As we approach the end of the year, it's a good time to analyze year-to-date (YTD) and historical stumpage market trends and prices in the US South. While winter seasonal pressure typically drives prices higher, I want to take note of the data before 4Q affects the market.
During a recent FRA event in Wisconsin, I was asked to speak about wood fiber supply chain characteristics that are unique to different wood basins within the US, as well as other parts of the world that have healthy forest products industries. As I was doing research and pulling together the specifics for my presentation, I found it helpful to start the process with a wide-ranging view of each of these regions while asking a very simple question-one that is at the foundation of the forest products industry: What is the most efficient way to move wood raw materials from the stump to the mill?
Cost reductions will always be an objective for wood consuming mills, especially in times of economic recession like Brazil is now facing. Economists are undecided on Brazil's growth prospects in 2016. Even in the most optimistic scenario, experts believe the economy will not recover until the second half of 2016, and some specialists are pushing this date to mid-2017. Until the recovery begins, forest products companies in Brazil will continue to cut costs and postpone investments.
In the Northwest United States, the primary source of wood for building products and pulp and paper mills is the timberland owned by institutional investors (timberland investment management organizations and real estate investment trusts) and corporate landowners. Like landowners around the globe, the goal of these entities is to obtain the highest possible stumpage prices for their timber. In order to do so, they have traditionally matched log flow volume with demand. These sophisticated timberland owners are sure to meter out volume on an as needed basis. If you believe in the laws of supply and demand, then this practice should - all things being equal - keep log prices flush. Since abundant supply generally brings prices down, this strategy makes sense.
Lean manufacturing, a customer-focused management philosophy for waste elimination and quality improvement, focuses-as is often said-on making obvious what adds value by reducing everything else. One of the foundations of lean manufacturing is the Japanese concept of Kaizen, a striving for continuous, daily improvement. Continuous improvement is a comprehensive concept that requires meticulous attention to detail and nimble operating procedures to sustain it. For the forest products industry-an industry that is diverse and susceptible to the effects of myriad market variables-lean manufacturing can bring tangible value to the supply chain and increase profits.
In 2012, the National Hurricane Center (NHC) was able to predict, with a high degree of accuracy, the path and intensity of Hurricane Sandy. As a result, residents of New York and New Jersey had plenty of time to relocate and prepare in advance of the storm. The work of the NHC has since been lauded as providing the most accurate forecast of a hurricane in history. How did they do it? The NHC analyzed a huge amount of data from satellites and probes dropped by planes flying in and out of the storm. They then used all available hurricane forecast models built off historical data from previous hurricanes, adjusting each for its known biases, to arrive at a final forecast that was highly accurate five days before the storm hit.
The anticipation of a Federal Reserve rate hike earlier this month had global market analysts teetering on the edge of their seats. They breathed a collective sigh of relief after the Fed announced it would not being raising interest rates at this time, and the volatile market continues its march into uncertainty. Housing starts are still one of the few bright spots for the US economy as soft global demand, a strong dollar and weak exports continue to hinder economic growth; housing starts for September were positive. Interestingly, lumber prices also continue to climb despite the expiration of the Softwood Lumber Agreement (SLA), confirming that housing is indeed on the rise.
Forest industry performance in August and September was reported by both the US government and the Institute for Supply Management. Total industrial production (IP) decreased 0.4% in August (-0.2% expected) after increasing 0.9% (originally +0.6%) in July. Upward revisions to mining and utilities were largely responsible for July's higher estimate; the revision resulted in total IP retreating in August by the greatest amount in three years. Total IP in August was +0.9% YoY, however.
