Standing timber prices and factors which affect them
EVIJA GREĢE - STALTMANE
Forest Faculty, Woodworking department
Latvia University of Agriculture
Dobeles street 41, Jelgava, LV 3001
[email protected]
Abstract: - The value of trees in a forest can change
due to both physical changes and price changes in
the market. Timber price is one of the key elements
in forest evaluation and profit calculation from
forest assets. As a forest stand does not necessarily
need to be cut at the rotation age, an owner can
wait until wood prices increase and then sell it in
such a way to get the maximum income from the
forest. As the investments in forest land deal with
more than an 80-year horizon, the main problem is
prediction of reasonable future prices. Therefore
the paper analyzes fluctuations in the average
prices paid for the standing timber, commonly
called the stumpage price, in Latvia and
Scandinavian countries, examines the factors which
effect timber price changes, and models the future
timber price scenarios. The research also suggests
the ways of determining the timber prices.
Key - Words: - timber price, inflation, forest value.
1 Introduction
One of the most important factors in the forest
value determination is the price of standing timber.
Prices for the standing timber should be assumed to
determine the income in the future but as the timber
growth period is an average of 80 years, then future
predictions are difficult to make. Timber price
determination problem exists from the beginning of
forest economy. 96 years ago Chapman indicated
that the past data is the only place where clarity is
[4].
Pearse notes that in many forest value calculations
it is assumed that the stumpage values are constant
over time, but in reality, they are likely to change
[6]. It is generally difficult to predict the direction
and magnitude of future changes in timber prices,
therefore we must incorporate our expectations, or
best guesses into future timber price predictions.
Prices fluctuate when economic conditions are
changing, but as timber growing takes much time,
then we should look at the long - term trends.
Pearse also indicates if stumpage values are
expected to rise over time, then identifying this
percentage rate it is possible to reduce the discount
rate applied to stumpage values by that percentage
[6].
Straightforward methodology for determining
future timber prices are not found in the literature,
so it is important to recognize how price of timber
is formed and the main factors affecting it.
2 Problem formulation
2.1 How standing timber price forms and
what affects it
According to economic theory the price is
expressed in the amount of money for a certain
good which exists as an appraisal between the
prospective buyer and the present owner of the
good. The market price originates where there is
active bargain with this good and it forms of
numerous transactions. So the value of the
stumpage in the forest for its owner grants the
future manufacturer, respectively, the stumpage
derives their value from retail and wholesale
sawnwood prices. The prices of sawnwood and
other forest products fluctuate mainly due to supply
and demand. Intensive roundwood supplies usually
lead to a reduction in prices of timber, lower cost
for timber manufacturers and higher demand for
forest products. Conversely, if there is a huge
demand (growing human population) and it is not
possible to provide it (the forest areas have
decreased), then the price of timber is rising.
Consequently, the market price for sawnwood is
the basis of value for stumpage.
As it can be seen in Figure 1 the value of stumpage
is derived from profit and costs of harvester,
roundwood buyer and manufacturer. This is a
complete scheme, but there could be other
variations when there is no stage with roundwood
buyer and forest harvester does transportation by
himself, and it may also be that the forest owner
does all operations up to the sawmill by himself. If
the price at the manufacturer is known, it is
possible to calculate the stumpage price.
are directly related to the volume of construction,
energy consumption and green thinking.
Fig. 2. Extra factors that affect supply and demand.
Fig. 1. Timber price stages from the forest to the market.
The price of stumpage is derived directly from the
final product into which it is manufactured in the
end. Usually the roundwood is sold to the
manufacturer who can pay the most for the certain
timber assortment. But for all that the price of
stumpage does not change so rapidly than the
sawnwood prices. This is due to the fact that
manufactured production should be sold for the
company to obtain a turnover and final goods
would not get accumulated in warehouses,
therefore it allows more frequent price fluctuations.
While the trees in the forest can remain much
longer and wait for positive market conditions in
order to maximize revenues from sales. Thus,
forestry has a greater flexibility.
So in the timber price forecasts determination the
resources,
manufacturer
and
the
market
characteristic should be taken into account (see
Fig.2.). The analysis should be begun with resource
availability (distance to the sawmill, ease of
harvesting) and substitution of timber by other
materials. It should be continued with the number
of manufacturers and their processing capacity in
the country and the existence of monopolies. As
well as the main export markets and figures of
domestic consumption should be analyzed which
Seller and purchaser opinion on the price may be
affected by economic reasons (unemployment,
purchasing ability of residents, interest rates, etc.).
It is possible that in the periods of crisis sawnwood
is frequently sold for less than its costs were.
Accordingly the economic climate may be
regulated by political decisions (tax incentives,
subsidies, export promotion, etc.).
For the last 100 years real timber prices have risen
by 2 percent per year according to timber manager
Timbervest [3]. However timber price trends at the
global level were significantly affected by the
economic crisis in the world’s timber markets in
2008, despite of the importance of timber in climate
change mitigation, and as an alternative to fossil
fuels. Prices for timber have fallen since this time.
According to the Global Conifer Sawlog Price
Index roundwood prices have fallen sharply, for
example, for softwood sawlogs by 26% [2]. The
wood and paper industries have closed many of the
mills because of reduced demand and have started
to seek for alternative markets. Forest owners in
their turn have reduced harvest volumes.
Further we examine the impact left by the crisis on
the Latvian and Scandinavian timber market.
2.2 Timber price tendencies in Latvia and
Scandinavia
Latvian forest sector is highly dependent on export
markets. According to the State Forest Service data
8.96 million m3 were cut in Latvia in 2008, of
which 3.2 million m3 or 36% were exported as
roundwood. The production consumption and its
price decreased by falling of the purchasing
capacity in the impact of the world economic crises
in 2008 which made effect on forest sector exports
from Latvia. Due to this fact in 2008 the sawnwood
90
70
EUR
50
40
30
20
10
0
2002
2003
2004
2005
Years
2006
2007
2008
2009
Fig.3. Average stumpage nominal prices dynamics in
Latvia (EUR), 2001-2009.
(Source: Forestry Company Hansa Silvesters Ltd data
base.)
Since Latvia exported about 2 million m3 of
roundwood to Sweden and 0.5 million m3 to
Finland, it could be assumed that the stumpage
price or roadside prices of roundwood in these
markets is also affecting the price of standing
timber in Latvia. But looking at the roadside prices
of roundwood in Sweden over the 9 years (see Fig.
4.), it could be seen that they are practically
unchanged during this period even despite of the
crisis in 2008. 90
Pine logs
Spruce logs
Pine pulpwood
Spruce pulpwood
Birch pulpwood
80
70
EUR
60
50
40
30
20
10
0
2001
2002
2003
Pine logs
Spruce logs
Birch veneer logs
Pine pulpwood
Spruce pulpwood
Birch pulpwood
80
70
60
50
40
30
20
10
0
2002
2003
2004
2005
Years
2006
2007
2008
2009
Fig.5. Average stumpage nominal price dynamics in
Finland (EUR), 2001-2009.
(Source: Finnish Forest Research Institute (Metla) data
base.)
60
2001
90
2001
Spruce logs
Pine logs
Birch veneer logs
Birch pulpwood
Conifer pulpwood
80
While from the analysis of the stumpage prices in
Finland (see Fig. 5.), it could be drawn that the
price of pine and spruce logs had an increase, but
pulpwood prices remained unchanged in 2007.
EUR
prices decline was observed, it caused also the drop
in timber supply in Latvia and the price for
stumpage also decreased because forest owners
decided to wait for the better times when the
stumpage price is higher. The lowest stumpage
prices were in the beginning of 2009 by the end of
the same year the situation had improved.
Stumpage prices for all timber assortments were
rapidly increasing till year 2007 in Latvia (see Fig.
3.) that was linked with increased use of wood,
both in Latvia and in the world, especially with the
rapid growth of construction in Latvia. In 2008 the
world crisis caused a sharp fall in timber prices and
the prices returned at year 2001 price level.
2004
2005
Years
2006
2007
2008
2009
Fig.4. Average roadside nominal prices of roundwood
dynamics in Sweden (EUR), 2001-2009.
(Source: Finnish Forest Research Institute (Metla) data
base.)
Such a sharp price rise for all timber assortments
was only in Latvia in 2007. Sweden and Finland
were forced to buy roundwood from Latvia for
such high prices while in their country the prices
were much cheaper, probably, it was linked with
the planned roundwood deliveries and volumes
from Latvia. This analysis clearly demonstrates that
the crisis leaves a different impact on timber prices
in each country, therefore additional factors which
influence the supply and demand should be
examined in each country. As well as in general in
all countries in 9 - year period timber prices have
had a tendency to remain at a steady level. This
shows that the price of timber not always should
increase over a long period.
3 Problem solution
Solberg created the forest sector model EFI-GTM,
where a global market, the forest sector and forest
product demand were integrated in order to assess
the growing timber trade and forest stock impact
till 2020 in Europe [7]. It is assumed that the forest
resources are increasing, thus the log and
sawnwood prices are falling in Europe. As a result,
future prices for pulpwood are increasing and for
sawlogs are decreasing in Western Europe.
Although it should be noted that in this model the
future demand for bioenergy from forest resources
was not taken into account and timber prices trends
are projected for only 20 years ahead, because it is
almost not possible to predict the prices of standing
timber for 60-120 years ahead. During this time
radical changes may occur not only in economics
but also at social, political, climatic or ecological
changes in international or even at global level
which may substantially affect the prices of
standing timber. Wherewith it is practically
impossible to determine the price what would be
for specific timber assortments after more than 100
years.
In Klemperer’s work the past timber prices were
taken into consideration for the period 1952 - 1986
in America [5]. The prices were projected for
softwood sawlogs on the stump for the period 1990
to 2040 for the different regions with the increase
in prices from 1,7-3,2% per year. Of course, the
crisis in 2008 was not predicted. This shows that in
anticipation of possible prices, they are generally
adopted with a increasing and positive tendency in
the future because the population in the world is
growing, but the forest areas are decreasing. Total
forest area (30% of the total land area) continues to
decrease about 13 million hectares per year. Africa
and South America go on to have the largest losses
of forests while the forest area in Europe continues
to expand about 0.5 million hectares per year [1].
Promoting the consumption of wood products,
especially under condition of crises is directly
dependent on government flexibility in the
legislation and the various programmes in order to
stimulate wood-based energy development and to
support the forest industry in general. Today
professionals of the sector are working together to
stimulate the use of wood products in the whole
world, as well as new technologies facilitate the
development of wood- processing industry and the
wider use of wood. These facts indicate that there
will be the future demand for wood products.
Over the long term demand for timber has grown
broadly in line with population and income growth
[3]. Demand for timber has been sustained despite
of the substitution of other materials in many
applications of timber particularly plastics and
metals, and the recycling of timber products.
However, there is no reason to expect that timber
prices will increase more than inflation.
According to the author's view, in the future
calculations determining the value of the forest, in
the calculating moment it would be most suitable to
use the current market price of the timber, applying
only the discount rate which includes risk factors.
In case of necessity the correction of the timber
market prices would be made. That means to make
the past data and the current analysis of timber
prices compared with global trends, and if dramatic
increase of timber prices is found (and it was the
case in Latvia) the prices should be adjusted
according to the steady growth as it was before and
then this adjusted price will be used in the
calculations.
4 Conclusions
Forest value is highly influenced by timber price
assumptions. Therefore the price assumptions
should be realistic and well justified.
The study results show that the crisis on timber
prices of each country leave a different impact,
therefore each country should be examined
individually, analysing the factors which affecting
demand and supply and when determing the timber
price forecasts.
It is practically impossible to determine the price
what would be for specific timber assortments after
more than 100 years because during this time
radical changes may occur at international or even
global level which may substantially affect the
prices of timber.
When determining the value of the forest in the
calculating moment it would be most suitable to
use the current market price of the timber, applying
only the discount rate which includes risk factors.
When comparing the past data with the current
market prices of timber very rapid growth is
observed, then the prices should be adjusted, taking
into account the steady growth as it was before the
dramatic rise and check the prices in compliance
with global trends in wood.
References:
[1]Anon., Global Forest Resources Assessment,
Forestry Department Food and Agriculture
Organizationof the United Nation, Rome, Italy,
2005.
[2]Anon., Forest Products Annual Market Review
2008-2009, United Nations, New York and
Geneva, 2009.
[3]Anon., Timberland as an investment for
institutional portfolios,
Mercer
Investment
Consulting, 2006.
[4]Chapman H. H., Forest Valuation, Boston:
Stanbope press F. H. Gilson Company, 1914.
[5]Klemperer W. D., Forest Resource Economics
and Finance, Singapore: McGraw-Hill Inc, 1996.
[6]Pearse Peter H., Introduction to Forestry
Economics, Vancouver, University of British
Columbia Press, 1990.
[7]Solberg B. ,Moiseyev A., Kallio M.I., Economic
impacts of accelerating forest growth, Europe.
Forest Policy and Economics, Vol. 5, 2003,
pp.157-171.