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Economic Outlook

After a very strong showing in 3Q2007, growth of real US Gross Domestic Product likely will be cut in half by year’s end. The housing market and associated finance-industry debacle are two main players behind the expected slowdown. Price inflation is poised for a comeback, especially in food and energy, thanks in part to the greenback’s depreciation on a trade-weighted basis. If the US dollar continues to weaken, exports could yet provide some relief to beleaguered solid-wood manufacturers.

The US economy grew at a surprising clip in 3Q2007. The Commerce Department posted a stronger-than-expected increase of 3.9 percent for its advance estimate of annualized change in real Gross Domestic Product (GDP) .

Understandably, there are several segments of the economy that – on the surface at least – appear to be fairly robust:

The above is an excerpt from the November issue of the Economic Outlook. To learn more about the Economic Outlook or to subscribe click here.

Corn to share market with trees in ethanol production
As oil prices rise and the debate over ethanol intensifies, trees are emerging as a better source for the alternative fuel than corn. And, with developing technologies, ethanol and Southern forests are positioned to be a key component of the country’s future energy needs.

For years, corn has been the leading ethanol source because of its mass availability and an advanced refinery process. However, woody biomass – a feedstock that includes tree limbs, leaves and other byproducts of the forest products industry – is emerging as a viable, plentiful and more efficient source for ethanol.

Advances in cellulosic ethanol technology could turn wood chips and sawdust into fuel for cars across the country without impacting food prices, but the refining process is costly and complex. The technology that will make it commercially available and competitive with gasoline is still being developed.

Critics say corn ethanol is flawed because it takes almost as much energy to produce as it yields as a fuel. Corn ethanol is also blamed for increasing food prices as farmers, driven by high returns and government subsidies, convert fields to plant corn instead of other crops.

Recently, Jean Ziegler, a United States advisor to the United Nations, said the use of corn to make fuel was a “crime against humanity” because it exacerbates world hunger. That prompted a harsh rebuke from the National Corn Growers Association.

Tensions are running high, but corn will continue to be a feedstock for ethanol. Even if woody biomass becomes widely successful, corn ethanol will be used in corn growing states where the distance from the field to the refinery and on to the pump is short.

In the future, corn and woody biomass are likely to share the feedstock market for ethanol.

Market conditions worsen for mills, suppliers and timberland owners
Uncertainty and market volatility in the forest products industry caused by the residential housing sector is forcing lumber mills in the South to cut production or shut down for extended periods of time.

The problem is multifaceted, and it affects everyone in the industry, said Scott Twillmann, senior analyst for Forest2Market. Lumber markets are suffering because of the housing crisis, and reports indicate that residential construction will continue to decline before it begins to recover.

Meanwhile the wet season is approaching, which usually runs from December through the end of spring and brings difficult logging conditions. Also, questions remain about the amount of premiums historically placed on accessible tracts of timberland that can be logged year-round.

Suppliers are caught in the squeeze. The decline in residential construction has caused stumpage prices – the value of standing timber – to fall so far that sellers have been pulling tracts off the market for the last four or five months. Suppliers are running out of tracts of timber that they have contracted to harvest and deliver to mills, and it’s too costly for them to idle their equipment.

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