Quarterly Economic and Revenue Forecasts
UPDATED: July 6, 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: email@example.com
Lumber and Log Prices. Lumber and log prices have fallen markedly since the beginning of 2015. Random Lengths' Coast Dry Random and Stud composite lumber price index averaged $370/mbf in 2013, $373/mbf in 2014, but only $315/mbf thus far in 2015. The price of a `typical' DNR log moved up sharply from a two-year plateau in 2013 to $591/mbf in 2014. Prices have declined to average $532/mbf so far in 2015, mostly because of 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; however, the depth of the drop was unexpected.
Timber Sales Volume. DNR has sold 393 mmbf thus far this fiscal year through May and will likely sell another 77 mmbf in June, leading to a revised volume estimate of 470 mmbf for FY 15. About 21 mmbf will be pushed from the current FY sales plan to FY 16, increasing the FY 16 volume forecast to 521. Given current timber sales plans—and absent a new sustainable harvest calculation—sales volumes are still pegged at about 500 mmbf in the outlying years.
Timber Sales Prices. Weighted by volume, stumpage prices for FY 15 have averaged $359/mbf through May, compared to $363/mbf as of the same time last year. The forecast average sales price for FY15 is $352/mbf, unchanged from March. Stumpage sales price estimates are lowered to $346/mbf in FY16 and to $371/mbf in FY17, four and two percent, from the March forecast due to revisions in the price outlook for logs and lumber.
Timber Removal Volume and Prices. The near-term harvest plans of DNR timber purchasers have been scaled back significantly since March. This is driven by the same market conditions that have pushed down prices; sluggish domestic and export demand (from China in particular) and ample log and lumber inventory at mills. These changes have led to large shifts in anticipated timber removal volumes throughout the forecast period. Removal volumes for FYs 15-17 are forecast to be 432 (-55), 608 (-4), and 558 (+59) mmbf. Timber removal prices are projected to be about $343 (+$4), $347 (-$4), $352 (-$6) per mbf for FYs 15-17. 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 Revenues. The above changes to timber sales prices, sales volumes, and harvest timing have reduced projected revenues in all years except FY 17. The timber revenue projection for the 2013-2015 Biennium is lowered 5.4 percent to $300 million. Revenues in the 2015-2017 Biennium are predicted to be $407 million, up 3.6 percent from March'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 revenues from agricultural and other upland leases are revised up slightly to $37 million in FY 15. Outlying years are unchanged.
Revenues from aquatic lands are projected to total about $31 million in FY 15, up about $1 million from the March estimate. Revenue expectations for FYs 16 and 17 have been revised down to $29 million due to changes in both aquatic leases and geoduck sales.
Total Revenues. Revenues for the 2013-2015 Biennium are projected to total $443 million, down $16 million (3.6 percent) from the previous forecast. Revenues for the 2016-2017 Biennium are expected to total $540 million, up $10 million (1.8 percent) from the March Forecast.
Notes to the Forecast. Although the sales volume estimates in FYs 15-16 are based on the best available internal planning data, they are subject to potentially large 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.
We had incorporated fairly conservative market assumptions into the March forecast, based on industry analyst forecasts of falling stumpages prices. However, these assumptions appear to have been insufficiently conservative: prices in the last two timber auctions have strongly reversed from the first quarter of 2015, dropping from an average of $411/mbf to $285/mbf. In the current fiscal year, an average price of $313/mbf in the June sale is needed to reach the un-revised timber price estimate.
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 market, there is growing concern that that the slowdown in Chinese construction, and economic growth more generally, will be much more dramatic than previously expected.
There is an unlikely upside potential for increases in timber price due to unexpectedly rapid strengthening of US housing demand. This potential has become somewhat more likely given the strong employment growth and reasonable wage growth from 2014 continuing into 2015. However, there are still a number of issues that are likely to impede demand—many that are especially meaningful for younger, would-be first-time homebuyers, who are facing a tough labor market, student loan debt, and persistently tough lending standards.
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. Taken together, both the geoduck sales price and harvest volumes may become even more difficult to predict in the coming years.