Forestry Report

The Federal Reserve finally dropped interest rates in September, and hopefully will do it again in October. And keep doing it. It’s coming a little late for rural America, particularly in the forest and farm economies, which were badly hurt by the tight money policy and the corresponding high interest rates that came with it. We have seen it in decreased demand for trees and low stumpage prices, all while operating costs continue to rise. Farmers may have been hit even harder than our sector, with low commodity prices and record high input costs. It shows up at a high level in the economy. For example, the Institute for Supply Management (ISM) Report on Business Performance shows that the wood products sector has seen either a decline or no growth since September 2021—three straight years! Prior to that, there had been a long period of growth.

I’ve been attending various summer forestry association and trade meetings, and the recurring theme is that while the long-term outlook for our industry is promising, we are in for some rough times in the short term due to high interest rates and their impact on housing and the broader economy. The Federal Reserve’s reluctance to cut interest rates is delaying the positive developments forecast by most economists. If you want to monitor the single most important indicator for future timber markets, watch the Fed’s interest rates. The Fed holds our future in its hands.

There is still not a lot of good news in timber markets in our operating region, although there are signs of improvement in specific sectors. It appears that pine sawtimber markets in the South and Northeast regions are beginning to ease up. Meanwhile, hardwood markets in the Northeast remain mixed, with Red Oak and Black Cherry improving in some areas. Anecdotal reports from our managers suggest improving conditions in the pine sawtimber markets. So we have to look to the future for good news. The best I’ve seen is that the Federal Reserve has signaled that it will stick with its forecast of three rate cuts this year, with the target being 4.6 percent at the end of 2024, according to the Federal Open Market Committee. That will help a lot, unless the recent news that inflation is staying higher than expected causes them to modify their plans.

It looks like a trend is emerging in the housing market! Housing starts increased in November, continuing a slow but steady rise that began in September. The better way to look at it is by examining the two price plateaus that occurred this year. In the early part of the year, January through April, F&W’s Lumber-Use Adjusted Housing Starts ranged from 1.025 to 1.07 million, annualized. After taking a big jump in May, starts dropped back down, but not to the earlier levels. In the latter part of the year, adjusted starts ranged from 1.09 to 1.31 million. The F&W-adjusted starts factor in the different lumber usage in single-family homes vs. multiple-family buildings, which is necessary for long-term comparisons. During the boom period of 1994 to 2006, adjusted starts were in excess of 1.2 million. We find ourselves back in that range, with November adjusted starts surpassing 1.31 million. Watch this number. If it stays above 1.2 million for several months, we could start to see demand impact timber stumpage prices.

In our last issue, the very favorable May housing start numbers caused some optimism on my part. At the end of the article, I promised to let you know in the next newsletter if May was an anomaly or the beginning of a favorable trend. It was an anomaly—but not completely. The June and July numbers, while not as high, were better than preceding months. So, I was still feeling a little optimistic. And then came the August numbers. Back to the bottom, the lowest since June 2020. We will just have to keep watching starts and the Federal Reserve’s actions on interest rates. As soon as rates start dropping—and I expect that to happen before the presidential campaign really heats up—I think we will see housing pick up and hopefully our sawtimber markets too.