Quarterly Economic and Revenue Forecasts
UPDATED: June 26, 2018
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
June 26, 2018
Lumber and Log Prices. Lumber prices in 2017 increased through the year from $350/mbf to $490/mbf, averaging $425/mbf for the year---significantly higher than previous years and the highest prices in real terms since the height of the previous housing boom in 2005. Prices have continued to increase in 2018, averaging $537/mbf through April. Prices for the `typical' DNR log were also markedly higher in 2017 than previous years, climbing from $578/mbf to $719/mbf to average $611/mbf for the year. Again, prices for DNR logs have continued to increase in 2018 and have averaged $723/mbf through April. Prices are expected to weaken in the final two quarters of 2018, though they will remain above recent years' averages, before climbing back to near current levels.
Timber Sales Volume. The sales volume forecast for 18 is reduced to 495 mmbf due to some recent no-bid sales at auction. Sales plans in outlying years have not changed, so absent a new sustainable harvest calculation, sales volume forecasts in those years remain at 500 mmbf.
Timber Sales Prices. FY17 auction prices averaged $346/mbf. To-date, auction prices for 18 have averaged $460/mbf with over 90 percent of the forecast volume sold. The sales price forecast for 18 is increased to $453/mbf. The sales price forecasts for outlying years are unchanged, despite expectations for increases in log prices. This is because there are a number of risks to house prices and the broader economy that could adversely affect log and stumpage prices.
Timber Removal Volume and Prices. Accounting for changes to purchaser plans, the timing of contract expirations and likely average monthly harvests, 18 harvest volume expectations are lowered by 25 mmbf to 514 mmbf. Previous purchaser surveys indicated that timber purchasers had more ambitious harvest plans than eventuated. The FY19 harvest volume forecast is increased slightly by 2 mmbf to 587 mmbf. Harvest volume forecasts for FY20 and FY21 are increased by 10 mmbf and 14 mmf, respectively. The average timber removal price for FY18 is increased to $334/mbf, due to increased auction prices and an increase in the value of remaining inventory. Timber removal prices for FYs 19-21 are projected to be about $353 (+$12), $348 (-$2), and $344 (+$1) per mbf. These removal prices reflect changes in both the sales prices and removal timing.
Timber Revenue. The above changes to timber sales prices, sales volumes, and harvest timing have shifted projected revenue through FY 21. Revenues for the 2017-2019 biennium are forecast to total $394 million, an increase of around two percent ($8 million) from September's forecast. Forecast revenues for the 2019-2021 biennium are increased by four percent ($16 million) to $393 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.
The upland lease revenue forecast for FY18 is increased by $2 million to $45 million due to increases in revenue expectations for irrigated and dryland agriculture, and commercial property outweighing decreased expectations for orchard/vineyard agriculture. Revenue forecasts for outlying years are decreased marginally from the previous forecast to $42 million, due to revised expectations for grazing leases.
Aquatic lease revenue expectations are higher in FY18, increased to $11 million, due to better than expected revenue for every type of aquatic lease. Revenues in outlying years are also increased slightly, to $10 million, due to a better outlook for both water-dependent and non-water-dependent leases. The FY18 geoduck revenue is increased by $2 million to $25 million and 19 revenue is increased by $4 million due to higher than expected auction prices to-date and an increase in sales volume. The remaining outlying years are unchanged.
Total Revenues. Total revenues for the 2017-2019 Biennium (FYs 18-19) are increased by three percent ($16 million) to $549 million. Revenues for the 2019-2021 Biennium (FYs 20 and 21) are raised by $16 million to $533 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. In particular, these issues are likely to affect sales volumes in outlying years, where the assumed sustainable harvest volume of 500 mmbf might be too high.
A continuing downside risk for the forecast is timber and lumber demand from China, which has already experienced a steep decline. A further decrease---due, for instance, to a slowdown in Chinese economic growth, continued loss of market share to international competitors, or an expansion of the nascent trade-war---would undermine overall demand and would most-likely weaken prices. However, the major market for timber in the U.S. is domestic housing, which is predicted to continue to grow and may outweigh a demand drop from China.
Since the expiration of the Softwood Lumber Agreement (SLA) in late 2015, the U.S. and Canada have been without a trade agreement that covers lumber. As of late 2017 the U.S. has been clear to impose duties, which have been set at 20.23\%. Although Canada has appealed the finding to a NAFTA panel and has filed a complaint with the WTO, much of the short-term uncertainty about trade costs is gone. Without a breakthrough on the new SLA negotiations or a finding from the WTO or NAFTA panel, the markets are unlikely to see the price volatility that the previous duty uncertainty caused. Additionally, at current lumber prices, the duties shouldn't be significant enough to reduce Canadian production.
More robust growth in U.S. residential improvements and housing construction would provide a high-side potential. Both measures have improved since the end of the recession in 2009, however, even with the growth forecast in the next two calendar years, starts will still remain below underlying demand. Robust growth hasn't yet occurred because of significant demand and supply side constraints. Although housing demand is strong overall, there are still a number of impediments---persistently stringent lending standards, a continued tough labor market for younger workers, student loan debt, and poor wage growth. Most of these are easing, but none shows signs of completely abating just yet. Additionally, there are a number of supply-side impediments constraining construction growth, primarily a lack of skilled labor and a lack of readily buildable land. It is possible that the tax cuts passed in late 2017 will spur investment in real estate, but it is far from clear that this will really help the market given that they are unlikely to alleviate any of the demand or supply side issues.
In late 2015, China again instituted a ban on geoduck imports from the Pacific Northwest due to paralytic shellfish poison (PSP) and arsenic concerns. However, once again, this didn't appear to impact prices or harvest activity. In late February 2016, 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. It is entirely possible that China could re-enact a more forceful ban on geoduck that would have a dramatic effect on geoduck prices, and therefore revenue.
As always in the geoduck fisheries, PSP closures create uncertainty around harvest volumes as well.
Finally, it is unclear how long U.S. economic growth can continue in the absence of coherent, growth-driven federal economic policies. Additionally, souring trade relations with tit-for-tat increases in tariffs with major trading partners has the potential to affect DNR revenues directly, if tariffs target DNR products, or indirectly, if the tariffs affect overall economic growth.
Fiscal year 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