By Chris Loomis
The recent survey performed by FP&R interviewed a number of forest products purchasers to determine the volume they plan to purchase from Vermont suppliers. This is an update of the April 2020 regional market assessment.
Forestry Consultant, Appraisal Dept.
Significant changes to the marketplace have occurred since April, the biggest change agent being the explosion at the Pixelle Pulp Mill in Jay, Maine. This explosion caused a mill shutdown and a tremendous ripple effect in the demand for roundwood pulp and mill residual chips throughout the region.
The result of this constriction of the low-grade wood market, combined with the continued low demand for hardwood lumber and spruce-fir dimensional lumber is captured to some extent in the FP&R survey, though the report overall leaves the reader with a strong sense of uncertainty.
Pulpwood and chipwood pricing at the mills were already at break - even or below for most contractors. The chip market will remain viable in Vermont as the two biomass plants continue to operate, but they still base their procurement on the demand for electricity, which is largely served by plants fueled by natural gas, a cheaper alternative to biomass chips. The oversupply of pulpwood is to some extent converted into chips but largely there is no room for all of the pulpwood to be chipped. Contractors who rely on the biomass chip market can be expected to struggle to cover machinery payments unless the harvest projects they are working on have considerable percentages of sawlog material to offset the lack of margin (or negative margin) associated with producing chips and pulpwood. This is especially important for softwood jobs, since softwood pulpwood does not enjoy an alternative market like hardwood pulpwood, which can be sold for firewood in most cases.
Sawlog demand and pricing has suffered in recent months, reacting to the economic slowdown in China, a major consumer of sawlogs and rough lumber coming out of our territory. While this has stabilized to some extent, restrictions doe to COVID-19 and the ensuing economic downturn in the US have exacerbated an already significant problem. Mills continue to purchase raw materials cautiously, while producing lumber, generally at reduced volumes in an effort to continue operating and to ease the oversupply of lumber. This obviously affects the price that can be paid to the landowner for stumpage on any job, regardless of timber quality.
Landowners should expect to receive reduced rates for stumpage overall in comparison to the values for similar products received 24 months ago. This should have a bearing on the timing of projects, and in many cases landowners who can postpone their projects are prudently doing so. In many cases however, circumstance dictate harvest timing, and in the case of using harvest revenues to finance carrying costs and debt service, a landowner may not have the option to wait for the market to improve. On the positive side, projects carried out under these circumstances provide much needed work for contractors struggling to keep workflow. Unfortunately there are many negative aspects of this situation, including reduced ability to cover costs, unfulfilled contract obligations, such as the contractor not being able to pay stumpage for the wood that has been harvested or complete required woods close-out or specified non-harvesting related items, such as trail building or other “add-ons”.
Landowners should be compelled to thoroughly analyze their specific goals, timing and harvest opportunities prior to conducting a harvest in any economic environment. In our current environment, this need is heightened significantly as inherent risks are increasingly profound.
Loggers need to take care not to “over promise” themselves and their services by simply following old models of operation. Knowing the actual cost of operating, and allocating that cost correctly across the products that are being manufactured and sold will allow for contract pricing that is both fair and sustainable. In the long run, if both the landowner and the logger understand the impacts of the current market conditions, then both parties can enter into a contract with the knowledge to have a successful operation, albeit at lower margins than in previous years.
Lumber producers have been through dramatic economic cycles in the past and generally have a wealth of experience and a sophisticated understanding of the factors at hand and their impact on margins. Since mill pricing for forest products, paid by lumber producers, is foundational to the margins that can be achieved by loggers and landowners, the best indicator of the overall forest products market can be gained by investigating and analyzing the information provided by this segment of the forest products economy. The survey and market assessment developed by the Department of Forests, Parks and Recreation
has done the rest of the players in the forest products industry a good turn by producing this report.
To view the full, click here: Regional Forest Product Market Assessment – June 2020
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