Coronavirus pandemic. Still overshadowing all of the normal constituent parts of the forecast is the COVID-19 pandemic. However, that will likely change in the next six months. Since the last forecast, the two prospective vaccines we discussed in the previous forecast have been approved and have more conclusively been shown to be extremely effective; a massive production and distribution effort has begun, with more than 20 million people fully vaccinated (around 6 percent of the population) and 65 million doses administered; and another very effective vaccine has just been approved. In recent days, more than 2 million people per day are being vaccinated.
Additionally, and perhaps most importantly in the short term, the number of new daily infections, hospital admissions and deaths have plummeted during the past month. The tremendous increase in cases we wrote about in the previous forecast grew from a low of 35,000 in September to average almost 250,000 new cases per day in early January. As of this writing, there are around 67,000 new cases per day. Although this is a large drop, it is still around the level of the previous wave of cases in summer 2020.
There is still a risk of another spike in cases. At least two new, more-contagious strains of the disease have emerged, and the current vaccines appear to be less effective against at least one of these. This suggests that right now, vaccine distribution and pandemic mitigation efforts in the U.S. are in a race against time to get enough people vaccinated before the new strains are established enough to cause another spike in cases.
Given the efficacy of the vaccines, as well as the lasting immunity for those who have already had the disease, it seems likely that a new spike would be only temporary, extending the COVID-19 constraints on the economy by a couple of months. So, it appears that the over-riding question of the pandemic has shifted from "if" it will be brought under control to "when". The Bloomberg Vaccine Tracker shows that with the vaccination rate in the U.S., 1.8 million per day on average at writing, it would take about 7 months to vaccinate 75 percent of the population - about the level required for herd immunity. However, the vaccination rate is likely to increase to around 3 million per day and there are plausible estimates that around 28 percent of the population has already had the disease, meaning herd immunity will come much sooner. We expect that by the next forecast, in June, the coronavirus will be much less of an impediment to economic activity in the U.S, and may even be insignificant.
Although we don’t expect the pandemic to be an active constraint on the economy, it is unclear how long the recovery from the economic fallout from the pandemic will take. Although the public health response of the U.S. was poor relative to other developed nations, the massive multiple fiscal stimuluses and monetary policy response appears to have been enough to mitigate the worst of the damage so that, at least as far as GDP is concerned, the US has fared relatively well. And importantly, personal income and savings increased in 2020. This means that U.S. consumers, as a whole, are flush with cash to spend when they are comfortable or able to spend it.
Additionally, the new $1.9 trillion fiscal stimulus before Congress will likely spur a recovery and the Fed has been very clear that it will maintain a very accommodative monetary policy stance until there is full employment and sustained inflation averaging 2 percent. However, there is still much to rebuild. Many small businesses have closed and the headline unemployment rate is 6 percent, though a more realistic unemployment rate, that includes people who have left the job market is around 11 percent.
Overall, the outlook is much more optimistic this forecast than the one just a couple of months ago.
Lumber and Log Prices. Lumber prices in the latter half of 2020 were extraordinarily high. Through March 2020, lumber prices had been climbing and peaked at $478/mbf, but crashed to $363/mbf in May. From May, prices rebounded dramatically, peaking at $1,000/mbf in September. Prices fell back to $623/mbf in November before rebounding to $984 in January—higher in real terms than any other point since before 2000.
The high lumber prices have pulled up log prices, with the price of a ’typical’ DNR log rising from a low of $498 in April 2020, to peak at $711/mbf in October. In January, the price was $692, higher than has been seen since the spike in prices in 2018.
Early in the pandemic, we, and others, expected the pandemic to undermine house prices and demand, and, consequently, the demand for lumber. This widely shared expectation resulted in slower production at mills, furloughs, layoffs, and some mill closures. However, it appears that the very low interest rates have spurred housing demand and starts, and remodeling and renovation demand has also spiked during stay-at-home orders. The result was a sharp drop in supply while there is strong demand, making lumber prices rocket up and pushing up log prices. Prices are expected to remain high in the first quarter of 2021, before pulling back throughout the year, though the average for the year will remain higher than the 2020 average.
Timber Sales Volume. DNR plans to offer around 560 mmbf for sale in FY 21. We are leaving our sales volume forecast unchanged at 520 mmbf to take account for the risk of no-bids or pulled sales. Forecast sales volumes in future years are also unchanged.
Timber Sales Prices. Sales prices throughout FY 21 have been consistently high, with every sale being above the five-year average of $340/mbf, and many of them well above. We are increasing the sales price forecast for FY 21 to $380/mbf—from $300/mbf in the June 2020 forecast, $320 in September, and $340 in November. This is due to the both the strong log and lumber prices that we’ve seen and their continued strong outlook. With an updated February auction price, received as this was being written, this forecast price is likely too low.
Timber Removal Volume and Prices. The removal volume in FY 21 is decreased by 10 mmbf to 500 mmbf. To-date, harvest volumes have been much less than we had expected. It appears that the 2020 wildfires in Oregon created an enormous amount of salvage timber that must be harvested within a year before it becomes useless. The salvage effort has apparently tied up much of the log hauling capacity, pushing down harvests in Washington State.
The removal volume forecast is unchanged in outlying years.
The average price of timber harvested to date in FY 21 has remained high, and there is still a decent amount of timber due to expire this fiscal year that has high prices. This has motivated us to increase the forecast average removal price for FY 21 by $6/mbf to $331/mbf. Removal prices in outlying years are increased as well, based on higher sales prices in FY 21.
Timber Revenue. Forecast timber revenue in FY 21 is decreased slightly by $0.2 million to $165 million. FYs 22 and 23 are increased, by $9 million and $6 million respectively.
Forecast timber revenues for the 2019-2021 biennium are unchanged at $347 million, while revenues for the 2021-2023 biennium are increased by $15 million to $360 million.
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.
The non-timber uplands revenue forecasts are increased by $0.7 million in FY 21 due to additional revenue from back rent in communications leases and much higher than expected revenue in other leases, which includes a variety of smaller revenue sources.
The aquatic lease revenue forecast for FY 21 is decreased due to much lower non-water-dependent revenue offsetting small improvements in revenue in aquaculture and easements.
The forecast geoduck revenue has been slightly increased for FYs 21-23 due to better than expected prices in recent auctions. However, it has been decreased in FYs 24 and 25. Previously, we had built in an increase in prices due to ’normalization’ of relations between China and the U.S., seeing the elimination of the tariffs on geoduck. However, it doesn’t appear that the new U.S. administration is any more inclined to reduce tariffs or the trade-war than the previous. The geoduck revenue forecast is based on an assumed harvest volume of 85 percent of sales through the first half of CY 2021.
Aside from the COVID-19 pandemic, there remains a trade war between the U.S. and China, with high tariffs on geoduck. These are expected to continue indefinitely, limiting Chinese consumption and continuing to push Chinese consumers toward other luxury seafood.
Total Revenues. Forecast revenues for the 2019-2021 Biennium (FYs 20 and 21) are essentially unchanged at $480 million. Revenues for the 2021-2023 Biennium are increased by 3.4 percent ($16 million) to $499 million.
Other notes to the Forecast. In addition the possibility of a COVID-19 resurgence, a number of sources of uncertainty may affect DNR revenue specifically, and the overall economic activity more broadly. These include: legal challenges to the sustainable harvest volume and marbled murrelet conservation strategy; uncertainty about the type and quality of stumpage DNR is able to bring to market more than six months out; the ongoing trade war and political tension with China directly affecting timber and agricultural exports and prices; and uncertainty about the stability of the current high housing starts level. Additionally, while the timber sales volume estimates are based on the best available internal planning data, they are subject to adjustments due to ongoing operational and policy issues.
From the beginning of 2018 until just before the COVID-19 pandemic, the U.S. and China engaged in an escalating trade dispute. Prior to the pandemic, the tariffs on geoduck were 25 percent and were a significant driver of the drop in geoduck prices in late 2019. The log tariffs and a slowdown in housing starts were the major contributors to the lower domestic price of logs through late 2019. With the pandemic, tariffs were reduced to 5 percent tariff on geoduck, wheat, and softwood logs. There’s no indication that tariffs between the countries will be reduced or removed soon.
In addition to the coronavirus and the trade tensions discussed above, other things could undermine Chinese demand, such as continued loss of Pacific Northwest market share to international and Southeastern U.S. competitors.
As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Fiscal Year 2021
September 2020 | November 2020 | February 2021 | June 2021
Fiscal Year 2020
September 2019 | November 2019 | February 2020 | June 2020
Fiscal Year 2019
Fiscal Year 2018
Fiscal year 2017
Fiscal Year 2016
Fiscal Year 2015
Fiscal Year 2014
1111 Washington St. SE
Olympia, WA 98504-7001