraudulently obtained in excess of $164.5 million dollars from more than 320 investors located in at least 14 different states.
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Over a period of at least 7 years, Adams executed this sophisticated Ponzi scheme using Madison Timber Properties, LLC, a company wholly owned by Adams. From as early as 2011 through April 2018, Adams’s scheme defrauded investors by soliciting millions of dollars of funds under false pretenses, failing to use the investors’ funds as promised, and converting investors’ funds to Adams’s own benefit without the knowledge of the investors. Instead of investing his clients’ money, Adams used the invested funds for his own personal benefit and for purposes other than those represented to investors, which also included making payments due and owing to other investors, thus perpetuating the Ponzi scheme. 

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As part of his fraudulent scheme, Adams falsely represented to investors that Madison Timber Properties was in the business of buying timber rights from landowners and then selling the timber rights to lumber mills at a higher price. The object of the scheme was to cause individuals to invest in loans that purportedly were for the purpose of financing contracts for the purchase of timber rights to be sold to lumber mills at a higher price. However, neither Adams nor Madison Timber Properties had such timber rights or contracts with lumber mills, except in only a few instances.

Adams entered into fraudulent investment contracts with investors, most often in the form of promissory notes on behalf of Madison Timber Properties. The loans typically guaranteed investors an interest rate of 12-13%, with the interest to be repaid to investors over the course of 12-13 months. The monthly payments due on these promissory notes were typically due on either the first or the fifteenth of the month.

Adams created false documents causing investors to believe that their investments were secured by sufficient collateral from which they could recover all or part of their investment in the event that Madison Timber Properties defaulted on the loans. Specifically, Adams created false timber deeds purporting to be contracts conveying timber rights from landowners to Madison Timber Properties. Adams forged the signatures of landowners and also created false timber deeds purporting to convey timber rights from Madison Timber Properties to the investors.

Owners of forest land along the Florida Panhandle and beyond are grappling with at least $1.6 billion in timber losses after Hurricane Michael snapped and mangled trees across the region, according to state authorities.

Forestry officials in Florida, Georgia and Alabama estimate the hurricane damaged more than five million acres of woodland in the region when it roared through this month. The destruction marked a fresh blow to timber growers already saddled with historically low prices brought on by a glut of mature trees in the South.

The storm hardly dented the oversupply. But it wiped out decades-old investments and triggered heavy cleanup costs for local timber owners, most of whom are individuals and families.
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Landowners rarely carry insurance on timber because it isn’t cost effective. Some may be eligible for casualty loss deductions on their federal income taxes, depending on how much they invested in their timber, how long the trees have been growing and whether any money is spent replanting.

Southern yellow pine, which is sawed into lumber and pulped into paper and particle board, is one of the region’s top agricultural products. Sunshine State growers alone are out about $1.3 billion worth of wood as a result of the storm, according to Florida authorities.
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In Georgia, state officials say the lost timber is worth roughly $374 million. Forestry officials in Alabama are still tallying lost value, but have identified more than 42,000 acres of forestland in the state’s southeast corner where damage ranges from modest to total loss.

Most owners simply have to salvage what wood they can while it is still worth something. Blue stain, brought about by fungi, can set in within about a month, and ruin saw logs. And it doesn’t take long for bugs and rot to take over.
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Growers will be fortunate to salvage 20% of the damaged trees, and those that make it to mills might fetch just 20% to 50% of their pre-storm value, said Chad Nimmer, a Georgia lawmaker who works in logging.

Wind-rattled wood usually won’t make the grade for top-dollar forest products, like utility poles and lumber, foresters say. It is more likely to be pulped or mulched, which returns far less.

The condition of local mills is another concern. It isn’t economical to carry trees too far from where they are grown, with weight limits on highways, slim margins and in-demand logging crews who are reluctant to spend too much time on the road.

WestRock Co. said its Panama City mill, a likely destination for much of the downed timber, suffered substantial damage. The paper and packaging firm is working to get the line that makes facing for corrugated cardboard back to full production by mid-November. It will be at least six months before its pulp production is back to capacity.

Undamaged mills, on the other hand, may already be fully stocked from the summer logging season. “We’re hoping they’ll be considerate and take as much of that damaged wood as possible,” said Dana Stone, an Alabama Forestry Commission official.

Southern yellow pine (SYP) lumber prices leveled out in September before plummeting to a new 2018 low in mid-October. Forest2Market’s composite southern yellow pine lumber price for week 42 was $392/MBF, a 3.2% decrease from the previous week’s price of $405/MBF and a 4.6% decrease from the same week in 2017. This is also the third week in a row that prices in 2018 have been below prices in 2017.
Price volatility decreased in September as prices were range-bound between $430/MBF and $438/MBF. After reaching a record high price of $576/MBF in late June, SYP prices declined rapidly before bottoming at their lowest point of the year in week 42.

A closer look at some of the prices we have seen since the beginning of the year:

1Q2018 Average Price: $449/MBF
2Q2018 Average Price: $523/MBF
3Q2018 Average Price: $486/MBF
YTD Average Price: $471/MBF

Sales of new single-family houses were down 13.2 percent in September from a year earlier, the Census Bureau reported Wednesday. That’s a lot — the biggest year-over-year percentage decline since April 2011, when the housing bust was still busting.

It is also within the margin of error. The Census Bureau doesn’t go out and count every home sold. It takes a sample, and it estimates that there is a 90 percent likelihood that actual home sales nationwide in September were somewhere between 26.8 percent lower than a year before and 0.4 percent higher. The midpoint of that range is 13.2 percent.

There was one region of the country, though, where home sales were definitely down by a lot. That would be the Northeast, where new home sales fell year over year at a rate somewhere between 31.2 percent and 71.4 percent (midpoint: 51.3 percent).

Why might this have happened? Nationwide, rising interest rates would seem to be the obvious culprit for any decline in home sales. The average 30-year fixed mortgage rate was 4.85 percent as of Oct. 18, up from 3.88 percent a year before and higher than it’s been since 2011, according to Freddie Mac.

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But there’s this other thing that’s weighing on the Northeastern housing market: the provision in the Tax Cuts and Jobs Act passed by Congress and signed into law by President Donald Trump in December that restricts deductions for state and local taxes (aka SALT) to $10,000 a year. Some homeowners in states with (1) high housing prices and (2) high property tax rates will see much bigger tax bills as a result. Those homeowners happen to be concentrated in the Northeast. 

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The SALT effect seems to be showing up in prices as well, with the New York area (which includes suburban counties in Connecticut, New Jersey and Pennsylvania) the worst performer this year to date among the 20 metro areas tracked by S&P CoreLogic Case-Shiller Home Price Indices.

Existing home sales have declined even more rapidly in the West than in the Northeast. But that seems to be more about high prices than the loss of the tax deduction.

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So blame the Federal Reserve and the stronger economy (and maybe the rising federal deficit) for any national housing slump. In the Northeast, though, you can thank the authors of the Tax Cuts and Jobs Act.

As the Supreme Court of the United States returned from its summer recess on Oct. 1, one of the first issues heard during its new term involved a timber giant with a major presence in Columbia County, a rare frog and a challenge of the U.S. Endangered Species Act of 1973.

In the case, which has been appealed all the way to the high court since 2012, the Weyerhaeuser Company—owner and operator of a veneer plant in Emerson and a nursery in Magnolia—and a Louisiana landowner are at odds with the federal government over 1,544 acres in St. Tammany Parish involuntarily deemed a "critical habitat" by the federal government for the endangered dusky gopher frog. The problem, though, according to the petitioner, is that the frog has not called the acreage home since 1965 and the land as it exists now cannot support the animal.
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The matter began in 2011 when, according to a Sept. 13 New Orleans Times-Picayune report, the federal fish and wildlife agency classified thousands of privately-owned acreage in Louisiana as a possible breeding ground for the amphibian. The dusky gopher frog, also called the Mississippi gopher frog, is currently only seen in the Magnolia State, where approximately 100-150 still live in the wild just north of Gulfport, Miss.

The Louisiana land, owned by New Orleans resident Edward Poitevent and his family, is, according to the wildlife agency, the only area in the country that the frog could potentially rebreed if its natural homelands in Mississippi suffered a major drought and displaced the animal. But the acreage now, according to an Oct. 1 report by the Property and Environment Research Center, is full of lush commercial-grade timber and not suitable for the frog.

To convert the land into a proper habitat, an abundance of the existing pines would need to be chopped down, new variations of foliage planted, and further accommodations made, including regular controlled property burns and clearing of the land. The Endangered Species Act also places certain restrictions on the area that would likley severely hinder most future development plans or industrial timber farming.

Poitevent claimed the endangered species "habitat" tag placed on his acreage—due in no small part to a tract that includes five ephemeral (seasonal) ponds suitable for the frog's breeding—would devalue the parcels to the tune of $34 millions of dollars. It would also cost him personal expenses to convert the property for the frog even as it has not called the area home for more than 50 years.

Weyerhaeuser Company, which filed the 2012 suit against the federal wildlife agency, has interest in the matter since it currently holds a 140-acre timber lease on the Poitevent family land that does not expire until 2043.

One of the architects of a federal program that pays farmers to plant cropland with trees or grasses says the decades-old subsidy is his “biggest professional regret,” partly for the way it has distorted markets for Southern timber.

Trees planted in the late 1980s and early 1990s with help from the program are now ready to harvest and flooding the market, adding to a glut and depressing prices for Southern yellow pine. The Wall Street Journal examined the tumbling fortunes of farmers-turned-forest-owners in an article last week.

Mike Gunn, who served in the Reagan administration as legislative director for the Soil Conservation Service, said in an interview that he led efforts to include the Conservation Reserve Program in 1985’s Farm Bill, which was drafted in response to plunging crop prices.

The conservation program promises farmers with qualifying land annual rental payments for every acre of cropland they replace with trees or grasses. The aim was to prop up prices for agricultural commodities by taking fields out of rotation while also stemming erosion in ecologically sensitive areas.

“What was meant to be only a temporary reset turned into a boondoggle,” said Mr. Gunn, who went on to be a state legislator in Mississippi and is now a real-estate investor. “Like everything else in government that starts out with honorable intent, the CRP gained entrenched political support; then turned into a crony capitalist welfare system for well-heeled farmers.”

Starting in 1986, droves of Southern landowners signed up for the program. By 1994 they had planted some 2.2 million acres with pine trees, which are harvested for lumber and paper. The subsidy program paid them about $30 to $50 an acre, for up to 15 years.