by Byron P. Krempl, Headwater Forests Program Manager, Tuolumne River Trust
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| Joseph Furia, Executive Director of the World Forestry Center, giving welcome remarks at WWOTF15 |
We are arguably facing some of the most rapid and profound
change ever seen in human history. Population growth, climate change,
demographics, and technology are changing at an unparalleled pace. If today’s
forest professionals want to be able to succeed tomorrow, we need to be aware
of these changes. With change comes uncertainty; with uncertainty comes risk;
with risk comes opportunity. If we understand our context (where we’re at), our
desired future condition (where we want to be) and our decision-making process
(how we’ll get there), we can take advantage of this change to ensure our
continued success. Whether an institutional investor, a logger, or a professor,
we have a unique opportunity to make a difference, and inspire others while
doing so. The Who Will Own the Forest? 15 convention highlighted these changes
that we need to be aware of and set the context that surrounds our
decision-making processes.
Diversity was highlighted in every aspect of the WWOTF? 15
convention. Diversity of forest types, of products, of location, demographics,
and of thoughts and ideas. There is no one solution to modern problems in the
timber space. There is no cookie-cutter answer to the problems of tomorrow.
There is only opportunity for today’s leaders to rise up, take initiative, and
try. We must try to slow deforestation, to create new markets for our forest
products, to learn how to utilize private finance for conservation, and to
become aware that the three pillars of the triple-bottom line (economic,
social, and ecologic) are not separate, but instead uniquely intertwined. Rather
than focus on any one pillar of sustainability, the convention highlighted the
need for diversity in thought process, approach, and solution.
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| Eric Freed, keynote speaker at WWOTF15 |
Mr. Freed’s point was further highlighted during a panel
session on mapping risk in the face of climate change. Reforestation as a
cost-effective natural solution to climate change was highlighted, as well as
the need to slow deforestation in tropical forests. As environmental stewards,
managers need to “play both defense and offense”, leveraging, conserving, and
restoring our natural resources, and creating innovative ways to bring private
equity to the table. Highlighting the value of environmental and social goods
(ESG) and products, divesting from fossil fuel investments, and utilizing
timber as an investment opportunity are key components to the large-scale
approach we need to undertake to address climate change.
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| Panel at WWOTF15 focusing on the social aspect of ESG |
Climate change and ESG weren’t the only topics discussed
during the convention. The impacts of changing demographics on the timber
industry along with a generational shift in priorities are affecting
consumption. With massive demographic shifts and changing fiscal and monetary
policy explaining the two inflation regimes of the last 60 years, new
approaches to fiscal and monetary policy and a shrinking labor force suggest
the market’s complacent consensus about inflation is too low. While regional
supply and demand will continue to be a key factor, timber income streams
suggest a positive outlook for timber as an asset class overall.
Regionally, the U.S. South has begun to see a plateau in
sawmill investments. Trade dynamics have injected uncertainty in the market,
and while regional employment has proven to be stable, the microeconomy has
proven to be a significant scale in the South. Workforce, access to mills and
ports, and timberland has allowed some areas to see continued growth, while
other areas in the South lagging. Maintaining relationships and making
decisions on a risk-adjusted basis are key to continued success in the U.S.
South.
Even with this plateau in sawmill investments, it is still
possible to mitigate the risks of forest investments in the U.S. South. By
capitalizing on concentrated regions and microeconomies, efficiencies and
economies of scale can be achieved in the South. Georgia, while undergoing
social and demographic transformations, still produces the higher timber
volumes of any state. A strong representation from groups such as the Georgia
Forestry Association ensure that the forest sector continues to have a voice in
the legislature and among consumers, creating a comparative advantage against
many other states and regions.
Likewise, the U.S. hardwood universe is currently a mixed
bag, with high value species such as hard maple and yellow birch continuing to
appreciate, but with a general shift from grade product to industrial product
overall. Hardwood prices have decoupled from housing starts since the Great
Recession and are now increasingly dependent on export markets. Due to this,
volatility created from tariffs has impacted this market. The U.S. hardwood
markets have also been losing share internationally, with China, Russia, and
neotropical countries beginning to inject more supply into the global market.
Globally, China’s economy is slowing, but is still outpacing
the U.S. China is shifting from a manufacturing to a service-based economy and
is transitioning to utilizing domestic forest products for production and is
increasing its utilization of Russian forests. While transportation of forest
products continues to be a limiting factor for Russian forest products, China
is actively leasing large tracts of Russian forests, allowing for value to be
unlocked in this forest landscape. China is continuing to ramp up production of
pulp and paper and is turning to Vietnam for materials to meet this upscaling.
Other nations, such as Thailand, may also benefit from China’s increased
appetite for forest products.
Russia still faces bottlenecks in its production system, such
as distances between forests and mills, but continued investments will allow for growth through 2030 in this market. Likewise, India is poised to see an increase in demand for forest products. With a rapidly expanding middle class, India can become a large demander of North American Exports. While barriers such as certification currently exist, major companies are promoting their products to the Indian market and are capitalizing on increased urbanization and a current housing shortage.
While timber markets in Russia and China are seeing new
growth, countries like Japan have poorly performed. An aging workforce coupled
with small private lots and steep slopes has caused timber markets within Japan
to lag. However, new policies and tax advantages have created opportunity for
the timber sector to be revitalized.
As timber markets internationally continue to develop and
change, foreign investors continue to find foreign direct investment in the
U.S. timber space to be attractive. While there are many complexities involved
in tax-efficient investing, investors typically want to ensure that by
investing in the timber space they do not subject any additional unrelated
non-U.S. business activities and investments to U.S. tax jurisdiction. As
markets continue to change, foreign direct investments will continue to be a
strong part of the story.
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| Joseph Furia presents the Award for Forest Investment to Bill Bradley |
Whether through the lens of REITs or private ownership,
timberland valuation is an evolving field. As George Box famously said, “All
models are wrong, but some are useful”, raising the questions of how wrong the
models are, and how useful they can be. As such, we shouldn’t expect the truth
from models—instead they provide us with useful information to help facilitate
decision making. Static variables and dynamic variables should be analyzed, and
sensitivity analysis can be utilized to ensure that risk is appropriately accounted
for. By utilizing the data and processes we have, such as an array of
site-specific growth and yield models, as well as forecasting, we can know all
knowable information, ensuring the most accurate valuations for timberland can
occur.
The 15th WWOTF convention focused on change and
diversity, preparing forest professionals to solve unforeseen problems in new
and innovative ways. Both domestically and internationally, forest
professionals must continue to adapt and grow, anticipating unforeseen changes to
forestry, valuation, products, and markets, guiding our planet toward a healthy
and sustainable future. To learn more about forest finance, changing
environmental, social, and economic factors, domestic and international market
trends and drivers, and emerging markets/market products, come to the WWOTF? 16
convention in Portland next year.
