Fear Grips Industry as Fundamentals Collapse

What Will Turn the Economy Around? More Importantly, How Will You Know?

For the past eight years, I have been writing an “end of year” wrap up in this space. As I looked back on past letters, I discovered that they all described the dramatic change that had occurred in the previous four quarters and all predicted change next year. Happily finding myself clairvoyant—or maybe just consistent, predictable or plain boring—I believe I will change course this quarter.

We all know that 2008 was a tough year and that 2009 is shaping up to be tougher—especially in our industry. A few year-over-year industry statistics will make you take pause:

• Housing starts down 40% year over year
• Stumpage sales (US South) down 37%
• Delivered log consumption down 22%

These last two numbers—derived from actual transactions in Forest2Market databases—don’t lie. And remember the base year for these changes was 2007, which was not exactly an admirable year for the industry.

As lumber mills and sawlog sellers were managing a declining demand curve throughout 2008, pulp mills and pulpwood sellers were having a banner year of sorts. Demand for pulp and paper held up through the first half of 2008.

By third quarter, some chinks in the armor started to crack and by fourth quarter, demand all but disappeared. Adding to the anxiety were outside forces, such as the promise of new demands placed on resources by cellulosic ethanol, wood pellets and other wood-to-energy projects. For the most part, these demands have not materialized.

As a result of these factors and others—but mostly demand—everyone from landowners to loggers and consultants to CEOs are hunkered down waiting for a “new day.”

No one could have anticipated the market changes that swept over the industry. And no one can manage a business effectively in the face of double digit drops in demand.

If you subscribe to our forecasts, you know that our economists, as early as December of 2007, repeatedly said that the market fundamentals suggested that the Dow Jones Industrial Average (Dow) should be at 8,000. I finally believed them when the Dow actually did hit 8,000. So much for the doctor heeding his own advice! My point is don’t beat yourself up. In hindsight, the clues seemed to clearly point to troubled waters. However, as the storm gathered, it was disguised as a zephyr.

Many of you are experts at surviving this industry’s pernicious cycles. I myself have seen two, one at Forest2Market as we started up. Some sage advice offered to me during that time bears repeating.

• Be brutally honest with yourself—this is no time for a flight of fantasy.
• If your plan isn’t working, change it today.
• Spend your money on sales and marketing; develop new markets, new products or services. (Yes, I know this one is tough to swallow.)
• Be optimistic and cheerful—you will get more business.

How will you know the market is turning? There is no perfect answer. We do know, however, that the market can and will change. And that change can come swiftly. Recall that the market rocketed out of the recession circa 1989-91 and 2001-2002 to seek new highs for log and lumber prices, respectively.

Here are things to look for:

• Slowing or leveling off of job losses: usually companies are slow to rehire workers; the economy will come back prior to the employment numbers turning around.
• An end to the inverted yield curve: short term interest rates will be lower than long term rates.
• Steadily increasing demand with little volatility: erratic demand is indicative of a shallow and confused market (often with little inventory), not necessarily indicative of a turn around. Many will confuse this scenario with a recovery, but it is only a false start.
• Note activity at the shopping malls, restaurants, car washes and Starbucks: when the average citizen starts buying $15 car washes and $4 cups of coffee again, we will have the makings of a recovery.

Where is Forest2Market heading in 2009? First and foremost, we plan to take care of our existing customers. But we also plan to act on that sage advice by extending our services in three markets: lumber pricing, carbon credits and renewable energy.

As always, we appreciate your business and commitment to Forest2Market.