Economic Outlook – [Excerpted from the December 2007 F2M� Economic Outlook]
After a sizzling 4.9 percent 3Q2007 growth rate in real Gross Domestic Product, the economy appears poised for a substantial slowdown during the current and coming quarters. Continued uncertainty in the financial markets has reduced business and housing-related lending, and stubbornly high energy prices are restricting consumers’ spending habits. It remains to be seen what effect the freezing of some distressed homeowners’ interest rates will have on the housing market, and whether the government-sponsored agreement even survives in the courts.

Although the Bureau of Economic Analysis revised its estimate of growth in 3Q2007 Gross Domestic Product (GDP) sharply higher – to 4.9 percent from the previous estimate of 3.9 percent – evidence continues to mount in support of a 4Q2007 slowdown:

The Federal Reserve’s most recent Beige Book notes a “marked loss of momentum as seven of the 12 districts reported slowing growth.”

� At a 29 November presentation, Bernanke said, “[Federal Open Market] Committee members took the view that tightening credit conditions – the product of ongoing stresses in financial markets – and some intensification of the correction in the housing sector were likely to restrain economic growth.”

US construction spending resumed a decline in October, reversing two months of gains.

Real incomes are shrinking as inflation outstrips wage growth.

The seasonally adjusted four-week moving average for initial jobless claims rose to 340,250 at the end of November, the most since late October 2005.

The above is an excerpt from the December issue of the F2M� Economic Outlook. To learn more about the Economic Outlook or to subscribe click here.

Demand for wood chips rises as weak housing market restricts supply
Power companies in the South and Pacific Northwest will drive prices for wood fuels higher as new facilities are built to produce an energy alternative to fossil fuels, according to experts in the forest products industry.

But the supply of wood chips – a byproduct of lumber production used at pulp mills and power facilities – is dropping as residential construction drastically slows in the weak housing market. The reduced supply has raised prices by almost 10 percent since the third quarter of 2006.

“The supply of wood chips is already low because of the problems with the housing market,” said Pete Stewart, president of price information provider Forest2Market. “Increased demand from power facilities will continue to increase prices.”

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Massive storm hurts Pacific Northwest timber prices
The early December storm that ravaged the Pacific Northwest and devastated thousands of acres of forests will lower timber prices.

The crippled housing market has already shut down mills and lowered prices of delivered logs because of weakened demand for lumber, said Gordon Culbertson, Pacific Northwest region manager for price information provider Forest2Market. As landowners race to salvage downed trees, they will encounter the lowest log prices in many years.

“Landowners who were planning to harvest their timber when the housing market recovers will be forced to sell their downed trees now at reduced prices,” Culbertson said. “This will particularly hurt small woodland owners who were relying on their stands for retirement. They are concerned there may be a shortage of loggers and limited interest by mill buyers for the salvaged logs.”

The storm blew through the region on Dec. 3 with sustained winds of 50 mph and gusts that exceeded 100 mph. Preliminary estimates indicate the winds and torrential rains may have downed 1 billion board feet of timber in Washington, which is almost one-third of the state’s annual timber harvest. Oregon’s reported 270 million board feet is also a very significant volume of blow-down.

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US and Canadian lumber dispute to be resolved in February
The Softwood Lumber Agreement (SLA) between the United States and Canada continues to spark debate. The US Coalition for Fair Lumber Imports charged the British Columbia government early November of artificially restricting demand for logs by raising the export tax. Canadian lumber exporters can choose to pay export charges of up to 15 percent or cap the charge at 5 percent with an additional restraint on export volumes. The US has accused Canada of interpreting the section of the SLA unfairly, giving Canadian exporters an unfair advantage. The U.S. claims that as lumber prices fell and the export volumes allowed under SLA became more restrictive, several assistance programs implemented in Quebec and Ontario violated SLA anti-circumvention provisions. The new British Columbia tax, effective February 1, is expected to cut exports from public lands by 50 percent. “The new log export restraints will reduce B. C. lumber producers’ manufacturing costs to offset SLA lumber export taxes,” said coalition chairman Steve Swanson. In a statement made earlier this year, US Trade Representative Susan Schwab asserted that Canada had not “live[d] up to its SLA obligations relating to export volume caps, proper application of import surge mechanism, and anti-circumvention.” Disagreements arose, said David Emerson, Canada’s Minister of International Trade, due to “differing interpretations of the Softwood Lumber Agreement by Canada and the U.S” that were not resolved during the consultation phase. According to Fair Lumber Imports, by May 2007 Canada had under-collected $116 million in export taxes and shipped 522 million board feet over quota. The London Court of International Arbitration (LCIA) announced in December that it expects to rule on the charge by the end of February.

Timberland value rises in the US South
The value of timberland in the US South rose 14 percent in the fourth quarter from the same time last year, despite an 8.3 percent decrease in the value of other lands in the South, Northeast and Pacific Northwest. According to Merrill Lynch & Co., another $4 billion will be invested in forests within three to five years. A large portion of this investment will come from pension funds and endowments as a hedge against inflation. Despite the housing slump and the resulting decline in the price of lumber, timberland remains an attractive investment to these groups who can “wait out sagging lumber prices,” said Robert Bertram, executive vice president of investments at the Ontario Teachers’ Pension Plan, which has acquired $3.16 billion of forests mostly in the US. “When you’re in a Market like this, the strength of a pension fund owning timber versus a lumber mill owning it is we have no pressure to sell the timber at any moment in time.”

Timber Tax Tips: Maximizing Your Deductions – [Excerpted from the F2M� Timber Owner Market Guide, vol. 7, issue 6]
Albert Einstein once said “[Filing income taxes] is too difficult for a mathematician. It takes a philosopher.” Timber landowners are in fine company, as they too could benefit from the auspices of a philosopher to determine the purpose, as required by the IRS, of their timberland. Treatment of income, expenses and losses for federal income taxes is based on a staggering number of variables including how timber management activities and timber basis are classified. Make sure to talk to a timber tax professional about the exact specifications for the following timber tax guidelines.

� Determine the purpose of your timberland ownership for tax purposes. Classifying your timber as a trade or business, investment or for personal use can determine the amount of deductions you can make on your taxes.

� Establish the Timber Basis of your property. Timber Basis, for tax purposes, is the cost of forest land and timber acquisitions. Timber landowners should establish different capital accounts for each type of property (land, timber, buildings) to take advantage of all permissible deductions. Timber basis ideally should be determined at the acquisition of the property, but can be completed retroactively.

� Complete the IRS Form T “Forest Activities Schedule” for timber depletion deductions, timber sales under IRC section 631(b), and timber sales or exchanges under IRC section 631(a).

� Verify how your timber sales income should be treated. Income from timber sales can be treated as either a long-term capital gain or ordinary income. Capital gains are taxed at a lower rate than ordinary income. IRC section 631(a) allows timber landowners to deduct the adjusted basis of the timber and additional costs from the gross sale. IRC section 631(b) applies to pay-as-cut contracts and allows owners to treat all gain as capital gain income.

Find additional timber tax resources online by clicking here.

The above is an excerpt from the November/December issue of the F2M� Timber Owner Market Guide. To learn more about the F2M� TOMG or to subscribe click here.

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