Quarterly Economic and Revenue Forecasts
UPDATED: November 10, 2016
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: email@example.com
Lumber and Log Prices. Lumber and log prices have fallen markedly since peaking in 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 lumber index continued to fall to average $311/mbf for 2015. Prices have averaged $328/mbf from January to September 2016, with the last four months averaging $338/mbf.
The increase in prices in 2016 appears to have been initially driven by much higher first quarter housing starts compared to 2015, which spiked lumber demand and caught lumber dealers off-guard. Prices are expected to fall in the fourth quarter before increasing again in the beginning of 2017.
Through 2015 the price of a `typical' DNR log averaged $521/mbf, falling from the $591/mbf average in 2014. The average price for 2016 is slightly higher at $531/mbf through October. The decline in 2015 was primarily due to the dramatic slowdown in demand from China and an ample regional supply of both logs and lumber. Log prices are expected to remain flat through 2016 and begin increasing in 2017 from increased lumber demand.
Timber Sales Volume. Given current timber sales plans---and absent a new sustainable harvest calculation---sales volumes are still pegged at 500 mmbf in FY 17 and beyond. We have more confidence in the assumptions supporting the 500 mmbf in FY 17 than we had in September.
Timber Sales Prices. External analysts expect flat stumpage prices through the remainder of 2016 and higher prices beginning in 2017. Prices for DNR sales in FY 17 to-date have been weak compared to analyst expectations but higher than most auctions last year, averaging $304/mbf for the first four auctions. Although these are on relatively low volume compared to total expected sales for the year, it is an indication that our current price forecast of $360/mbf is likely too high, so we are reducing the FY 17 forecast to $350/mbf. We're lowering FYs 18 and 19 to $363 (-6) and $367 (-5), respectively.
Timber Removal Volume and Prices. Accounting for changes to purchaser plans and the timing of contract expirations, we're lowering FY 17 harvest volume expectations by 43 mmbf to 565 mmbf. In FYs 18-20, compensating increases of 13, 23, and 7 mmbf yield annual estimates of 604, 531, and 514 mmbf.
Timber removal prices for FY 16 were $339/mbf, slightly higher than expected in the June forecast. Timber removal prices are projected to be about $303 (+$2), $348 (+$6) and $363 (-2) per mbf for FYs 17-19. These removal prices reflect changes in the removal timing and follow from, and lag behind, the changes projected in timber sales prices.
Timber Revenue. The above changes to timber sales prices, sales volumes, and harvest timing have shifted projected revenue down in FYs 17 and 21, but up in FYs 18, 19, and 20. Revenues for the 2015-2017 biennium are forecast to total $337 million, down three percent ($12 million) from September's forecast. Revenues for the 2017-2019 biennium will be up by four percent ($15 million) to $402 million.
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.
Revenue estimates from non-timber uplands are virtually unchanged from the September Forecast.
Expected geoduck revenue for FY 17 is increased by $1 million due to a surprisingly high average price for the August auction and increases in sales volume assumptions. This increase outweighed a small decrease in expected earnings from water-dependent rents. In outlying years aquatics revenues are unchanged.
Total Revenues. Forecast revenues for the 2015-2017 Biennium (FYs 16 and 17) are lowered by $11 million to $476 million. Most of the revenue change is driven by expected timber prices and harvest timing. Revenues for the 2017-2019 Biennium (FYs 18 and 19) are increased by $15 million to $542 million.
Notes to the Forecast. While the sales volume estimates are based on the best available internal planning data, they are subject to adjustments due to ongoing operational and policy issues. These issues may also affect sales volumes in outlying years, where the assumed sustainable harvest volume of 500 mmbf might prove too high.
A continuing 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 market prices, and the export volumes of logs and lumber has largely stabilized, the Chinese economy continues to have issues. There is continuing concern that the slowdown in China could become dramatically worse.
In the November 2015 forecast, we noted that the expiration of the Softwood Lumber Agreement posed a major downside risk to the forecast because the expiration of tariffs might allow a flood of cheaper Canadian lumber into the US, suppressing domestic prices. Though the expiration of the SLA has likely held down prices, it has not resulted in the dramatic price drops that some feared. Current expectations are that the SLA situation will cause a counter-seasonal increase in prices this autumn, which will fall back until early in 2017.
Robust growth in U.S. housing demand would provide much needed, if unlikely, high-side potential. This has not yet eventuated, despite strong employment 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, student loan debt, and general economic and social malaise---most of which are lessening, but none of which show signs of completely abating just yet.
In late 2015, China once again instituted a ban on geoduck imports from the Pacific Northwest due to paralytic shellfish poison (PSP) and arsenic concerns. However, once again, this doesn't appear to have had an impact on prices or harvest activity. In late February, the Washington Department of Health posted an article saying that China had lifted the ban and it listed the areas cleared for geoduck export to China.
Additionally, on-going friction between geoduck purchasers and divers could disrupt the market, though these seem to have settled. As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Archived Economic & Revenue Forecasts
Fiscal year 2017
September 2016 | November 2016 | February 2017 | June 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
Office of Budget & Economics
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1111 Washington St. SE
Olympia, WA 98504-7001