A Forestry Inflection Point

It appears we are sitting at one of the most profound and important points in the history of forestry management, conservation, and preservation. A number of conditions and events are converging and the outcome of this convergence is not at all clear on all levels. Yet, these outcomes will have a profound influence on our industry and the lives of human beings throughout the world. We will start with those with most clarity and move to the foggier ones.

It is quite clear at this point that a significant amount of worldwide pulp demand in the future will be supplied from tropical plantations in Brazil and Chile. The climate, access to shipping, and hybrid indigenous tree species make this a certainty, at least for the next 50 years or so.

This leaves the forests in North America and Europe up for grabs for other uses. The root cause of this is that conversion to pulp is no longer the highest and best use for these forests. So, for a decade or so, financiers have been stripping large holdings of forestlands from pulp and paper companies, thinking they will be able to realize higher values for these resources. The only thing that may be wrong with this thinking is that they may have already paid too dearly for these lands.

These forestlands, stripped from the pulp and paper companies, have been available for two uses, and, within the last year or so, identified for a third.

The first use, which we can analyze quickly, is preservation for conservation purposes. This use of course, is dependent on some one or some entity bringing forth endowment like funding to maintain these lands, for once forestlands are placed in this category, they become an expense, not an income. This is a relatively small category, for it is, again, dependent on an outside source of income for maintenance, and this outside source can only come from governments or wealthy endowments willing and able to set aside funds for this purpose (entrance fees for recreational access, especially to government held lands, have not and will likely never be high enough to be a significant source of income for maintenance of these forestlands).

We will tackle the third use next—and this is for fuels. Personally, and I am reaching beyond just the forestlands at this point, I think the whole ethanol and biofuel excitement is a larger bubble than the recycled/deinking bubble of the 1990s. Reports are, for instance, that the ethanol plants under construction right now, in Iowa alone, will consume the entire 2007 corn crop in Iowa. Other corn-belt states are apparently in a similar condition. This little condition alone will drive the price of beef, chicken, pork, starch, and sweetener through the roof, for beef, chicken and pork feed, along with starch and sweetener, have been the major consumers of corn in recent decades.

One would think that these conditions would make ethanol from trees attractive, and it may. However, again, as of this writing, it is believed by the pundits paid to make these prognostications, that in a mere 8–10 weeks from right now, gasoline prices at the pump will fall by 1/3. If this holds true, it will be interesting to see how many investors in ethanol plants are still fascinated by Christmas of this year.

This third use, however, was a bit of a surprise and probably, at least over the next decade or so, of no consequence to the use of forestlands for industrial purposes.

This brings us to the second use, which is the big one in the entire picture. In the United States, Canada, and some parts of Europe, the developing highest and best use for forestlands has been for housing subdivisions and ancillary services (shopping and so forth). And, these have been high-end subdivisions, with large, expensive homes.

However, the housing bubble, and some very bad lending practices that have been going along with it, appears to be over. In "The Economist," 26 August 2006, page 12, there is a small article on this subject titled "What's that hissing sound?" This article cites data from the National Association of Realtors showing that housing prices barely rose over the past year, down from annual rates of increase of 15% a year ago. (You can confirm this for individual houses in the United States by going to www.zillow.com.)

The Economist article further states that the biggest bubble of any type or time in the United States has been the housing bubble of the last five years. This, coupled with looser and looser lending standards, has put the average homeowner in dire straits in a stagnant, or, heaven forbid, declining market. Housing prices have not fallen on a nationwide basis since the Great Depression of the 1930s, but look poised to do so now.

If you are reading this from, say, Britain, there is little comfort for you. Housing prices have doubled in the United States since 1997, but The Economist says they are up 180% in the same period in your part of the world.

If widespread stagnant or falling prices of housing do not lead to a severe depression, they at least have a potentially positive effect for the pulp and paper industry. Through no fault of our own, we may have sold our forest assets at a peak price, and, depending on how impatient investors become, have a chance to buy them back at fire sale, shall we say, "forest fire" sale prices, about the time, perhaps, that tropical pulp wood plantations peak in capacity.

Only time will tell.