An MFC Global Investment Management Company Timberland Investor First Quarter Softwood Sawlog Prices in Brazil The Move to Equilibrium

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1 Hancock An MFC Global Investment Management Company Timberland Investor First Quarter 2 Softwood Sawlog Prices in Brazil The Move to Equilibrium Over the past three years, prices for pine timber in Brazil, in inflation-adjusted dollars, have increased almost 15 percent. Price increases were driven by surging exportoriented domestic production as a result of a weak domestic currency. Continued strong demand, combined with a strengthening currency since 2 have brought Brazilian softwood prices to international levels. The Timber Resource The pine resources of Brazil are concentrated in two contiguous regions of the country. Approximately 3 percent of the 1.9 million hectares of pine plantations are comprised of tropical pine species, located in the northeastern and central regions of the country. Due to relatively slow growth, and poor form, this resource is generally used for fiber and local market requirements.the much larger and faster-growing pine plantations of the southern region of Brazil are comprised primarily of southern pine timber, of the same species found in the U.S. South. It is these areas that have supported the fastest growth in demand in the last decade, and a commensurate rise in stumpage prices. Demand for timber by domestic manufacturers in Brazil rose significantly early in this decade, triggered by a substantial fall in the value of the Brazilian Real.A weaker Real combined with healthy off shore demand for southern pine products, caused sawnwood, panel and secondary manufacturing capacity to rise, as production was pushed toward the export market. An increasing volume of sawnwood products are now exported in the form of furniture components, molding and millwork, and rough lumber for fencing. As much as 2 percent of pine sawnwood is currently exported Demand for timber by domestic manufacturers in Brazil rose significantly early in this decade, triggered by a substantial fall in the value of the Brazilian Real. from Brazil to markets in Europe and the U.S. Brazil, along with Chile and New Zealand, has also emerged as one of the largest suppliers of molding to the U.S. market. Similarly, the panel industry of Brazil in the last decade has experienced tremendous growth, with Brazil today being the largest supplier of pine plywood to the U.S. market. Exchange Rates Matter In the early 1 s, Brazil suffered through a difficult period of high inflation, and rapidly changing currencies. In 14, the Real was introduced and initially pegged to the US$ at a rate of 1:1. At the time, Brazilian timber was very competitively priced on a global basis with small sawlog stumpage priced between US$ per cubic meter, and large sawlog stumpage priced between US$ 2-22 per cubic meter. (See Chart 1 on page 2.) The domestic log market of Brazil during this time, however, was dominated by small private mills, generally cutting rough and green products for the domestic market. Logs were typically sold on a roadside, or log yard basis as few buyers could afford stumpage sales, or efficiently handle multiple product sales. Prices remained fairly stable until the Russian default in 18 triggered a currency crisis in Brazil dropping the value of the Real against the US$ from 1.2 $R/US$ in December 18 to 2.1 $R/US$ by February 19. Pine stumpage continued on page 2 Hancock Timber Resource Group High Street, Boston, MA

2 Softwood Sawlog Prices in Brazil The Move to Equilibrium continued prices remained low in US$ terms until early 2 when a very weak Real (hitting a daily low of 3.8 $R/US$ in late 2) greatly increased demand for sawnwood and plywood for the export market, and began to push log prices toward international levels. Between the 1st quarter of 2, and the 1st quarter of 2, inflation-adjusted US$ stumpage values for small and large pine sawlogs in Brazil increased by 143 percent and 149 percent, respectively. In absolute terms, inflation-adjusted small sawlog prices increased from approximately US$ 1 per cubic meter, to US$ 24 per cubic meter, and real prices for large sawlogs increased from US$ 21 per cubic meter, to US$ 51 per cubic meter. In mid-2, the Brazilian Real began to strengthen against the US$ as a result of extremely high real interest rates in the country, and a surge in US$ inflows based on rising agricultural and mineral commodity exports and prices. From a mid-2 level of 3.1 $R/US$, the currency has strengthened to a level of approximately 2.2 $R/US$ in the 1st quarter of 2. Such a move in a generally US$ denominated log market would typically have resulted in a fall in local price levels in order to maintain parity in US$ values.although most price tracking services have documented only that prices have leveled off since mid-2, there is transactional evidence to suggest that discounts as high as 2 percent are being taken in the large sawlog and veneer log markets today to achieve the same result. Observation of pine sawlog stumpage values in Brazil and the U.S. South 2 US$ / cubic meter 2 US$/cubic meter Chart 1: Pine Sawlog Stumpage Prices in Parana Brazil $6 $5 $4 $3 $2 $1 1Q/ 1Q/ Chart 2: Brazilian and US South Pine Sawlog Stumpage Prices $8 $7 $6 $5 $4 $3 $2 $1 Sources: STCP Engenharia, Ibbotson Associates US South Pine Sawlogs 2 21 Sources: Timber Mart-South, STCP Engenharia, HTRG Research show prices have tended to track one another historically.the correlation between the annual change in inflation-adjusted US$ denominated stumpage prices over the past decade is 33 percent. Excluding the years 2 2 Brazil Pine Sawlogs $4. $3.33 $2.67 $2. $ Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ 1Q/ Brazil Small Sawlog Brazil Large Sawlog $R / US$ (right hand side) following the run-up in Brazilian stumpage prices, the correlation between the two regions strengthens to just under 5 percent. This recent movement in Brazilian prices toward stumpage values in the $R / $US continued on page 6 2 Hancock Timberland Investor First Quarter 2

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1, $8 $6 $4 $2 Sources: Log Lines, Timber Mart-South, New Zealand Ministry of Forestry and HTRG analysis U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic U.S. South U.S. Northeast New Zealand Export Figure 1. Softwood Sawtimber Stumpage Prices Regional softwood stumpage prices were mixed first quarter. U.S. Southern Pine stumpages prices were up 3 percent over last quarter, or $8 per MBF, to average $26 per MBF for the quarter. Softwood sawtimber prices in the U.S. Pacific Northwest remained unchanged from last quarter, yet up over $1 per MBF from year-ago levels. Radiata pine export prices in New Zealand fell first quarter, losing all of last quarters gain as vessel shortages had freight rates climbing during the quarter. Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ per MBF - lumber scale) $6 $5 $4 $3 $2 $1 Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber Southern Pine Sawlogs Sources: Random Lengths and Timber Mart-South Southern Pine Chip-n-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. South U.S. Southern Pine lumber prices retreated slightly first quarter, yet remain high as compared to historic levels. Both delivered Southern Pine sawtimber and chip-n-saw average log prices were unchanged from last quarter levels, despite regional drought conditions and high log production across the South. Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 $1 Douglas-fir, Green, 2x4 Lumber Hem-fir (Coast), Kiln Dried, 2x4 Lumber Douglas-fir Sawlog Whitewood Sawlog Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Lumber prices in the U.S. Pacific Northwest were mixed first quarter, with coastal Hem-Fir prices gaining $43 per MBF over last quarter, to average $352 per MBF. Lumber production in the region has fallen, with prices for some grades of lumber being off 1 to 2 percent this year as compared to the same period last year. Prices for the two indicator grades we track here, Douglas Fir Green 2x4 Random and Hem-Fir Dried 2x4 Std&Btr, both held up despite lower production numbers so far this year. Sources: Random Lengths and Log Lines Hancock Timberland Investor First Quarter 2 3

4 Quarterly Average Regional Composite Prices for Softwood Pulpwood Stumpage ($ per ton) $4 $35 $3 $25 $2 $15 $1 $5 U.S. Pacific Northwest U.S. Northeast U.S. South Figure 4. Softwood Pulpwood Stumpage Prices In the U.S. Pacific Northwest, a combination of wet weather impeding logging and less residual chip output from a slowdown in lumber production pushed softwood pulpwood stumpage prices up first quarter. Softwood pulpwood prices in the Pacific Northwest finally averaged above break-even levels at $3. per ton. $-5 $-1 Sources: Log Lines, Timber Mart-South and HTRG analysis Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 1 tons) $9 $8 $7 $6 $5 $4 NBSK Market Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Delivered softwood pulplog prices were mixed first quarter. In the U.S. South, prices fell just over.5 to $24.41 per ton from last quarter and down $1 per ton from year ago levels. Delivered softwood pulplog prices in the U.S. Pacific Northwest strengthered again first quarter, rising $5 per ton over year ago levels. $3 $2 $1 Southern Pine Pulp Logs Sources: FOEX Industries Ltd, Log Lines and Timber Mart-South Quarterly U.S. Timberland Values ($ per acre) $2,5 $2, $1,5 $1, $5 Pacific Northwest South Figure 6. U.S. Timberland Values in Private Property Markets Timberland values in the U.S. Pacific Northwest were up $45 per acre first quarter to $2,321 per acre. In the U.S. South, values fell $11 per acre over last quarter to $1,162 per acre. It is worth noting, first quarter timberland values as reported by NCREIF are of limited use as only a small sample of properties in the database are appraised first quarter Source: NCREIF 89 4 Hancock Timberland Investor First Quarter 2

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) South Pacific Northwest Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets Trailing multiples to operating EBITDDA were mixed first quarter. In the U.S. Pacific Northwest, market values rose enough to offset the fall in trailing four quarter income per acre resulting is a rise in the multiple.the opposite occurred in the U. S. South. The fall in timberland market values offset the increase in the trailing four quarter income per acre, dampening the multiple. 1 Sources: NCREIF and HTRG analysis Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Rayonier Plum Creek Crown Pacific U.S. Timberlands The Timber Company Deltic TimberWest Figure 8. Hancock Securitized Timberland Index Share prices for the individual timber-intensive companies we track for our Securitized Timber Index were mixed first quarter. Share prices for Rayonier rose steadily throughout the quarter where as Plum Creek s share price remained relatively unchanged from last quarter. Overall, our Index ended the quarter slightly higher than last quarter. 8 Index 4 Source: HTRG analysis Quarterly U.S. South Timberland Values ($ per acre) $1,4 $1,2 $1, $8 Private Property Market Public Equity Market Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets Timberland values in the U.S. South moved in opposite directions first quarter. Private timberland values dropped one percent from last quarter levels and public timberland values rose three percent. $6 $4 $2 Sources: NCREIF and HTRG analysis Hancock Timberland Investor First Quarter 2 5

6 Softwood Sawlog Prices in Brazil The Move to Equilibrium continued U.S. South can also be observed on a freight equalized basis. In fact, an estimate of current pine sawnwood production costs in Brazil puts total production costs (less residual revenue) at just over US$ 12 per cubic meter of lumber. When the cost of ocean freight to the U.S. is considered, it is apparent that Brazilian producers no longer have a delivered price advantage over producers in the U.S. South. Should the Brazilian Real remain at current levels of $R 2.2/US$, downward pressure on log prices can be expected to continue. On the other hand, should the Real weaken to levels of $R 2.5/US$ as projected by many financial institutions, current price levels would seem to be sustainable in the short to medium term. The movement of log prices in Brazil over the past decade reflects both US$ per cubic meter of Lumber Chart 3: Pine Lumber Production Costs 2 estimate Log Cost US South Production (net chip revenue) Source: International Wood Markets, HTRG Research Ocean Freight Brazil the increasing integration of the world s forest product industry, and the impact currency movements can have on production economics and market orientation. The exportoriented pine industry of southern Brazil must now compete globally with raw material costs that have moved to international levels. Research Team NOTES: Courtland L. Washburn, Ph.D. Managing Director and Chief Investment Officer cwashburn@hnrg.com Robert W. Hagler Director of International Investment Strategies & Economic Research bhagler@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment adviser and wholly owned subsidiary of Manulife Financial Corporation. Figure 1. The composite price for southern sawtimber is based on quarterly average Timber Mart-South published prices for pine sawtimber and chip-n-saw stumpage. Pacific Northwest prices are derived from quarterly average Log Lines published prices for whitewoods and Douglas-fir with internal analysis of logging costs for stumpage calculations. New Zealand export prices are based on New Zealand Ministry of Forestry quarterly average published prices for Radiata unpruned A, J and K sort export logs with internal analysis of logging costs for stumpage calculations. Northeast sawtimber prices are calculated from internal analysis. Figure 2. Quarterly southern pine (westside), kiln dried, 2x4 #2 lumber price published by Random Lengths. Timber Mart-South published southern pine sawlog and chip-n-saw log prices converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 3. Quarterly Douglas-fir, green 2x4 lumber (Portland rate) and Hem-Fir (coast), kiln dried, 2x4 lumber prices published by Random Lengths. Douglas-fir and whitewood sawlog prices derived from Log Lines published prices for #2 and #3 sawlogs in various regions in the Pacific Northwest converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 4. Pulpwood composite prices are derived from quarterly average Timber Mart-South published prices for southern pine pulp wood stumpage, Log Lines published whitewood and Douglas-fir pulp logs with internal analysis of logging costs for the Pacific Northwest, and HTRG analysis of Spruce/Fir pulpwood in the Northeast. Figure 5. Quarterly NBSK pulp prices derived from daily list prices reported by FOEX Industries Ltd. Southern pine pulp log prices published by Timber Mart-South. Pacific Northwest Douglas-fir pulp log prices published by Log Lines. Pulp log prices expressed in multiples of 1 to accommodate market pulp pricing scale. Figure 6. Regional NCREIF timberland market value per acre is derived by dividing the total regional market value at quarter end by the number of acres reported in that region. Market values for Northeast timberland were re-estimated for the period 18Q4 through 19Q3 to adjust for what we believe to be an anomalous property included in the NCREIF database during those quarters. Figure 7. EBITDDA multiples are calculated using NCREIF timberland value per acre at quarter end divided by a trailing four-quarter average NCREIF net income per acre. Figure 8. The Hancock Securitized Timberland Index (HSTI) uses a base-weighted aggregate methodology (similar to that used to construct the S&P 5) to calculate a market capitalization-weighted value for seven publicly traded timber-intensive forest products companies. Base weights were readjusted for the emergence of new companies or at the beginning of each year. Dividends are not reinvested. The companies included in the HSTI have no investment relationship with the Hancock Timber Resource Group. Figure 9. Public equity derived from our Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA) for five timber-intensive publicly traded companies compared to southern timberland values per acre calculated from the NCREIF database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value. 2 Hancock Natural Resource Group, Inc. References to expected investment performance in this newsletter are based on historical information and are based on management's projections. Potential for profit as well as for loss exists. 6 Hancock Timber Resource Group High Street, Boston, MA