Maroc - TIMBERBIZ.COM.AU - A La Une - 12/Aug 01:29

Logs are gold

In the United States lumber market, a ratio of lumber futures prices to gold futures prices is often used to gain insights into broader economic trends, investment strategies, and market behaviours. Gold is widely regarded as a reliable store of value over the long term and serves as a hedge against inflation driven by depreciating fiat currencies. Source: Margules Groome Margules Groome has developed an Australian index comparing Australian softwood raw sawlog prices to gold prices (Figure 1), using data from KPMG’s Australian Pine Log Price Index (APLPI) [1] for medium-sized sawlogs.   The Australian log-gold index, which tracks relative prices from 1995 to present, indicates sawlogs prices have declined over the past three decades relative to gold. Further analysis by Margules Groome compares Australian softwood stumpage prices and agricultural land prices relative to gold prices (Figure 2), using data from Rural Bank’s 2024 Farmland Values report [2]. As shown in Figure 2, in 1995, one ounce of gold could be bartered for approximately 8 cubic meters (m3) of medium-sized sawlogs on the stump. By June 2024, one ounce of gold can be bartered for more than 29 m3 of medium-sized sawlogs, indicating that, when measured against gold, medium-sized softwood sawlogs are currently about 360% cheaper than in 1995. The figure also shows that one ounce of gold can be bartered for around 0.4 hectares of agricultural land. Land prices relative to gold were relatively low around 2005, peaked around 2012, and are now in line with historical trends. The trend for land prices compared to gold remains relatively flat, suggesting a stable market price discovery process. Logs and timber Commodity prices are characteristically expected to move on short and longer terms cycles as demand shifts, and/or new efficiencies created on the production and consumption side. Unlike other Australian commodities such as energy or minerals which are largely export oriented and have benefitted from broader market exposure and structural changes in demand from China and other emerging economies, Australian softwood logs are grown for domestic consumption with some exports at the margin. This, together with historic pricing arrangements, appears to have quarantined Australian log producers from market price discovery which other commodity producers and exporters benefitted from. Despite the observed stumpage trend, transaction evidence shows that implied discount rates for Australian softwood forestland saw continued compression over the past two decades.  How can that be explained? Smaller estates being transacted are largely located on freehold land and supplies a marginal log volume at higher prices relative to the larger government forests. Land In contrast to logs and timber, land maintained its value relative to gold over time. Land values may be driven by several factors, including productive capacity, and highest and best use development opportunities. Like gold, land can also act as a store of value, particularly through periods of inflation such as experienced in the last few years. It is therefore unsurprising that land has tracked gold values over the sample period. Structural factors Further analysis requires considerations of some of the structural characteristics of the Australian softwood estate. Much of the Australian softwood estate was developed by state governments before being sold to institutional investors in the late 1990s and early 2000’s. The former government estate (98% of almost 1 M ha) is located on public land and quarantined from changes in the underlying cost of agricultural land. Timberland investments on public lands have therefore not been impacted (positive or negative) by changes in underlying land values (as demonstrated in Figure 2). An opportunity for timberland owners is to expand onto freehold land, thereby gaining some exposure to the underlying hedge of freehold land values. Another legacy issue for investors into former government forests, are the long-term log sales contracts inherited from the former government owner-developers in order to attract and retain employment-rich processing infrastructure to regional areas. These contracts have tended to reduce the price volatility that may have otherwise been expected in commodity markets. In the longer terms, these contracts may have also contributed to the downward pricing pressures for logs in Australia. An opportunity for today’s investor-operators is to unwind or modernise these legacy contracts to capture some of the price upside that is expected in future timber demand. Globally, demand for softwood is anticipated to tighten over the next decade, likely driving up imported softwood timber prices. The Food and Agriculture Organization (FAO) forecasts a 49% increase in global roundwood demand from 2020 to 2050, driven by advancements in mass timber, biomass, and cellulosic products. Given this context, there is substantial opportunity to develop more innovative pricing models for Australian-grown softwood logs and timber to support further afforestation and industry growth. For more insights and analysis, contact info@margulesgroome.com Note: Stumpage log price is the residual price received by the grower. [1] KPMG (2023) Australian Pine Log Price Index (Stumpage) Updated to December 2023 – Public Version, 19pp. [2] Rural Bank (2024) Australian Farmland Values 2024, Rural Bank – a division of Bendigo and Adelaide Bank Limited (Bendigo Bank), 57pp.