T IMBER TRENDS. Economics, Macroeconomics, U.S. International Trade, Exports

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1 The Campbell Group, LLC March 2007 T IMBER TRENDS Economics, Macroeconomics, U.S. Fed Keeps Rates Unchanged 1 Federal Reserve Board policymakers kept the benchmark U.S. interest rate unchanged at 5.25 percent, while acknowledging a downturn in housing and mixed signals from other economic indicators. "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth," said the Federal Open Market Committee in a statement. International Trade, Exports China Further Expands Trade Surplus in Forest Products 2 The total trade value of China s forest products rose 24 percent to $47.07 billion in 2006, according to Chinese customs statistics. The import value of these products rose 10 percent to $19.39 billion (of which $18.49 or 95.4 percent were wood products) while the export value rose 34 percent to $27.68 billion (of which $24.27 or 87.7 percent were wood products). China s trade surplus of these products grew 171 percent to $8.29 billion. Russia remained China s largest log and sawnwood supplier, accounting for 68 percent (21.83 million m3) of total log and 19 percent (1.174 million m3) of sawnwood imports. Inside This Issue: Prices 4 Supply & Demand 5 Corporate/Other Announcements Timberland Sales 9 Openings, Closings, Curtailments Certification/ Environmental Monthly Highlights: British Columbian log exports decline Housing starts up, existing home sales up, new homes sales down Remodeling activity steady U.S. lumber production, shipments down Resources/References 11 One S.W. Columbia, Suite 1700 Portland, Oregon

2 Timber Trends Page 2 MMBF BC log scale British Columbian Log Exports Decline in BC Log Exports US Japan Trade in Wood Products, Latin America, Brazil Brazil Offsets Falling Exports of Lumber, Plywood with Added-Value Products, Taking Total Timber Export Value to $4B in The value of solid wood product exports from Brazil rose 1.8 percent to $3.97 billion last year, helped along by an increase in the value of addedvalue products. a 38 percent drop to 1.65 million m³; while tropical plywood exports were down 23 percent to $212.5 million, a 38 percent drop to 453,800 m³. The value of wooden furniture exports fell 6.7 percent compared to 2005 to $813.6 million. Primary wood products accounted for 58 percent of the export value of solid wood products in 2006, compared to 65 percent in The decline was largely due to strong appreciation of the Brazilian currency against the US dollar during 2006, which reduced the competitiveness of the Brazilian products in international markets. Brazilian exports of solid wood products have grown over the last several years, fueled by significant consumption by the U.S. civil construction industry. From , exports grew at an average of 20 percent a year. But in the last two years, the export volume to the U.S. declined significantly due to the continued strengthening of the Brazilian Real, the increasing cost of large-diameter logs and rising taxes on In contrast, exports of primary wood products fell, according to a report by the International Tropical Timber Organisation (ITTO). Pine sawnwood exports dropped 9.4 percent to $275.3 million between 2005 and 2006, representing a 14.5 percent drop in volume to 1.33 million m³. Tropical sawnwood exports fell 1.4 percent to $570.4 million in , a 12.3 percent drop in volume to 1.54 million m³. Exports of pine plywood also dropped 15 percent to $438 million,

3 Timber Trends Page 3 Trade Issues, U.S. Canadian Softwood Lumber Dispute Lumber Price Composite Stays in Highest Duty Zone 1 Softwood Lumber Alert Code Composite Price Option A - Export Tax Option B - Export Tax Market Share Green $ % 2.5% Regional share of 34% of U.S. market Orange $ % 3% Regional share of 32% of U.S. market Red $315 or less 15% 5% Regional share of 30% of U.S. market Three-Month Random Lengths Framing Lumber Composite Price History /5/2007 1/12/2007 1/19/2007 1/26/2007 2/2/2007 2/9/2007 2/16/2007 2/23/2007 3/2/2007 3/9/2007 3/16/2007 3/23/2007 3/30/2007 Framing Lumber Composite Price 5% duty 10% duty 15% duty

4 Timber Trends Page 4 Prices, Logs, U.S. South Pine Pulpwood Stumpage Prices Up, Sawtimber Flat in South for First Two Months of $/ton $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ South-Wide Pine Stumpage Prices Sawlogs CNS Pulpwood U.S. Lumber Dollars per thousand board feet Random Lengths Lumber Prices 1/7/2005 3/7/2005 5/7/2005 7/7/2005 9/7/ /7/2005 1/7/2006 3/7/2006 5/7/2006 7/7/2006 9/7/ /7/2006 1/7/2007 3/7/2007 Random Lengths Green Douglas Fir Std&Btr 2x4 R/L (Portland) Random Lengths Western S-P-F Std&Btr 2x4 R/L kd Random Lengths Southern Pine (Westside) #2 2x4 R/L

5 Timber Trends Page 5 Supply, Logs, U.S., West TIMOs Cited as a Factor in Coast Region Log Crunch 6 Sawmills in western Washington are dealing with a variety of factors keeping log prices up and availability thin. Among them: competition from offshore buyers, from pulp and paper manufacturers, and from new sawmills in the region. Bad weather and a shortage of logs from Canada also have contributed to the problem. Timber buyers cite another reason for the log shortage: a cutback in harvests on lands managed by timber investment management organizations, or TIMOs. They say the cutback also has implications for the longer-term supply of timber to the region. One observer estimated that 60 percent or more of the timber supplied to western Washington sawmills in recent years has been from TIMOmanaged lands. Some sawmill operators say the volume of logs offered by TIMOs increased in recent years, as those organizations capitalized on higher log prices, spurred by hot demand for wood products. However, timber buyers for Washington sawmills say the log volumes offered by TIMOs have declined since the first of the year. They express concern that those offerings could remain lean for the foreseeable future as TIMOs scale back harvest to long-term sustainable levels. Lumber, North America, U.S. Lumber Production U.S. Lumber Output Down 5.7 Percent in U.S. lumber production totaled billion board feet in 2006, down 5.7 percent from the 2005 total, according to the Western Wood Products Association. Production in the West totaled billion feet in 2006, off 8.8 percent compared to the previous year, while southern production totaled billion feet, off 2.5 percent from Initial estimates show lumber consumption in the U.S. totaled 60 billion feet, down 6.4 percent compared to the 2005 total. Imports from Canada in 2006 totaled 20.1 billion feet, off 6.3 percent for the year. European shipments to the U.S. declined nearly 19 percent. Treated U.S. Southern Pine Lumber Shipments Fell Six Percent in 2006, to 6.61 bbf 4 Treated southern pine lumber shipments during 2006 fell 6 percent to an estimated 6.61 billion board feet (bbf), from 7.02 bbf in 2005, according to American Lumber Standard Committee (ALSC)- accredited grading agencies, the Southern Forest Products Assn. (SFPA) said. SFPA's director of treated markets Richard Kleiner said that the softening of new housing starts in 2006 as interest rates edged up had been a key factor in the decreased shipments. "Nevertheless, the numbers reflect a continued healthy demand for treated lumber, he added.

6 Timber Trends Page 6 Demand, Housing, U.S. Housing Starts Bounce Back in February 7 Groundbreaking on new homes rebounded by 9 percent in February after a 14 percent decline in January, but less volatile building permits declined by 2.5 percent, the Commerce Department reported. Housing starts increased to a seasonally adjusted annual rate of million in February from a revised 10-year low of million in January, exceeding the expectations for a smaller increase to 1.46 million. Starts are down 28.5 percent compared with February Building permits, which are not as affected by weather, fell for the 12th time in the past 13 months, down 2.5 percent in February to a seasonally adjusted annual rate of million from million in January. Permits are down 28.6 percent compared with February They are one of the 10 leading economic indicators. Permits for single-family homes fell to a nine-year low. New Home Sales Fall Sharply 8 The median sales price of a new home was $250,000, down from $250,800 a year ago. The median is the point where half the homes sell for more and half for less. The weak performance in the new homes sector was a clear sign that a glut of unsold homes and tepid demand is still battering the housing market. Compounding the problem is a crackdown on the mortgage industry that will most likely shut out some potential buyers. The housing boom that ended in 2005 was driven in part by the willingness of lenders to give nontraditional mortgages to people with blemished credit or no money for down payments. The supply of new homes for sale increased by 1.5 percent in February to 546,000. At the current sales pace, it would take 8.1 months to get through that supply, up from 7.3 months in January and 6.4 months a year ago. By region, the Northeast had a 26.8 percent drop in home sales, the steepest decline in the country. The Midwest had a 20 percent drop. The South was down seven percent. The West was the only part of the country to have an increase in sales, up 24.6 percent from January. Sales of new homes fell for the second consecutive month in February, an unexpected drop that dashed hopes of an imminent recovery in the housing market. The U.S. Department of Commerce reported that sales of new single-family houses dropped 3.9 percent last month to a seasonally adjusted annual rate of 848,000. Although the monthly decline was significant, even more telling was that it represented an 18.3 percent drop from February 2006's seasonally adjusted annual sales rate of 1,038,000. million starts SAAR U.S. Housing Starts Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

7 Timber Trends Page 7 Home Prices Fall in Metro Areas 1 The price of homes in 20 U.S. metropolitan areas fell in January for the first time in at least six years, according to the S&P/Case-Shiller homeprice index. Home values in those metro areas fell 0.2 percent from a year earlier, marking the first decrease since the group started keeping yearover-year records in January Sales of Existing Homes Rise Most in Three Years 9 Sales of previously owned homes in the U.S. unexpectedly surged last month by the most since March Purchases increased 3.9 percent in February to an annual rate of 6.69 million, the National Association of Realtors said. Sales were down 3.6 percent from the prior 12 months, the smallest decline in a year. The supply of homes for sale increased 5.9 percent to million last month, representing a 6.7 months' supply at the current sales paces. That compares with 6.6 months at the end of January. Resales of single-family homes rose 3.7 percent in February to an annual rate of 5.88 million, the report said. Sales of condos and co-ops rose 5.3 percent to an 810,000 rate. Purchases increased in all regions of the country except the West, where they were unchanged. They rose 14.2 percent in the Northeast, 3.9 percent in the Midwest and 1.6 percent in the South. Resales account for about 85 percent of the housing market. Even with last month's sales gain, some economists noted that the supply of unsold properties continued to climb. Mounting defaults on subprime mortgages -- loans to people with patchy or poor credit histories -- may throw more properties onto the market and weaken prices. Lower prices and rising incomes are making homes more affordable, along with a decline in mortgage interest rates. The National Association of Realtor's affordability index rose to an almost two-year high in January, the group reported. Existing home sales averaged 6.51 million last year, lower than the 7.06 million average for all of The median price of an existing home fell 1.3 percent last month from a year ago to $212,800, the Realtors group said.

8 Timber Trends Page 8 30-Year Mortgage Rates Unchanged 1 Thirty-year fixed-rate mortgages (FRMs) averaged 5.86 percent for the week ending March 29, unchanged from last week's average, according to Freddie Mac. Last year at this time, the 30-year FRM averaged 6.35 percent. One-year adjustablerate mortgages (ARMs) averaged 5.43 percent this week, up from last week's average of 5.40 percent. At this time last year, the one-year ARM averaged 5.51 percent. Mortgage Applications Decline 1 The Mortgage Bankers Association's Index of Mortgage Applications was at a reading of 671 for the week ending March 23, down 0.2 percent from the previous week. The refinance component of the index declined 0.5 percent, while the purchase component increased 0.1 percent. The refinance share of mortgage activity declined to 45.1 percent of total applications, from 45.3 percent the previous week. The adjustable-rate mortgage share of activity decreased to 20.2 percent, from 20.9 percent of total applications the previous week. Remodeling Activity Steady 1 Remodeling activity remained steady in the fourth quarter of 2006, according to the National Association of Home Builders Remodeling Market Index. The current market conditions index edged up slightly from 47.8 to 48.2, and the future expectations index moved up to 46.0 from "Remodeling retained strength across most of the country compared to late last year," said NAHB Remodelers Chairman Mike Nagel, a remodeler from Chicago. "Certainly regional economies and housing markets play an important role, but overall we see maintenance of high levels of remodeling activity and solid future prospects." 2006 Home Price Growth Slowest Since During 2006, home prices appreciated 6.1 percent, the slowest calendar-year growth rate since 1999, when prices increased 5.4 percent, according to Freddie Mac. The rate of price appreciation was less than half the 13.3 percent growth seen in With mortgage rates down about half a percentage point from last July, declining home values, and rising family income, Freddie Mac predicted that affordability will gradually improve, sparking a recovery in sales and single-family construction in the second half of U.S. Construction Spending Rises; Residential Expenditures Fall 1 Construction spending during February was estimated at a seasonally adjusted annual rate of $1.107 trillion, 0.3 percent higher than the revised January estimate, according to the Census Bureau. The February figure is 2.4 percent below the February 2006 estimate. Residential construction was at a SAAR of $562.4 billion in February, 1.0 percent below the revised January estimate. Canada Canadian Housing Market and U.S. Market Going in Different Directions 10 Canada s housing market outpaced the US in January as the long life of the current real estate cycle continues to hinge on the strength of the country s job market and income growth. In Canada, housing starts in January were up 17.3 percent (US was down 14.3 percent). Canadian building permits were up 11.3 percent (US was down 2.8 percent). Canada s housing sector is showing it has plenty of life in it yet.

9 Timber Trends Page 9 Products, Lumber Corporate/Other Announcements mmbf U.S. Lumber Consumption Drops 6.4 Percent in Initial estimates show lumber consumption for the year totaled 60 billion board feet, down 6.4 percent compared to Western production fell nearly 9 percent while production in the South dropped a modest 2.5 percent. Total U.S. production was down an estimated 5.7 percent. Imports from Canada tallied 20.1 billion board feet, off 6.3 percent for the year. B.C. shipments were off three percent at 11.9 billion board feet. Lumber shipments from the other provinces fell nearly 11 percent. Meanwhile non-canadian imports declined nearly 12 percent to 2.7 billion board feet, nominal scale. European shipments decreased nearly 19 percent. US Softwood Trade Sierra Pacific Industries to acquire Washington's Centralia Sawmill Co. 12 Sierra Pacific Industries (SPI) of Redding, Calif., is set to acquire the Centralia Sawmill Co. (CSC) in Centralia, Wash. In a brief press release issued Mar. 19, SPI said the company has an agreement in principle to acquire the Washington state mill, which primarily produces green Douglas fir studs. Timberlands Sales Campbell Group to Acquire Menasha 1 An affiliate of investment funds managed by The Campbell Group has agreed to purchase Menasha Forest Products Corp. Through the transaction, The Campbell Group will acquire about 136,000 acres of timberlands in Oregon and Washington, along with Menasha's related businesses. The transaction is expected to close in April. Potlatch Sells its 17,000 acre Boardman, Ore., Poplar Tree Farm for US$65M Canada imports Non-Canada imports Exports Potlatch Corporation, a real estate investment trust (REIT), has announced the sale of the company's 17,000-acre hybrid poplar tree farm in Boardman, Oregon, to a private-equity tree-farm investment fund for $65 million. A definitive purchase agreement was signed and closing is expected during the second quarter of Potlatch expects to incur an after tax book loss of approximately $33.5 million on the sale, which will be recorded in the first quarter of this year. Potlatch intends to apply the proceeds from the sale to its recent 76,000-acre Wisconsin forestland acquisition through a tax efficient 1031 like-kind exchange.

10 Timber Trends Page 10 Openings, Closings, Curtailments Simpson Resumes Production 1 Following two weeks of downtime, Simpson Timber Co. resumed production on March 26 at its operations in Shelton, Dayton (Mill 5), and Tacoma, Wash. CMPC to Built its First Plywood Plant 13 Chile s CMPC is to build its first plywood plant, with an investment of $56 million in Region 9 at Collipulli, Mininco, El Sur reported. Francisco Urcelay, public affairs manager for CMPC offshoot Forest Mininco said the plant would have a capacity of 225,000 cubic meters per year and sales would be aimed at the US and Asia. Certification/Environmental Washington Will Seek "Green" OK for Logging on Some Forests 14 In a partial win for environmentalists, Washington's state-owned forestlands could for the first time earn an environmental stamp of approval for logging practices. The department isn't reversing positions on stewardship council certification, said spokeswoman Patty Henson. When it earlier declined to seek FSC certification, it was because the department hadn't completed forestmanagement plans needed for the stewardship council's approval, she said. That work is almost done for the sections of forest where certification will be sought. The department wants the additional seal of approval because it "reassures the public that our management practices, and the timber supply that comes from that, are grounded in environmentally sound and responsible practices," Henson said. Overall, the department controls 2.1 million acres of forestland. Most of it is managed to raise money for school construction, hospitals, libraries and other public needs. Henson said the department would consider pursuing certification for other parts of the state on a case-by-case basis. Public Lands Commissioner Doug Sutherland said that the state Department of Natural Resources will seek certification from the Forest Stewardship Council (FSC) for logging on 141,000 acres of state forests on the Kitsap Peninsula and in the western Cascade Mountains. For years the department has declined environmentalists' urgings to seek certification from the stewardship council, created by environmental, timber and community groups.

11 Timber Trends Page 11 Resources/References Tropical Timber Market Report March 1-15, Random Lengths International March 21, Forest2Market 6 Random Lengths March 23, percent7bb5d5642b-faf6-4cde- AEE7-5CB3C09E6E5D percent7d&dist=mostreadhome 8 article/2007/03/26/ar html?nav=rss_ / components 9 pid= &sid=aosd6xwssm6w&refer=home 10 The Forest Industry Trader March 20, WWPA Lumber Track March 7, Forestweb March 20, localnews/ _forestry07m.html The Campbell Group, LLC One SW Columbia, Ste Portland, OR Phone: Fax: adavis@campbellgroup.com