Economic Outlook
The U.S. economy in July was, in a word, volatile. Almost daily, we experienced triple digit fluctuations in the stock market. Oil prices hit an all-time high of $147/barrel before retreating to $120/barrel. Unemployment claims soared to a 5-year high during the last two weeks of the month. Financial institutions continued to wobble, and the $500 billion bailout/nationalization of Fannie Mae and Freddie Mac is likely to be just around the corner. The balance between interest rates and inflation is more and more precarious, and many predict that—in order to stave off further inflation--the Federal Open Market Committee will hike interest rates in early 2009 if not sooner.

Since July’s volatility, however, the economy has shown some positive signs: oil prices have settled, with gasoline and diesel prices dropping significantly; the exchange rate for the U.S. dollar is also holding relatively steady against foreign currencies.

Unfortunately, not much has changed in the housing market. The most recent report by the National Association of Realtors (NAR) reports an 11.2 month supply of houses on the market and a continued decline in housing starts. Prices are still dropping as well (median home prices were down 7.1 percent from this time last year). The single bit of good news is an increase of sales—the NAR reported a 3.1 percent rise over June’s levels—as a result of good prices and the buying incentives in recently passed housing legislation. Our models still show that though sales are starting to show signs of improvement, housing starts will not follow suit until mid-2009.

The above is an excerpt from the August issue of the Forest2Market® Economic Outlook. To learn more about the F2M® Economic Outlook or to subscribe, click here.

On Growing Green, Going Green, and Getting Green: Ups and Downs on the
Chicago Climate Exchange
The Chicago Climate Exchange (CCX), the first voluntary carbon trading platform in the United States, started operating in 2003. Since the market’s inception, prices for carbon credits have fluctuated wildly, moving from $1.70 per metric ton of C02 in November 2007 to a high of $7.40 per ton in May of 2008. What accounts for this volatility? As with all markets, the supply and demand fundamentals are influenced by a variety of factors. With the CCX, the tale of influence includes the lack of transparency, market interventions by the exchange, electoral politics, legislation, and financial speculation.

The most important factor affecting prices on a voluntary carbon market is transparency. Buyers want to know that the offsets they purchase represent actual reductions in greenhouse gas emissions. On the CCX, this transparency can be tricky. Two types of credits are traded on the CCX: allowance-based credits and offset credits. When a member organization reduces its emissions beyond its targets, it can then sell “surplus” reductions as allowance-based credits to other member organizations. An offset credit represents a project taken on by a non-trading member of the exchange that either reduces or captures emissions; the integrity of these projects is verified through a third party.

Forestry credits fall into the latter category since they capture and store carbon emissions. CCX currently accepts three types of forestry projects: 1) afforestation credits are given for planting trees on land previously unforested (with 15-year no-cut commitment), 2) managed timber credits are given for timberland with American Tree Farm Certification (again with a 15-year no-cut commitment), and 3) long-lived wood credits are given for certain product classes after harvest, as wood used to frame houses and craft furniture continues to sequester carbon.

The issue with transparency for the CCX is that the actual allowance- and project-based credits are not traded on the exchange. Instead, once allowances or projects are registered at the exchange and verified, carbon financial instruments (CFIs) are issued. These CFIs are backed by, but not tied directly to, specific allowances or projects. While each CFI represents 100 tons of CO2 equivalent, there is no way to identify whether you have an allowance backed credit, a no-till soil project offset, or a managed timber project offset. In a recent survey, buyers of carbon credits indicated that the most important factor in their credit buying decisions was quality—a combination of demonstrable emissions reductions or sequestration and third party certification. For those concerned with quality, CFIs may not be that attractive.

Buyers also reported an interest in “co-benefits” when they buy carbon credits; these “co-benefits” range from social and environmental to the economic and business benefits that occur as a result of offset projects and in addition to reducing or capturing emissions. Let’s look at an example. Home Depot is a company that relies on forests for significant portions of its inventory. If Home Depot wants to offset its carbon emissions by purchasing CFIs, it might want to purchase CFIs backed by forestry-based offsets. By strategically offsetting its own emissions with forestry credits, Home Depot would get the additional benefit of having a positive influence on its future supply lines. Today, however, since the CCX does not allow for this type of transparency, companies looking for co-benefits must either take a chance or look elsewhere for their offsets.

Other factors affecting prices on the CCX are market intervention by the CCX, politics, legislation, and speculation by financial institutions. A tracking of the price through the nine-month period beginning November 2007 and ending in August 2008 will illuminate these additional factors. To see more, click here.

Best Places for Biomass in the United States
Forbes magazine named Georgia the third best place in America for alternative energy, citing the amount of privately owned forests in the state, the 50 million tons of state owned timber used by wood-products manufacturers, and the substantial volume of primary mill wood debris produced by the industry. Mississippi came in fourth, in part because the 3.6 million dry tons of logging waste that remains in the forest after harvest is ideal for the production of cellulosic ethanol. Eighty-five gallons of ethanol can be produced from one dry ton of wood chips.

All Wood Is Woody Biomass, Isn’t It?
Not according to the 2007 Energy Act. Signed into law December 19, 2007, the 2007 Energy Bill set a Renewable Fuels Standard (RFS) of 36 million gallons in 2022; 16 million of those gallons are mandated to come from cellulosic biomass. That sounds like good news for timberland owners. Unfortunately, the legislation defines woody biomass in a way that excludes 88 percent of all private forest land. According to the Forest Landowner’s Association, this “has the potential to impact the locations of new facilities where we could sell wood.”

In response to this flaw in the 2007 Energy Act, HR 5236—the Renewable Biomass Facilitation Act of 2008—is sitting in the House of Representatives awaiting the return of Congress after the Labor Day holiday. HR 5236 would allow all wood to be defined as woody biomass. If you would like to encourage your Representative to cosponsor and support this bill, find his or her phone number by visiting www.house.gov and entering your zip code in the top left corner, or by calling the Forest Landowners Association at (800) 325-2954.

Join Your State Forestry Association and Make Sure Your Voice Is Heard
State forestry association annual meeting season is upon us. Reminders for these meetings are popping up on our calendars here at F2M daily. We thought we’d take this opportunity to remind you to join your state organization if you haven’t already. And if you’re already a member, go to the annual meeting. While there you can mix business and pleasure, meet others in the forestry industry and learn about changes that are occurring.

In addition to the annual meeting, state forestry associations provide many year round benefits; they provide educational programs on forest management, and many of these programs are free. State forestry associations also act as lobbying groups; they represent the interests of participants in the forestry industry to both state and federal governments. Joining the state organization is the most effective way for forestry professionals to make sure their voices are heard. By becoming involved in your state association, you can help influence tax, environmental, and energy policy so that they benefit you and the forestry industry. Click here for state resources and links to annual meetings, if available.

NAFO
On a national scale, the newly formed National Alliance of Forestry Owners (NAFO) has a mission similar in nature to that of the state forestry associations. Formed to work on a “defined policy agenda to promote legislative and market policies that will enhance the economic and environmental value of forests,” NAFO is based in Washington D.C. and will spend its time educating its members about policies and proposed legislation and lobbying on Capitol Hill. NAFO members, including Forest Capital Partners and Resource Management Service to Plum Creek and Hancock, own or manage almost 60 million acres in 47 states including all of the U.S. South and the Pacific Northwest. David P. Tenny, formerly the V.P. of Forestry and Wood Products at AF&PA, has been named CEO.

The policy issues that NAFO will focus on initially include:

• Renewable Energy: encouraging investment in forests as a source of renewable energy, “by establishing non-restrictive definitions of forest biomass eligible for use in renewable energy programs.” (See “All Wood Is Woody Biomass, Isn’t It?” above.)
• Climate Change: supporting a mandatory cap-and-trade system that specifies how forest landowners can demonstrate legal equivalency for the carbon sequestered in forests, the carbon stored in wood products, and the carbon dioxide avoided by using wood as a renewable energy source in the place of fossil fuels.
• Long-Term Investment and Tax Policy: modernizing tax provisions to take into account new ownership structures such as REITs and TIMOs and “encourage long-term sustainable forest management.”

American Tree Farm System Certification Recognized Internationally
Certification through the American Tree Farm System (ATFS) was recently recognized by the Programme for the Endorsement of Forest Certification (PEFC), an international non-profit organization. As a result, family forest owners in the U.S. who receive certification through ATFS will be able market their sustainably produced timber to “green” markets, which often pay a premium.

Pete Stewart Speaking at South Carolina Forestry Association Annual Meeting
Pete Stewart, F2M founder and President/CEO, will be speaking at the 2008 South Carolina Forestry Association Annual Meeting in Hilton Head, SC. The South Carolina Forestry Association (SCFA) is a private, non-profit organization of individuals and companies dedicated to forest conservation and the sustainable use of natural resources. SCFA is a partnership of landowners, loggers, foresters, educators, researchers, conservationists, and sportsmen. They are joined by lumber mills, pulp and paper mills, wood processors, and equipment dealers.

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