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Knock on WoodKnock on WoodOverhauling East Texas Lumber ProductionErin M. Kiella2020-03-16T05:00:00Ztierra-grande
Land Markets
The Takeaway

When lumber prices dropped after the Great Recession, East Texas' lumber industry changed its processes to optimize production and reduce waste.

Timberland became a popular retirement investment vehicle in the 1980s. Purchasers idealized the prospect of buying a piece of land, planting trees, and returning in 30 years to harvest their retirement profits. Today, unattractive timber (unprocessed wood) prices and competition from institutional players have made the passive strategy of the '80s less realistic and possibly obsolete. Institutional investment in East Texas timber has turned the previously passive wait-and-harvest method into a highly optimized process, maximizing harvestable timber and minimizing waste.

Ninety-two percent of East Texas timberland is privately owned, with 53 percent considered family forest landowners. The remaining 8 percent of Texas timberland is publicly owned by the U.S. Forest Service (572,000 acres), the State of Texas (129,000 acres), and the Department of Defense (173,000 acres). Historically, wood and paper mill companies dominated the region, acquiring timberland to supply their mills. From the 1980s into the 1990s as timber prices declined, many of these companies sold off their land, which has since been largely subdivided. Companies such as International Paper, Gibbs Bros., Champion International Corp., and Louisiana-Pacific sold a total of 1.6 million acres during this time (See “Seeing the Forest for the Trees . . . and Streams and Fish and Wildlife," Tierra Grande, January 2004). Timber investment management organizations bought the majority of the land and managed it for ten to 12 years before selling.

Following the economic recession of 2008, demand for lumber (processed wood) for residential building halted and lumber prices declined. Prices recently increased due to demand from the construction industry and the imposition of a 20 percent duty on imported Canadian lumber in 2016. Imports reduced by nearly two billion board feet. The resulting lumber price increases were substantial enough to rival labor shortages as homebuilders' primary cost concern.

Several factors prevented timber prices from experiencing similar price growth. Landowners postponed harvesting timber following the decline in 2008 to avoid smaller margins or even selling their timber at a loss. Delaying harvest resulted in an increase in both the inventory of timber acres and the size of trees. Today, the oversupply of timber is present throughout the southeastern United States.

Another factor suppressing timber prices is growers' contracts with mills. Growers in East Texas are locked into long-term contracts to supply timber at a set price. Therefore, despite changes in demand for lumber prices, timber prices have been set for some time. With many of these contracts set to expire, timber prices may react more consistently to changes in demand for lumber in the near future.

Finally, processes have been optimized to minimize costs in the lower price environment. Like the oil industry during the 2016 crash in prices, the timber industry prioritized cutting costs to maintain profit margins. Each step in the timber-supply chain, from the nursery to the mill, was optimized to increase output per unit of input while decreasing waste (see sidebar). The previous vertical integration structure is now decentralized with each player optimizing their individual practices.

The passive timber investment strategy is no longer competitive in today's optimized timber management and production environment. The low-demand environment resulting from the Great Recession reduced prices and production margins, promoting optimization throughout the timber-supply chain. The result has been an increase in the amount of output and a substantial reduction in waste.


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Dr. Kiella (emhardin210@gmail.com) is a former assistant research economist with the Real Estate Center at Texas A&M University. She is now executive vice president and consultant with Real Property Analytics in Belton.

Digital and Print2264https://www.recenter.tamu.edu/articles/tierra-grande/Knock-on-Wood-2264 https://assets.recenter.tamu.edu/Documents/Articles/2264.pdf

 

 

Knock on WoodKnock on WoodLand Markets
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