2001 Black Walnut Log Price Report and Trend Analysis for Logs Purchased by Mills in Indiana
William L. Hoover
Professor of Forestry
Purdue University

July 22, 2001

Preliminary data from 2001 Indiana Forest Products Price Report and Trend Analysis indicate a mixed condition for prices paid at Indiana mills for black walnut logs.  The comparison is for May 2000 to May 2001.  Lumber prices have definitely strengthened from January of last year to this year.  From a historical perspective sawlog prices are just keeping up with inflation as measured by the producer price index for all goods.  Veneer log prices were down overall.  The long-term trend for real prices, however, remains positive.

Sawlog and Lumber Prices

The top grade, Prime, decreased by 5.3 percent from $1,043 per MBF Doyle scale to $988.  The median price stayed at $1,000 MBF.  No. 1's increased by 10.2 percent from $725 to $799.  The median price decreased from $800 to $775.  No. 2' increased by 21.4 percent from $453 to $550.  The median increased from $488 to $500.  No. 3's, the lowest grade, held at $259.  The median increased from $225 to $250.  These 2001 preliminary prices are based on 16 to 20 reporting mills.  The results will change when all 40 or 50 mills have reported.

Nominal sawlog prices over the last 45 years, since 1957, Figure 1, have been cyclically.  Nominally values is the reported price not adjusted for inflation.  Inflation adjusted prices are plotted in Figure 2.  Note the significant run-up of real prices from the 1960's until the major recession in 1973-74.  This was followed by a decline through the late 1970's.  Since then there has been no significant upward trend.

One way to assess trends is to fit a straight line through the price data and convert the slope of this line to an average annual compound rate of change.  Doing so for the four grades of sawlogs for 1957 to 2001 period provides estimated trends of -0.2 percent decliner per year for prime sawlogs, +0.3 percent per year increase for No. 1's, +0.4 percent for No. 2's, and -0.1 percent for No. 3's.

A weighted average sawlog price series was calculated to assess the overall trend in sawlog prices.  This average assumes that 40 percent of a stand's volume is prime sawlogs, 30 percent is No. 1 quality sawlog, 20 percent No. 2's, and 10 percent No. 3's.  This average and its linear trend line are plotted in Figure 3.  The equivalent average compound rate of increase is a mere 1/10th of 1 percent.  Thus, the average sawlog price based on the assumed weights is just barely keeping up with inflation.

Lumber prices have finally showed significant strength, Figure 4.  From January 2000 to July 2001 the price of the best quality of 4/4-inch thick lumber increased from $1,410 per MBF to $1,565.  No. 1 Common went up from $775 to $785 over this period.  No 2A went up from $290 to $380 over this 18-month period.

The inflation-adjusted price of black walnut lumber has undergone a major adjustment since the 1973-74 recession, Figure 5.  Real prices have returned to their 1947 levels.  This can be interpreted in several ways.  One is to assume that this price adjustment will make walnut more competitive with other fine hardwood species.  At current nominal prices it certainly is competitive with black cherry.  In July of this year FAS black cherry was at $1,605 and black walnut was at $1,565, however, straight loads of FAS cherry bring a $770 premium.  This makes the price spread between these species $801 per MBF 4/4 in the Appalachian market region.

Veneer Log Prices

Veneer log prices were down significantly, Table 1.  This may change when data from additional mills is included.  This year many of the mills reported prices for prime veneer logs, but not the lower select grade.  The implications of this are unclear to me at this time.  The price increases for prime logs in the 16 to 20 inch dib (log diameter inside bark at the small end of the log) classes indicate some strength in the market.  Reports indicate that trend to lighter woods is fading somewhat as indicated by the high prices paid for black cherry logs.  Black walnut is expected to capture a larger share of the market for darker species in the coming months.

 1 Standard error of the mean is given in parenthesis below the mean.

The largest price declines were for the larger dib classes, i.e. over 20 inches.  The declines for the select grade in the larger size classes are meaningless since only one mill reported.

Real prices for the two smallest dib classes are shown in Figures 6 and 7.  After climbing in the mid-1990's prices have trended downward since 1999.  The long-term  trend line remains positive, however.  But, note that this trend is based on data starting in 1984, the year when prices for these smaller logs was first collected.

Overall price trends for veneer logs can be seen in Figure 8.  Averages are shown for prime and select logs.  Simple arithmetic means were used.  No attempt was made to estimate the log grade and size distribution for logs coming into mills over the years.  Again note the decline starting with the 1973-74 recession.  A trend line from early 1980's to this year would show a negative trend.

Assessment

Black walnut timber is a commodity.  It is now and has always been.  The prices of commodities are very responsive to changes in both supply and demand.  Supply changes take two forms.  In the long-run timber inventories determine supply and tend to demonstrate long cyclical patterns stretching over many decades.  In the short term supply responds to the volume of timber landowners are willing to sell at prevailing price.  Demand is responsive primarily to the species preferences of consumers and business cycles.  These factors in both domestic and international markets are important.

A basic tenant of investing is balancing risk and return.  Timber has been shown to improve this balance for an overall investment portfolio of stocks, bonds, etc.  It's the principle of diversification at work.  Within the timber portion of a portfolio diversification is also important.  This is tree from a financial and a biological perspective.

The historical focus on black walnut is based on consumer demand for the wood and the fact that it was the first hardwood species for which plantation research was conducted by the US Forest Service and several universities.  The market for other species of fine hardwoods have improved dramatically and research has expanded to other species as well.  Hardwood plantations are the focus of research and significant investment in the US, Europe, Central and South American, and Asia.  The culture of black walnut timber in plantations remains a viable investment despite price declines.  But, it should be part of a diversified overall portfolio and ideally your plantations should be of diverse species.