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MARKET WATCH

Seeing the Forest and the Trees: Understanding Forest Inventory

Posted by Joel Swanton on December 5, 2018

Distinguishing total forest inventory from commercially-available inventory is critical for accurately understanding current and future supply in a wood basin. Insight into the volume of commercially-available timber is gained through the analysis of forest inventory (supply) and the percentage of harvests (removals).

Consider, for example, an analysis of total forest inventory in a distinct region—the Pacific Northwest (PNW)—using Timber Supply Analysis 360, Forest2Market’s new interactive tool that provides fast, streamlined access to Forest Inventory and Analysis data. Though each forested region of the US has millions of timberland acres and robust forest industries, the available inventory in the PNW is, for instance, quite different than the available inventory in other regions due to different ownership and forest management structures.

Inventory_1

The graph below shows that most of the PNW’s timber volume—totaling over 391 billion cubic feet on both private and publicly-owned land—is in age classes older than 70 years old, much of which is well over 150 years old. (It’s important to keep in mind that these numbers represent all inventories of all species, not just those that are accessible to the commercial market, which will represent only a sliver of the total inventory.) Based on this information, one might conclude that an abundant available supply exists in the region. But a deeper dive into the data illustrates an ownership dynamic that tells a different story.

 Inventory_2

 

While the total inventory on privately-owned timberland is significant at over 97 billion cubic feet, it pales in comparison to the inventory on state and federal lands. Some harvest activity does take place on state and federal lands, but a vast majority of the PNW’s merchantable timber is harvested from private lands.

 

Inventory_3

 

Narrowing the focus and looking at the age class data from privately-owned timberland only, we can see that the inventory looks very different. We see a concentration of inventory and potential supply in the 31-90 year old age classes (roughly 60 billion cubic feet), and a much lower percentage exists in the high age classes of 100+ years old.

 Inventory_4.jpg

 

How much of this potential supply is realistically available on the market? A look at the removal data will help us drill down even further. While roughly 60 billion cubic feet of total inventory exists in the 31-90 year age classes, we can see that 2.1 billion cubic feet are harvested annually and a vast majority—1.6 billion cubic feet, or 76%—are on privately-owned land. This represents 2.8% of inventory in the 31-90 year age classes, and 0.4% of total inventory in the PNW.

 Inventory_5.png

 

Further investigation into harvest removals of the most popular commercially-valuable species helps us drill down yet again to understand how the inventory may change in the PNW. As an indicator of the trajectory of inventory over time, the growth-to-removal ratio (GRR) of a supply basin quantifies whether forest inventory is increasing or decreasing.

A value of 1.0 suggests growth and removals are in balance; a value greater than 1.0 means forest inventory growth is outpacing removals, and a value lower than 1.0 means removals are outpacing growth. GRR in a region tends to be cyclical over long periods of time as market forces react to high or low ratios that then move back toward equilibrium. Additionally, GRR can influence price. Extended periods when removals exceed growth typically indicate tight supply, and the market faces upward price pressure as a result; the reverse is also true.

Analyzing GRR for Douglas fir, True fir and Western hemlock on privately-owned timberland in the PNW, we see strong, steady demand for all of these resources and in the case of hemlock, removals are currently outpacing growth.

 Inventory_6.png

 

This deep knowledge of regional forest inventory provides a reliable foundation when we interpret trends in relation to the larger market. The data suggest that the three log species noted above are in high demand, and Forest2Market’s pricing data confirms this: Domestic prices for Douglas fir logs, for instance, have remained at sustained high levels (above $800/MBF) since December 2017, even cresting the $900/MBF mark in May and June of this year. Export prices for Douglas fir logs have also hit a high point of $894/MBF in May, though they have come down in recent months.

Hemlock fir prices have followed a very similar trend, albeit at a lower price point near $700/MBF. The tense and uncertain trade situation with China has undoubtedly driven regional log prices lower, and the abrupt crash of the North American lumber market has also impacted these prices in recent months.  If removals continue to outpace growth, however, and Western hemlock supply tightens, prices will eventually rise above the market threshold, causing supply and demand to rebalance and GRR to move closer to a sustainable level. As such, this dynamic can have significant impact on consumers of the species.

For mills that consume a large portion of Western hemlock in their product mix, this type of insight—available via Timber Supply Analysis 360, which provides a comprehensive view of regional forest data in a single platform—can be invaluable. It can help form the basis for procurement budget forecasts and help to develop strategic plans for reducing the risks associated with restricted supply. Whether you buy or sell timber, a customizable, interactive and granular look at forest inventory data can help improve your decision-making and profitability—regardless of the wood basin you operate in.

 

Timber Supply Analysis 360 call to action

Topics: timber supply analysis 360, timber supply, forest inventories, Pacific Northwest Log Markets, Pacific Northwest log prices, Pacific Northwest Market Trends

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