Economic Outlook
The U.S. economy grew at an anemic rate of 0.6 percent in 1Q2008, the same rate as during 4Q2007. The tepid reading prompted Aneta Markowska, an economist for Societe Generale, to say, “For the U.S. economy, which can potentially grow at about 2.75 percent, consistent growth below 1 percent should be considered recessionary.” Most indicators point to additional slowing during at least 2Q and perhaps 3Q2008 as well.
Forest products manufacturing reported mixed results in the latest ISM report. Survey respondents noted that the weak U.S. dollar is “challenging” supply chains by driving input costs higher, particularly for fuel and energy. These higher input costs are adversely affecting the profitability of forest products manufacturers.
The U.S. dollar has strengthened against other major currencies recently, despite another interest rate cut by the Federal Reserve, but that appreciation alone is unlikely to result in material crude oil price decreases in the near term. Although the housing market continues to soften, we expect some signs of a turnaround to become evident by year-end 2008.
The above is an excerpt from the May issue of the Forest2Market� Economic Outlook. To learn more about the F2M� Economic Outlook or to subscribe, click here.
High freight costs kept at bay
Higher freight rates may be down the pipeline for pulp and paper manufacturers as fuel costs continue to strain wood fiber suppliers. Delivered costs for raw materials across U.S. South, while negatively impacted by rising transportation costs, have not kept pace with the astronomical rise of fuel prices. Crude oil has more than doubled in the last year, from $63.97 per barrel in April 2006 to $112.57 per barrel during April 2008. Diesel prices are also at an all time high of over $4 per gallon at the pump, up more than $1 since the same time last year.
Although pulp and paper manufacturers in the U.S. South paid more during 2007 to transport roughly the same total volume of raw materials, Forest2Market benchmark data shows this was due primarily to an overall increase in the distance materials were hauled. The freight rate (delivery cost per mile) did not increase substantially compared to the change in fuel prices. Across the U.S. South from 4Q2006 to 4Q2007, the average freight rate increased by 5.8 percent for pine pulpwood, 4.3 percent for roundwood chips and 7.3 percent for sawmill residual chips. With average crude oil prices expected to remain elevated substantially above $100 per barrel for the next eighteen months, the current dampening of a substantial freight rate increase will surely dissipate.
2008 Farm Bill Update: Almost to the finish line
The long fight to pass the large $290 billion farm bill is almost over. Passage of the bill was held up first by President Bush’s May 21 veto and then due to the discovery of a printing mistake which sliced 34 pages from the bill sent to the President. The veto of the truncated bill was overridden by both houses with overshelming margins, but Congress is expected to pass the entire bill once again under a separate number. The flagging timber industry will receive some relief through a number of provisions designed to better position the industry for global competition, as well as advanced biofuels legislation that could help infuse the industry with new revenue sources.
To read more, click here.
Foreclosure bill likely to be passed
The Foreclosure Prevention Act of 2008, passed by both the House and the Senate, is currently in committee, where a number of Senate amendments to the bill have been accepted already, but will it be enough to actually accomplish what its title suggests? The bill, if passed, would provide some relief to lenders, businesses and, most recently, to stressed borrowers. A controversial provision that would have allowed bankruptcy judges to reduce the principal on troubled borrowers’ mortgages was axed early in the legislative process. The Senate Banking Committee is currently reviewing provisions in the bill and has announced a recent amendment that would benefit homeowners by allowing them to refinance into a government-guaranteed mortgage. Rather than allowing judges to force insurers to lower mortgages, the Senate provision is a voluntary measure. The FHA would insure mortgages if lenders agree to refinance the mortgage at 85 percent of the home’s current appraised value. The White House, despite an earlier threat to veto the bill, according to Rep. Barney Frank (D-Mass.), is expected to pass the new bill once it leaves committee.
To read more, click here.
When the world turned against ethanol (and forgot about energy security)
A few short months ago, the Energy Independence and Security Act of 2007 was hailed by politicians as a major breakthrough in energy policy and panned by environmentalists who claimed the 36 billion gallon Renewable Fuel Standard (RFS) was not enough. Since then, a number of contradictory statements and reports have spread alarm and caused politicians to retract earlier support. Twenty-four Republican senators, including Sen. John McCain, recently asked the EPA to waive or reduce the RFS. The current debate over ethanol is centered on the cost and environmental impact of ethanol production, with voices from both sides lobbing contradictory findings from an ever increasing number of studies. Further, this debate has obscured the intent of the RFS: to reduce greenhouse gases, transition away from non-renewable fossil fuels and achieve energy security.
To read more about the ethanol debate, click here.
Mississippi loggers ask the state for relief
Loggers in the U.S. South have seen profits hemorrhage due to the rising cost of diesel. High fuel costs have pushed a number of loggers, already hit hard by the housing slump, out of business and, without state aid, many more could follow says the Mississippi Loggers Association (MLA). In an open letter sent to Mississippi Gov. Haley Barbour, the MLA requested “immediate relief” from the state that would help stem the loss of thousands of jobs in the logging industry. According to the MLA, the logging industry contributes more than $14 billion per year to the state economy and directly employs more than 52,000 people. The association proposes four measures that will determine the “survival” of the Mississippi logging industry:
� A state fuel tax waiver for off-road and on-road diesel during the remainder of 2008.
� An increase in highway weight limits to 88,000 pounds.
� A sales tax waiver for equipment and truck supplies and parts.
� A waiver of landowner severance taxes collected at mills.
� A waiver of landowner long-term capital taxes.
Keeping Family Forests Intact
Over time a family forest, whether it was home to recreation or business, can come to represent a family’s history and values. This physical record of a family’s history can be difficult to keep in one piece. Economic pressure and high estate taxes can disrupt the original legacy, as children are forced to sell the land. Fortunately, several options exist today that allow families to maintain the integrity of their land into the future.
One option for families who manage their forests as timberland is to form a limited liability company (LLC). An LLC is a form of business partnership in which members’ liability and management responsibility can be tailored to meet the needs of the individuals in the partnership. Members are classified as either general partners or limited partners. General partners and limited partners are liable only for the amount invested into the company. This means that members are responsible for debts accrued by the LLC only in proportion to their ownership share. Management decisions, however, are controlled by general partners.
An LLC can help parents keep the forest intact while dividing ownership, liability and management responsibility among their children, grandchildren and other heirs. Additionally, it can significantly reduce the amount of estate taxes levied against the property, as the value of the property can be disbursed among several “owners” to whom parents can gift shares of the property during their lifetime.
To find resources in your state about forming a Limited Liability Company, click here.
Learn more about estate planning and other important issues that affect timberland owners. The Forest2Market� Timber Owner Market Guide delivers news, helpful hints and accurate, local timber prices from three U.S. South regions. To find out more, click here.
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