Contents Summary Update Timber Prices Product Prices Timberland Markets Economic News The FIA Quarterly Dashboard Summary Update Timber and Product Prices Southeastern pine stumpage markets experienced moderate improvements across all major products during the fourth quarter. Most notably, pine pulpwood saw a double-digit price increase. The Pacific Northwest domestic markets cotinine to be strong, causing price increases for both Douglas-fir and whitewoods. In the Northeast, demand increased for many of the hardwood species, and Wisconsin sawlog, veneer and bolt markets continue to be robust. Pulp and paper prices declined slightly over the quarter while framing lumber and structural panel prices experienced mixed results. As of November, annualized housing starts finished at 1,028,000, which is about 7.5% below the November 2013 rate of 1,105,000. Mortgage interest rates continue to be low, with the average rate for 30-year mortgage loans ending the quarter around 3.87%. Forest Investment Associates 15 Piedmont Center Suite 1250 Atlanta, Georgia 30305 TEL: 404.261.9575 FAX: 404.261.9574 www.forestinvest.com Timberland Markets Several transactions went under contract or closed during the fourth quarter, headlined by Potlatch s acquisition of 201,000 acres in Alabama and Mississippi from Resource Management Service (RMS) for a reported $384 million. The deal, which is expected to close in early 2015, was the largest domestic transaction of 2014. Hancock Timber Resource Group (HTRG) closed the sale of four separate transactions in Virginia, Louisiana, and Oregon to four different buyers. The transactions, covering approximately 83,200 acres, sold for a total of over $193 million. A handful of other transactions closed throughout the quarter as well, and investors are expecting deal flow to remain strong in 2015. On the international front, markets remain active in Latin America as well as Australia and New Zealand. Investors continue to await announcements on several international transactions. Forest Investment Associates 1 4 th Quarter 2014
Timber Prices Southeastern Southeastern pine markets improved across all products during the quarter. According to Forest2Market, south-wide average prices for pine sawtimber increased 9.3%, and ended the quarter 6.9% above year-ago levels. Chip-n-saw prices improved by 4.3%, and remained 4.2% above yearago levels. Within the pine markets, pine pulpwood prices saw the largest quarterly gains, increasing by 12.0%, and finishing 19.0% ahead of last year s prices. The two benchmark hardwood products experienced moderate improvements throughout the quarter, as average hardwood pulpwood prices increased 15.2%, while holding steady at 6.2% above year-ago levels. Average prices for hardwood sawtimber increased 4.1%, finishing 19.1% above last year s average. Southeastern Timber Prices Source:Forest2Market Northern Hardwoods As the demand for hardwood lumber continues to increase, demand for all of the major hardwood species continues to increase both domestically and internationally. According to the Pennsylvania Woodlands Timber Market Report, black cherry prices increased 14.2% during the third quarter (the most recent publicly reported pricing), remaining 20.4% above year-ago levels. Prices for northern red oak improved 15.3% last quarter, finishing 31.0% above year-ago prices. Hard maple stumpage prices increased 11.0% during the quarter, and finished 31.1% year-over-year. Soft maple prices decreased 2.3% last quarter, but still outpaced last year s prices by 10.6%. White ash prices increased 20.7% last quarter, finishing up 32.7% yearover-year. The Wisconsin sawlog markets remain strong through the fourth quarter with hard maple leading the demand. Some periods of warm and wet weather helped mills draw down inventories, alleviating concerns of high sawlog inventories dampening prices. Hard maple veneer log sales continue to be robust and hardwood bolt markets remain strong. Forest Investment Associates 2 4 th Quarter 2014
Northeastern Hardwood Timber Prices Source: Pennsylvania Woodlands Timber Market Report - Northwest Region Pacific Northwest According to Log Lines, Pacific Northwest (PNW) average delivered prices for Douglas-fir #2 logs increased by 5.5% during the quarter, finishing 0.8% below year-ago levels. Whitewoods (i.e., true firs and hemlock) average delivered log prices increased 1.7%, but finished 4.4% ahead of year-ago levels. Domestic markets remain strong and stumpage sales are receiving multiple bids from sawmills, especially west of Interstate 5. Japanese export markets remained strong through the quarter but Chinese demand continues to weaken with its slowing economy. Pacific Northwest Log Prices Source: Log Lines Forest Investment Associates 3 4 th Quarter 2014
Product Prices Lumber and Panels The lumber and panel markets continue to experience mixed results, and for the quarter, ended well short of the peaks seen in 2013. The Random Lengths Framing Lumber Composite Price fell by 0.8% during the quarter and finished 1.3% below year-ago levels. The Structural Panel Composite Price decreased by 2.7%, but still remains 6.8% above year-ago levels. Lumber and Panel Prices Source: Random Lengths Pulp and Paper Pulp and paper price indices declined through the fourth quarter. The benchmark NBSK (northern bleached softwood kraft) pulp price index fell 1.0% over the quarter, remaining up 3.0% above year-ago levels. U.S. Newsprint (30 lb.) declined 1.7%, holding at 1.6% above year-ago levels. Uncoated freesheet (20 lb.) also declined over the quarter falling 0.2%, and remained 2.8% above last year s prices. Linerboard and boxboard experienced no change in price for the quarter; however boxboard prices continued to be up 3.5% year-over-year. Pulp and Paper Prices ($/short ton) Source: FOEX Indexes, Ltd., RISI Pulp & Paper Week Forest Investment Associates 4 4 th Quarter 2014
Timberland Markets Transactions In the South, Potlatch agreed to purchase 201,000 acres in Alabama and Mississippi from RMS for a reported $384 million. Molpus closed on a 36,000-acre package from HTRG in Virginia for $60.3 million. Also in Virginia, HTRG closed the sale of 13,000 acres to Timberland Investment Resources (TIR) for $22.6 million. Conservation Forestry also purchased 12,400 acres in Virginia from BTG Pactual for $23.6 million. In Georgia, Southern Pine Plantations (SPP) purchased 26,200 acres from Conservation Forestry for $47.5 million. In Louisiana, HTRG completed the sale of 21,300 acres to CatchMark for $38.5 million. In the Pacific Northwest, Olympic Resource Management (ORM) purchased a 12,900-acre package in Oregon from HTRG for a reported $72 million. The deal set a new per-acre price record at over $5,500 per acre. ORM also closed the sale of 8,500 acres in Washington to Sierra Pacific for $31.5 million in the fourth quarter. Also in Washington, Campbell Global closed on 6,800 acres from Conservation Forestry for $30 million. The Nature Conservancy reached an agreement to purchase 165,000 acres in Montana and Washington from Plum Creek for a reported $134 million. Finally, in the Northeast, Molpus closed on a 115,000-acre package in New York from the Forestland Group for $44.9 million. Transactions in Progress Investors continue to follow the Hofmann Forest saga closely. RMS had previously agreed to purchase 56,000 acres of the forest, owned by the North Carolina State University Endowment, but withdrew its offer late in the fourth quarter. Walker Ag Group had previously negotiated a purchase of the forest, but faced criticism over the perception of timberland conversion to agricultural uses. Despite a quiet start to 2015, deal flow is expected to pick up in the coming months and remain strong throughout the year with some analysts predicting large-scale offerings. Forest Investment Associates 5 4 th Quarter 2014
Economic News Housing Through November, annualized housing starts were up 7.7% compared to the first 11 months of 2013, averaging a 990,000-unit pace vs. 930,000-unit rate last year. A slow pace of household formation is a significant challenge as high unemployment among young adults is forcing many to either continue living with their parents or sharing quarters with friends or relatives. Household formation is currently running at about 500,000 a year, far below the more than 1 million mark that would signal a robust housing market. Mortgage Rates Closing out a year of very low mortgage interest rates, the average rate for a conventional 30-year home loan ended the year around 3.87%. The 30-year rate averaged 4.17% for all of 2014, following two years of even lower rates driven by the Federal Reserve s easy-money policies aimed at spurring the economic recovery. The average for a 15-year fixed-rate mortgage ended the year at approximately 3.15%, down from 3.55% a year ago. The only sub-4% years for 30-year mortgages were the previous two years 3.66% average in 2012 and 3.98% in 2013. Jobs The improvement in the U.S. labor markets over the past year has been significant. The jobless rate ended 2013 at 6.7% and stood at 5.8% by November 2014. Monthly gains in nonfarm payrolls averaged 194,000 jobs in 2013. The 2014 average through November was 241,000. Economists predict that job growth will approach or exceed the estimated 15-year high reached in 2014. Employers added 321,000 jobs in November, the most in nearly two years, and 2014 is on track to be the strongest for job growth since 1999. Consumer Confidence The consumer confidence index increased to 92.6 in December, close to the seven-year high reached two months ago. Perceptions of current economic conditions advanced to the highest since February 2008. Inflation Economists are slashing U.S. inflation forecasts for 2015 as oil prices tumble. A stronger dollar, slowing global growth and cheaper oil are holding down costs for goods such as televisions and autos. In November, the inflation rate was 1.32%, compared to 1.66% the prior month and 1.24% the year prior. This is lower than the long term average of 3.32%. In December, the Fed sharply cut its forecast for 2015 inflation, expecting it to fall to between 1% and 1.6%, down from a previous forecast in September of 1.6% to 1.9%. Forest Investment Associates 6 4 th Quarter 2014
Trade Deficit The U.S. current-account deficit increased to just over $100 billion in the third quarter of 2014, up slightly from $98.4 billion in the second quarter. The deficit remained at 2.3% of current-dollar gross domestic product (GDP). On a relative basis, the trade deficient is significantly lower than it was in the 1990s and 2000s. For example, from 1993 to 2006, the United States set a record for its trade deficit 12 out of 14 years, culminating in an $827.97 million deficit the last year. While the U.S. deficit with China has set a record 18 out of the past 20 years, over the last decade, U.S. exports worldwide have increased more than 100%, including the number one U.S. export: gasoline. Interest Rates At the end of 2014 the central bank ended its bond-buying program, and the Fed has suggested that it will begin increasing short-term interest rates as priorities shift from stimulating lending markets to preventing inflation. Nonetheless, with inflation rates dropping significantly, yields on the 30-year bond started 2015 at the lowest level in more than two years, and with yields on the 10-year bond dropping below 2% in the first week of January, some economists believe the Fed may be forced to delay rate increases. Forest Investment Associates 7 4 th Quarter 2014
The FIA Timber Economics Quarterly Dashboard Southeastern Timber Prices Northeastern Hardwood Timber Prices Source: Forest2Market Source: Pennsylvania Woodlands Timber Market Report - Northwest Region Pacific Northwest Timber Prices Pulp and Paper Source: Log Lines Source: FOEX Indexes, Ltd., RISI Pulp & Paper Week Forest Investment Associates - 8-4 th Quarter 2014
($/ton) 000's in thousands The FIA Timber Economics Quarterly Dashboard Housing Starts 30 yr. Mortgage 1200 7% 1000 6% 800 600 5% 400 4% 200 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 3% Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Source: NAHB.org http://www.nahb.org/ Source: The Federal Reserve Lumber Inflation (CPI) $260 $240 $220 $200 $180 $160 $140 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% $120 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14* Source: U.S. Department of Labor, Bureau of Labor Statistics -5.0% Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Source: http://www.bls.gov/cpi/home.htm Forest Investment Associates - 9-4 th Quarter 2014