Quarterly Economic and Revenue Forecasts
UPDATED: November 24, 2015
This quarterly forecast includes our analysis of current economic conditions and our objective projections of future revenue for state trust funds and their beneficiaries.
For Economic and Revenue Forecasts 2013 and prior years, contact Office of Budget and Economics, PH: 360-902-1730; FAX: 360-902-1775; or email: firstname.lastname@example.org
Lumber and Log Prices. Lumber and log prices have fallen markedly since peaking in mid-2014. Random Lengths' Coast Dry Random and Stud composite lumber price peaked at $393/mbf in January 2014, but fell throughout the rest of the year to average $373/mbf. The composite lumber price continued to fall precipitously through May to a low of $287/mbf before bouncing up to $333/mbf in July. As of October the price had fallen again to $295/mbf, for an average of $312/mbf for 2015 thus far.
The price of a `typical' DNR log moved up sharply from a two-year plateau in 2013 to $591/mbf in 2014. However, prices have declined through 2015 to average $524/mbf so far. The decline in log price is primarily due to the dramatic slowdown in demand from China (noted as a significant risk in the March Forecast) and ample regional supply of both logs and lumber. A price decline was largely foreseen, though the depth of the drop was unexpected.
The outlook for stumpage prices in CY 2016 has been revised downward, held back by the same issues plaguing lumber prices, but they are still expected to be somewhat higher than in CY 2015.
Timber Sales Volume. DNR sold 18 mmbf less than expected at the end of FY 15. In the June and September forecasts, those sales were pushed out to FY 16, giving a sales volume forecast of 518 mmbf. However, the current timber sales plan suggests that a more realistic expectation is for 500 mmbf for FY 16. Through October 2015, DNR has sold 102 mmbf, leaving a remaining 398 mmbf in expected sales volume for the year. Given current timber sales plans---and absent a new sustainable harvest calculation---sales volumes are still pegged at about 500 mmbf in FY 17 and beyond.
Timber Sales Prices. Stumpage price expectations for FY 16 are reduced slightly to $340/mbf from $344/mbf. Stumpage price forecasts for further years are unchanged at $371, $369 and $367/mbf for FYs 17, 18, and 19 respectively.
Timber Removal Volume and Prices. Changes in harvester plans, largely due to continued weak timber and lumber prices, and the 18 mmbf reduction in planned sales, have reduced expectations for FY 16 removals by 40 mmbf to 524 mmbf. About 20 mmbf of this year's removals are shifted into outlying years, primarily FY 17. Removal volumes for FYs 17-19 are forecast to be 597 (+10), 511 (+2) and 515 (+8) mmbf. Timber removal prices are projected to be about $334 (-$2), $347 (-$2), $363 (-$1) and $368 (+0) per mbf for FYs 16-19. These removal prices reflect changes in the removal timing and follow from, and lag behind, the changes projected in timber sales prices.
Bottom Line for Timber Revenue. The above changes to timber sales prices, sales volumes, and harvest timing have shifted projected revenue in all forecast fiscal years. Revenue for the 2015-2017 biennium decreased by $12 million to $382 million, down three percent from September's forecast.
Uplands and Aquatic Lands Lease (Non-Timber) Revenues. In addition to revenue from timber removals on state-managed lands, DNR also generates sizable revenues from managing leases on uplands and aquatic lands.
Projected uplands revenue for FY 16 is increased by $0.5 million, due to an unexpected settlement in easement revenue and higher than expected production from mineral sales. Outlying years are unchanged.
Aquatics revenue expectations for FY 16 have been revised to $28 and $31 million due to changes in geoduck sales expectations.
Total Revenues. Forecast revenues for the 2015-2017 Biennium (FYs 16 and 17) are reduced by $16 million to $512 million. Most of the revenue change is driven by a change in expected timber harvests and timber sales volume.
Notes to the Forecast. Although the sales volume estimates in FY 16 are based on the best available internal planning data, they are subject to downward adjustments due to on-going operational and policy issues. These issues may also affect sales volumes in outlying years, where the assumed sustainable harvest volume of 500 mmbf could prove too high.
A continuing major downside risk for the forecast is timber and lumber demand from China. While it seems that a decrease in demand has largely been accounted for in the current prices, there is growing concern that that the slowdown in Chinese construction, and economic growth more generally, will be much more dramatic than previously expected.
Another major downside risk is the mid-October expiration of the Softwood Lumber Agreement (SLA, 2006) between the U.S. and Canada. The SLA was signed in 2006 after a long running trade dispute in which U.S. producers claimed that Canada was unfairly subsidizing their lumber industry by selling government owned timber at administratively set prices, as opposed to market based prices. The agreement provided for a tariff on imports of Canadian lumber to the U.S. that was set based on the market price of lumber. From November 2013 to April 2015, lumber prices were high enough that there was no tariff. However, since lumber prices have dropped precipitously, imports were attracting the maximum tax of 15 percent. Since October 12, that tax has been removed.
The effect the SLA expiration has on U.S. lumber and timber prices will depend heavily on demand conditions both in the U.S. and internationally, particularly in China. If demand increases again, enough to push lumber prices to the levels seen prior to April, then the effect will be negligible because there would have been no tax at those prices anyway. However, until demand recovers sufficiently, U.S. producers will likely see increased competition and lower prices. This means lower demand, and therefore prices, for logs, which undermines DNR stumpage prices. This has been taken into account in our forecasts, but the size of the effect is very uncertain.
There is an unlikely upside potential for increases in timber price due to unexpectedly rapid strengthening of U.S. housing demand. This has not eventuated, despite strong employment growth and reasonable wage growth for the last two years. The lack of housing demand is likely due to a number of impediments---persistently stringent lending standards, a continued tough labor market for younger workers, and student loan debt.
Finally, although the end of the Chinese ban on geoduck imports from the Pacific Northwest has eased much of the uncertainty surrounding geoduck demand, geoduck prices are historically volatile and there is no guarantee that a blanket ban will not be reinstated. Additionally, on-going friction between purchasers and divers has further disrupted the market. PSP closures in late October have added uncertainty around harvest volumes as well. Taken all together, both the geoduck sales price and harvest volumes may become even more difficult to predict in the coming years.