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December 14, 2016

Dear Friends:

The year has been one to remember: a long presidential primary and general election; 106 days with temperatures over 90 degrees through September; Level 1 drought across 110 counties of Georgia, with Clarks Hill Reservoir 11 feet below full pool, creeks and ponds are dry, and soil moisture depleted; begonias and lantanas are blooming, jonquils have broken ground in December; the USA won the Ryder Cup; Chicago Cubs won the World Series after a 108 year wait; Army beat Navy for the first time in 15 years; the United Kingdom voted to leave the EU contrary to polls; and our democratic republic elected a President-Elect for the next four years!!!  I am truly thankful for 2016 and now am enjoying the recent rains, which have nurtured Mother Earth and her flora.  This is a special time of the year to reflect and enjoy family, friends, our freedom, and good fortune. 

            The forest products business for landowners is dynamic, and private landowners are a major component.  In the Southeast, the breadbasket of our country, and specifically Georgia, 87%, or 24.3 million acres of timber land are owned by private or corporate landowners.  No matter where your tree farm is located, the products grown when harvested become part of an international/global market.  We, as landowners, have no control over the markets, as we only participate.  We have been in a down pine sawtimber market since 2008.   As markets fluctuate, I commend your continued commitment to proper forest management with a vision that, “what I do today will pay benefits in the future”.  From a Greek proverb, “A society grows great when old men plant trees whose shade they know they shall never sit in”. 

            The economy of the USA continues to show approximately 2% GDP growth.  New housing starts for 2016 will be approximately 1.1 million, still below 1.5 million, which is considered healthy.  Our trees grow every year and value accrues.  At the same time, timber and farm land continue to be perceived as good long term investments.   

            New home construction in our country is the key to sawtimber values.  If we go back to 2005, new housing starts were 2.2 million, and pine sawtimber prices, $50 per ton.  With housing starts at 1.1 million, the value of pine sawtimber as reported by Timber Mart-South has dropped 46%.  There is a direct correlation.  With improved employment across our country, consumer confidence increasing, and upward mobility of our population as far as their professions, homeownership should be at a much higher level than it is.  

            The homeownership rate was 62.9% at the end of the second quarter, which was the lowest since 1965.  It is projected that homeownership will continue to decline over the next 10 years, due to challenging lending standards, student debt, and potential increases in interest rates.  There is demand for single family “starter homes” in the price range of $200,000.  In 2015, the average price of new homes constructed was $351,000.  This is an indicator that entry level individuals wishing to buy a starter home are priced out of the market.  This is a critical economic situation that does not allow homeownership to be an equity builder for young families.  Homeownership for middle class Americans has been a key component of retirement, savings, and wealth creation. 

            The good news is new home construction continues to increase approximately 100,000 starts per year and we should be at 1.2 to 1.3 million in 2017.  In the construction numbers, single family homes represented 67% for 2016, and 64% in 2015.  We are moving in the right direction.  

            According to Case Schiller, approximately 1 million new households were formed during 2015, with only 620,000 new housing units built.  There is a perceived “shortage of housing”, and with anticipated gains in economic growth by young families, they will move into the single family homeownership category that will require structural lumber manufactured from trees grown on your timberland.  From John Muir, “Between every two pines is a doorway to a new world/opportunity” 

            Cross Laminated Timber (CLT) is dimensional  lumber remanufactured from wood chips.  CLT can be made into any dimension or length and treated with fire retardant.  At the 2016 ACF national meeting in Mobile, Alabama, Michael Green, architect from Canada, addressed the increased use of CLT in tall buildings.  Wood members are used in multi-story buildings in Canada and Europe and will enter the United States market contingent upon changes to building codes.  Oriented Strand Board (OSB) emerged 15 years ago.  This process remanufactured pulpwood trees into 4 x 8 panels for decking and other home construction uses, diminishing the conventional plywood product.  The same is happening now with dimensional lumber, as small and poor quality trees are being remanufactured into lumber. 

            There continues to be a market for our large diameter and quality pine sawtimber, 14 inches DBH and larger.  In January 2016, market value for pine sawtimber was $25 to $30 per ton.  During the first quarter, prices declined and we are now at $23 to $25 per ton.  Major markets in our area are Georgia Pacific, Interfor, and West Fraser.  Pollard Lumber Company and Burt Lumber are good markets but smaller.  Supply exceeds demand.  We may be dealing with this situation into the near future unless a new sawmill announces in our market area. 

With evolving construction standards, sawmill technology utilizing smaller diameter trees, and the growth of CLT, large diameter and quality pine sawtimber may become economically obsolete.  Our management regimen may very well trend towards shorter rotations and smaller trees at harvest.  As stated above, this is a dynamic business.  I quote from Robert Frost, “The reason worry kills more people than work is that more people worry than work”.  We covenant with you to continue to represent your best interests in the management of your timberland, and we will be working rather than worrying about what may happen.  

Other items of interest: 

  1. Mergers and consolidations within our business continue. During the year, Weyerhaeuser and Plum Creek merged their companies, and the current Weyerhaeuser business is the owner of 13 million acres of land in the Southeast and across the country.  Weyerhaeuser also sold the Port Wentworth paper mill in Savannah to International Paper Company. 
  1. Chirene Paper Company, a China Enterprise, signed a “letter of intent” with Arkansas to build a new $1.36 billion fluff pulp mill in south Arkansas. The last pulp and paper mill built in our country was 1985 in Eastover, SC at a cost of $600 million.  In Alabama, Two Rivers Lumber Company plans to invest $65 million to build a state-of-the-art southern yellow pine sawmill in Demopolis.  Consumption of logs will be approximately 200 million board feet annually. 
  1. From June’s Georgia Trend magazine, TreeZero, an Atlanta company founded in 2010, is producing copy paper from recycled sugar cane waste fiber. Plans are to expand production into other office products.  Office Depot is a distributor of TreeZero products. 
  1. According to the winter 2016 Southern Forester newsletter, the Conservation Use Covenant and Forest Land Protection Act tax programs in Georgia saved landowners $277.9 million in property tax during 2013. If you are not enrolled in the CUVA program or the FLPA, I recommend you do so with the county tax assessor during the period January 1 through April 1.  Most counties notify landowners when their 10 year term expires and how to reapply.  
  1. The size of newly built homes is increasing while lumber use decreases. From the Forest Research Group, in 1950, 8.9 board feet were used per square foot of a new home.  In 2010, 5.6 board feet per square foot were used.  As homes increase in size with open areas and larger rooms, lumber demand diminishes.  Engineered products have replaced solid wood in some applications, as floor joists, or 2 x 10’s and 2 x 12’s, sawn from our larger diameter trees. 
  1. The extreme drought we experienced during the fall placed stress on our trees, and we have seen pine beetles emerge. Insect infestations are Ips Beetles, which kill the tree, but their spread is very limited compared to the Southern Pine Beetle.  With cold weather upon us, the Ips population will crash; however, we will be vigilant next spring when the new growing season begins.
  1. Hardwood sawtimber prices continue to be very strong, with adequate demand for hardwood and pine pulpwood. 
  1. Wood pellet manufacturing using pulpwood size trees represents 3% of the total timber harvest in the US. Wood pellet manufacturing is concentrated in the Southeast with ports along the Atlantic and Gulf Coasts.  A new pellet mill is operating in Greenwood, SC, and it is expected to increase production as startup difficulties are worked through. 
  1. In the book by Peter Wohlleben, “Hidden Life of Trees”, there are some interesting facts. In the United States, our land supports 228 billion trees.  Trees have a social life, as trees of the same species communicate via inter-connected root systems termed “wood-wide-web”.  Through the root systems, trees share nutrients and warn each other of drought or insects.  When under attack by insects, trees release chemicals into the air to alert their neighbors.  Oaks release bitter tannin to discourage pests.  Trees can also count.  In spring, they track the number of warm days, and after a critical quota is reached, they open their tender buds for the season.  By registering the constantly changing hours of daylight, trees monitor the approach of fall so they know when to release their seeds and when to shed their leaves for their winter’s rest.  Much of a tree’s life takes place in the soil rather than above it.  Wohlleben suggests that the subterranean “limbs” are really more like the tree’s brain, directing all chemical activity and humming with electrical impulses. 
  1. We have utilized drone technology in our activities and feel it has tremendous application. 
  1. The Emerald Ash Borer (EAB) is prevalent in Georgia, having migrated from the northern forests in the Northeast and Pennsylvania. The EAB is present in 27 Georgia counties and 23 states. The Georgia Forestry Commission and Georgia Department of Agriculture have expanded the “quarantine area”, which restricts the movement of ash logs from affected counties.  The time restraints are generally spring and summer when the borer is active.  Winter months will allow ash trees from the northern counties to be moved to receiving installations.
  1.  Should you receive an inquiry regarding a solar farm, ask questions and get specific details.

I have refrained from speculating on federal taxes and other legislative matters.  We will await actions taken by the new administration and Congress as they convene in January 2017.  Let’s anticipate positive movements in 2017.  As an indicator, the November 8th Dow Jones Industrial Average was 18,332, and the S&P, 21,040.  On December 14th, the Dow registered 19,912 points, +1,580, and the S&P, 2,273, +133.  A Christmas wish is that the same momentum will positively influence the housing market and pine sawtimber prices. 

We are truly fortunate and blessed to live in the United States of America, and we must never lose sight of our good fortune.  We all thank you for your friendship and the relationship we share.  Please accept our best to you and your family for a blessed and Merry Christmas and healthy, happy, and prosperous 2017.

Sincerely,

James I. Alfriend, A.C.F.R.F.