How much will a sawmill will pay for sawtimber? The range is, of course, driven by market forces, among them the value of the lumber dimensions that can be cut from the log and the price of competitive products such as pulpwood or plylogs.
Over the last five years, the relationship between price and log size has changed. By plotting annual delivered and stumpage prices against log size, the relative stability of smaller logs can be compared to the much more dramatic dip in prices for larger logs (Figures 1 and 2). (For this analysis, log size is measured is pounds per lineal foot, or PLF. For a description of how PLF is calculated and its significance, see my post: Timber Pricing by Log Size or Pounds per Lineal Foot (PLF).
Essentially, the price curve has flattened. Even though the curve is not linear, i.e. straight, a simple, back-of-the-envelope measurement of the flattening of prices can be made by calculating the slope (rise over run) using the two end points of the curve.
As these figures show, roughly 40 percent of the value in the price curve has been lost over the last 5 years. In 2007, the price curve from 20 to 55 PLF rose very steep, but by 2011 this has flattened out considerably. The main causes for this: competition from pine pulpwood and the erosion of value for 2x6 through 2x10 lumber prices.
First, consider pine pulpwood. As the housing and construction market declined over this time-frame, sawmills cut production and removed a significant supply of sawmill residual chips from the market. As a result, pulp and paper mills were forced to increase their purchases of pine pulpwood. The increase in demand drove pine pulpwood delivered prices higher to average $28.70/ton by 2011. As small sawtimber averages an approximate log size of 27 PLF, delivered prices for pine pulpwood are only about $4.00/ton lower. Because sawmills could only lower their small log prices by so much before competing with pine pulpwood deliveries, this created a price floor for sawtimber prices.
Now consider lumber prices. Using #2 grade, southern yellow pine as a barometer, the housing and construction market has placed a value on 2x6 through 2x10 products that is significantly less than 2x4s and 2x12s. In fact, in 2011, even 2x12s were at a value lower than 2x4s (Figure 3).
The effect of this on sawmill profitability can be seen in Figures 4 and 5. For these charts, I plotted lumber prices on a PLF scale and then converted sawtimber per ton prices to a sawtimber cost in dollars per thousand board feet ($/mbf). The effect of depressed prices for 2x6s through 2x10s on sawtimber prices explains why sawmills have put more downward pressure on larger log sizes than smaller ones. And this does not account for labor and manufacturing costs. If we assume that these costs are at the least $40/mbf, sawmills were actually unprofitable on 2x6s through 2x10s.
As a floor is caused by pine pulpwood and as sawmills have lost profit on mid-sized lumber dimensions, the natural reaction of the pine sawtimber price curve has been to hold steady at smaller log sizes while declining at a much faster rate for mid-sized and larger logs. Only if pine pulpwood prices drop significantly or value is created for wider lumber dimensions will we expect a change in the slope of the curve for 2012.
Southern Yellow Pine Lumber--Mill2Market, Forest2Market's Lumber Market Report