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March-April 2016

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32 PalletCentral • March-April 2016 palletcentral.com 2016 HARDWOOD UPDATE: Lumber Industry Structure and Market Preferences in the U.S.* By Brooks Mendell and Jack Lutz ardwood log markets resist analysis. While "timber markets are uniquely local" resonates for wood-using businesses globally, hardwood grade markets put "local" on steroids. You can build a large softwood lumber mill and make it work locally in many states, but not so with hardwood. The structure of the U.S. hardwood log-using industry differs from softwood in scale, scope, risks and drivers. Dependence on a single species is not a winning strategy for hardwood lumber mill operators. While U.S. markets consume billions of board feet annually of hardwood lumber, it accounts for a fraction of total U.S. lumber use. Over the past ten years, U.S. hardwood lumber consumption averaged 8.4 billion board feet, or 16.9% of total U.S. lumber use. While smaller than softwood, the sector remains plenty interesting for investors and manufacturers. This article focuses on the structure and drivers of the hardwood lumber manufacturing sector, and addresses the role of consumer preference as a driver of variability in projecting demand. This research supports efforts by Forisk to forecast hardwood log prices over time in different U.S. regions. U.S. Hardwood Industr y Structure and Operations The distinctive feature of the hardwood lumber sector relative to softwood sawmills is scale. While the average softwood sawmill size in the U.S. continues to increase, hardwood sawmills comprise hundreds of modest-sized operations. For example, the 350 largest hardwood sawmills tracked by Forisk in the North – Lake States, Mid Atlantic and New England – average just 5 million board feet of annual productive capacity. To feed this industry, the U.S. has growing hardwood forests and, a vibrant and diverse, hardwood forestland owning and investing sector. According to the U.S. Forest Service, the volume of hardwood forest inventories (growing stocks) increased nearly 130% over the past 60 years. And most of this inventory, nearly 80%, grows on privately-owned forestlands, which also provides investment opportunities. For example, The Forestland Group consistently ranks as one of the three largest timberland investment managers in the United States, with 3.1 million acres under management as of February 2016. While hardwood lumber production feeds into national and export markets, log markets are critically local. The single most important exercise associated with forecasting hardwood log markets for timberland investors, for example, remains confirming the existence of diverse and well-capitalized mills across the market. U.S. Hardwood Industr y Trends and Preferences From 1990 through 2007, U.S. hardwood lumber consumption averaged 11.3 billion board feet. Consumption plummeted to 6.8 *Based on excerpts from the article "Forecasting Hardwood Log Prices in the U.S., Part I" in the Q1 2016 Forisk Research Quarterly (FRQ) by Brooks Mendell, PhD and Jack Lutz, PhD MARKETS H "The top three hardwood lumber consuming sectors are pallets and crating; expor t markets; and railroad ties." —Brooks Mendell, Forisk Consulting

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