Old forests, new investments

As the brisk January morning air settles in on the log yards in the north, the world finds yet another year has come and gone. Standing at the threshold of 2022, more than a few folks are relieved to see the prospect of hope in a New Year and many a lumber mill is glad to get another year in operation. In a year that saw record lumber prices, the small business world continued to face a challenging labor market throughout 2021.

Overall, the volume of logs available last year seemed good industry wide, fostered by the unprecedented demand in forest-based products and corresponding log values which started in the second quarter of 2020 on the heels of the world-wide pandemic. The activity in the woods kept most mills running at peak capacity. If their equipment cooperated, they created a steady lumber supply to feed an unquenchable market appetite in the first and second quarters of 2021.

By early July, the long-anticipated correction in price began to take hold in lumber markets which continued a downward trend into November when Canadian transportation experienced a large setback due to flooding in British Columbia.

While the COVID-19 pandemic certainly challenged the market's supply side with labor force disruptions, it seems to have also driven an unforeseen demand side behavior when many Americans descended on local home-improvement centers to invest in new homes or renovate existing ones. With prices moving up to new levels, wholesalers stockpiled inventories and awaited short-staffed transportation companies to move their freight with the hopes to meet the demand before the price shifted. As the logistics started to flow, the market began correcting wholesale prices. However, consumer prices held steady due to a backlog of purchased inventories which were bought during the preceding premiums and threatened bottom lines.

Yet another new emerging factor in the forest products industry became increasingly apparent in 2021, the Carbon Market. Various firms now offer incentives to guarantee that a percentage of a landowner's forest is "set-aside" from harvesting and is targeting the storage of carbon in the growing fiber. The allure of these credits as investments are in the opportunity to "off-set" carbon emissions for larger companies trying to make EPA standards and milestones or for private entities desiring to off-set their own activity.

Concurrently, landowners are often enticed by the agreement of capital to let trees grow and collect annual installments with opaque strings attached to the management of their timber. These agreements complicate harvest planning, sometimes generationally, depending on the duration of the agreement. While the agreements do not directly oppose the goals of many modern fiber-sourcing companies, indirectly the concern is coming into focus on the overall effects of carbon credits that encumber severability of timber from the land.

While all parties may have their opinions and viewpoints on the legitimacy of these instruments in addressing climate change, one agreeable point might be that the carbon markets seem very loosely defined in both product base and oversight with very little information on what constitutes a responsible application of carbon credits from a forest health perspective.

A few concerns with the current carbon marketing paradigm from a forest management perspective is the seeming lack of consideration for active forest management as a part of the climate change solutions. Guarantees by carbon investment firms which cover decades and possibly centuries of stored carbon seem to overlook any advocacy for responsible forest management practices which could unintentionally encourage mismanagement. Without active management, many of these forests lack fire resilience and foster greater carbon release in the event of future wildfires simply by creating fuel depots within the forest ecosystems.

Financially incentivized landowners under the carbon markets may have restrictions to selective harvesting of infested stands where thinning prescriptions would be beneficial. While it is doubtful that anyone intends to promote the spread of timber destroying disease and insects, the second and third order effects in emerging concepts are generally worth considering. Yet another factor is that younger forests will store carbon at increased rates and with larger future available capacity for storage over the mature forests. Mature forests create a lucrative baseline because the carbon market capitalizes on the unrealized value of past carbon that is stored in the mid- to late-life span of a forest depending on the species and location and overall health. Some of that carbon could even predate industrialization in this country or the carbon production of the credit purchaser.

To be fair, most of these firms are using forestry professionals to determine the carbon valuation of the investments in a rigorous and credible manner. However, unintended consequences and the actual value of these instruments as a solution to climate change remains questionable.

The dissimilar nature of some of these "off-sets" with "what they off-set" seems concerning to many of its skeptics as the market proponents are off-setting industrialized, petroleum-based carbon emissions which are human-originating and the focus of EPA regulations. These types of carbons are considered to be "off-set" using the forest's naturally occurring carbon storage as a substitute to carbon behaviors. In essence, these "products" bypass the intent of carbon emissions standards which gives the appearance that our regulatory loopholes are for sale and those loopholes are sanctioned as "products" on the open market.

The question becomes, "is all carbon equal and interchangeable to meet the intent of our laws?" Maybe the question should be about equitable return. Most investments promising only an upside should give pause.

If a tree within these carbon forests burns and its stored carbon is released into the atmosphere, do the holders of those carbon credits then stand to lose a corresponding balance in their carbon portfolio? While all landowners have the inherent right to enter into these types of agreements, due diligence and consideration of all factors is highly recommended. The effects can influence your flexibility and forest's management options for many years to come.