Posted on LandThink.com by Brooks Mendell.
The destructive flooding and weather events of 2017 centered in Texas and Florida remind us that Mother Nature is a force to be reckoned with. Combined, the two storms killed over 150 people. According to the Texas Department of Emergency Management, Hurricane Harvey damaged or destroyed nearly 200,000 homes in Texas. How can we wrap our minds around the implications? Posted on LandThink.com by Brooks Mendell.
Weather Risk
Catastrophic or severe weather events and risks may exceed the abilities and flexibility of the most talented wood supply organization. Weather risk is “volumetric” risk, representing the potential impacts on earnings and cash flow from changes in volume. Catastrophic weather events, such as hurricanes and floods, can halt normal business activities, while simultaneously (and ironically) creating a demand for building products needed to repair and rebuild homes and businesses.
Hurricanes can have significant localized effects on timber markets. These include, one, the interruption of current forest operations and manufacturing and, two, the disruption of current and future harvest plans through affecting timber supplies. The direct effect on timber stands is still being estimated for Irma, while Harvey appears to have primarily affected operations through the drenching rains dropped in east Texas and Louisiana. How can history help us understand the potential impacts of these recent disasters?
Hurricanes and Timber Prices
In 2004, seven hurricanes – including Bonnie, Charley, Gaston and Ivan – landed in a period of less than two months inflicting damages of approximately $1 billion. In 2005, twelve hurricanes – including Katrina and Rita – pummeled the South. Hurricane Katrina hit at the Mississippi-Louisiana border in August 2005 and destroyed about 275,000 homes. The estimated direct and indirect costs to the forest products industry of Katrina, including higher harvesting costs, lost production and inventory, approached $12 billion. Base case estimates as of 2007 put the timber-specific impact from Katrina at $1.7 billion in sawtimber and $153 million in pulpwood losses.
Previous research informs us how major weather events can affect timber prices. U.S. Forest Service researchers Prestemon and Holmes (1997) compared stumpage prices before and after Hurricane Hugo in 1989, concluding that, depending on the event size, there will be an initial decline in timber prices as short-term supplies increase from blow-down and damaged timber. Sawtimber prices recovered to pre-Hugo prices within seven quarters after the storm, while pulpwood prices remained depressed by 35%. Further research by Yin and Newman (1999) on how Hugo affected the timber supplied confirmed the initial analysis by Prestemon and Holmes. In sum, this research indicates that prices fall in the short-term and recover in the long-term.
Following Hurricane Katrina, pulpwood price trends followed those predicted by the previous research. Pulpwood prices in South Mississippi and Louisiana declined immediately following Katrina, while all of the Southern markets declined as a group during the year following Katrina. Then, as a group, pulpwood prices recovered in late 2006 and early 2007. While a portion of these changes may be attributable to Katrina, they also reflect cyclical trends in the end product markets for pulp.
Natural disasters do not occur in economic vacuums. Mother Nature does not have a 401(k) or invest with hedge funds, but her actions affect markets differently depending on what else is happening in the economy. Notwithstanding the trauma these storms visited on the victims, the effects on communities and local economies sting and endure.