Despite high lumber prices, log prices in the U.S. South remained at the same low level as in previous years. However, this gap is beginning to close. Atlanta-based Domain Capital Group, which manages $600 million in forestry assets, is already seeing growing prices for standing timber. Scott Reaves, director of forestry operations at Domain Timber Advisors, and Patrick E. Leardo, director of business development at Domain Capital Group, expect softwood log prices to match housing demand over the next few years.
Lesprom Network: Lumber prices dropped again last week. Can we consider this a sign of the beginning of a return to the normal price level or is it just a correction before further growth?
Scott Reaves: We certainly pay attention to the demand drivers around lumber usage and still expect growth around housing starts moving forward. As far as a return to normal, several researchers have indicated we're likely to see prices continue to come down this year and into next. But I don't know that we're going to see a true return to normal in the $300-$350 per thousand board feet pricing level we were at a year ago.
Exactly what the pricing is going to be is a little harder to predict without putting a fairly wide statistical range on it, but I suspect we'll be at somewhat of an elevated level for a good while.
Lesprom Network: What do you think the new bottom price will be? How much higher than the level of previous years?
Scott Reaves: It's hard to predict, but I would suspect it will be just above historical levels. We are continuing to see the mills respond and ramp up production to meet new demand. It'll be very interesting over the next 12 to 24 months to see how things shake out.
Lesprom Network: If we compare the main reasons for the rise in lumber prices such as increased demand, lack of supply, Canadian lumber tariffs, logistics issues, which ones are most affecting prices?
Scott Reaves: I think we had a perfect storm due to the effects of COVID-19 and mills losing production capability temporarily. What we're seeing now is a response from many mills and continued reinvestment in mill infrastructure. In the U.S. South, we expect to see demand for raw materials and standing timber increase as capacity ramps up. Based on research from Forrisk, indications are we're looking at another potential 5% increase in production capacity from lumber mills through the end of the year. That's approximately a billion board feet, which is a rather significant response by our mill infrastructure.
Lesprom Network: How long can supply and demand imbalances in the lumber market last?
Scott Reaves: I think you're looking at multiple years of increased demand from a housing perspective. The mills are going to rise to meet some level of that, and we're going to shake out. My expectation is we're going to shake out somewhere at an elevated lumber pricing level for a good little while. But exactly what it will be is hard to say.
Lesprom Network: Despite the high prices for lumber, the prices for logs remained at the same low level as in previous years. Why is there such a gap and will the prices of logs rise following the lumber?
Scott Reaves: I really do expect to see a tightening of supply demand balance. For years and years, we had an oversupplied net growth situation domestically in the US, especially in the US South. We were growing more sawtimber trees than we were consuming, so we had an oversupplied situation of timber sitting on the stump in the woods. With ramped up demand and growth characteristics changing, we're going to see that imbalance shrink.
We're going to see a tighter growth to drain ratio and see many markets, especially in the US South, come back into balance. We're already seeing gains on average in sawtimber stumpage pricing and as those supply demand imbalances tighten, we're going to continue to see better spot market pricing opportunities, so I think there will be a willingness of loggers or mills to pay additional for any given stand of timber. That will also be a benefit to forestland owners. I do see a positive trajectory for soft timber storage pricing over the next several years and expect it to follow in line with demand for housing.
Lesprom Network: Last year was a record year for the company in terms of sales of forest plots. What are the results of forestland sales from the beginning of this year? And what was the harvesting?
Scott Reaves: From our perspective, looking across our client base, we just had an unbelievable start to 2021 from a forestland sales perspective. We're seeing continued and significant demand for 100 acres up to 500 acres of land. Individuals really want to have a separate place outside of the city. A place where they can enjoy the outdoors, maybe fish or hunt on their property, and even have a home site for a cabin or their vacation home. We expect we're on track for another record year if things progress as we hope they will for our clients and investors.
From a timber sales perspective, it’s been an extremely active year, with more loggers working across our land base than we’ve had in recent memory. We're also seeing strong interest from a land sale and timber harvesting perspective.
Lesprom Network: There are many forests in the U.S. South, and it is profitable to build sawmills there. Is Domain exploring the possibility of entering the sawmill business?
Scott Reaves: At present, we've looked at a couple of projects, but we've not made a material push in that direction yet.
Patrick E. Leardo: We've looked at it from an acquisition standpoint for some of our larger clients. Certainly, with pricing high in this market, everyone wants to know if it makes sense. From a pure operational and business perspective, you generally don’t want to buy into the height of a market in almost any asset class, especially with research demonstrating spikes in this commodity are being driven more by lower supply rather than demand.
There are a few dozen mills that either came online in the Southeast or are being updated and expanded to increase efficiency and capacity. That had been in the works for probably 18 to 24 months going into the pandemic, and those mills are slated to still come online on their schedule. As that additional capacity is available, we're going to see pricing correct to more normal levels, though probably a bit higher than historical averages based on the demand for new homes that will pick up again as the supply is available and framing costs stabilize at more reasonable levels.
