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Timberland Valuations: Has the Correction just begun?


"It is difficult to overstate the depth of
the current downturn in the forest products sector. Real timber prices (corrected for inflation) are at multidecade lows. As a result, forest landowners are smartly deferring final harvests to minimize sawtimber production while awaiting a rebound in timber prices. Much of the softness in timber prices is a direct
result of reduced demand from woodusing facilities, with reported capacity utilization as low as 65 percent and 52 percent for printing/writing and lumber production, respectively (Pulp and Paper Week and Random Lengths). For forestland owners, the reduced
demand and low prices for their sawlogs have been the biggest factors impacting their management decisions.  Housing starts have trended upward since 1991, peaking at almost 2.3 million starts on an annualized basis in January of 2006 (Department
of Commerce: Census Bureau). Since the peak, we have seen an unprecedented
drop to around 0.6 million annualized starts. Until the housing sector absorbs new and existing housing inventory and equilibrium in homeownership rates is achieved, a significant rebound in housing starts is not expected. Most sources do not forecast starts to reach the long-term average annual rate of 1.5 to 1.9 million before 2012. Estimates place housing starts at roughly one-third the long-term average in 2009, one-half the long-term average in 2010 and two thirds the long-term average in 2011 (FIA research). Now that we have characterized the fundamental operating environment for timber markets, let’s briefly discuss the forestland market. Since the second half of 2008, the market has shifted to favor buyers. Auctions of investment grade forestland properties, while wildly successful during 2004 to 2008, have generally been met with only modest interest over the past 12 months. The volume and value of forestland transactions are down for
2009 and will likely be at multi-year lows. A preference for negotiated deals is evident in the transactions that have closed. Interest in smaller scale forestland properties (less than 200 acres) has also waned due to constrained credit markets and limited financing
alternatives. While current fundamentals are weak, investors are able to look through the cycle and focus on the long run. As forest landowners, we must view historical information in the context of the current environment, recognizing that the future that will no doubt be different than the past. The flexibility implicit in forestland ownership has never been more important, and continues to play a pivotal role in how we invest in our forests."

Can the meteoric rise in timberland prices continue? I think not. Yes, timberland remains an excellent long term investment and an exceptional hedge against higher levels of inflation, which I think we are headed for. But how long can the prices of timberland stay elevated? When there are very few sales, very little credit and the TIMO's running out of buyers something must give! I think it is going to take a correction in the form of large institutional sellers realizing that liquidity is only going to come at the expense of valuations.

What do you think?

Disclosure: Long: Timberland (the actual dirt and trees)