Embed Size (px)
Citation preview
Department of Natural Resources
Economic & Revenue Forecast
Fiscal Year 2021, Fourth QuarterJune 2021
Forecast Summary
Coronavirus pandemic The COVID-19 pandemicis no longer overshadowing all of the normal con-stituent parts of the forecast. However, it is stillan important consideration for the world economyand still poses a risk to the United States.
Since the last forecast, the number of fully vacci-nated people in the U.S. has climbed from 20 mil-lion to more than 135 million, with more than 168million having received at least one dose. Addi-tionally, the number of new daily infections, hos-pital admissions and deaths have continued down-ward after a small wave in April, falling from a peak75,000 cases per day, to around 16,000. This is welldown from the almost 250,000 new cases per dayin early January. It is also the lowest point since thefirst peak in daily cases in early 2020.
It looks as if the risk of another spike in casesnationally has substantially diminished—though itseems that some areas of the country have muchlower vaccination rates and are at greater risk offurther outbreaks later in the year. Although thereis still a risk that new strains of the disease willemerge, as fewer people get the virus there will beless chance for it to mutate.
Although we don’t expect the pandemic to be anactive constraint on the economy, the path of theeconomic recovery, and how long it will take, isunclear. The massive multiple fiscal stimulus pack-ages and monetary policy response of the U.S. ap-pears to have been enough to mitigate the worst ofthe damage so that, at least as far as GDP is con-cerned, the U.S. has fared relatively well. And im-portantly, personal income and savings increased in2020. This means that U.S. consumers, as a whole,are flush with cash to spend (though this is a veryuneven situation, with a significant portion of thepopulation worse off).
Already, the combination of a re-opening economyand relatively high savings have sharply increaseddemand. However, supply chain constraints havelimited the supply response, causing prices to spikefrom everything from cars to lumber. This will sup-press demand in the short term as the various sec-tors reach new price equilibria.
Regardless of the short term trajectory of the re-covery, right now almost all of the major indicatorssuggest that it will be very strong.
Overall, the outlook this forecast continues the op-timism from the previous forecast.
Lumber and Log Prices. Lumber prices in thethird quarter of 2020 were extraordinarily highand, after a briefly pulling back through the fourthquarter to just very high, increased even fur-ther since January 2021. Through March 2020,lumber prices had been climbing and peaked at$478/mbf, before crashing to $363/mbf in May.From May, prices rebounded dramatically, peak-ing at $1,000/mbf in September. Prices fell backto $623/mbf in November and since then have re-bounded to $1,203/mbf in April — almost doublethe highest real prices in any point between 2000and mid-2020.
The high lumber prices have pulled up log prices,with the price of a "typical" DNR log rising from alow of $498/mbf in April 2020 to peak at $711/mbfin October. By January, the price had pulled back to$692/mbf, but has again risen to $718/mbf in April.These are very high historically, but interestingly,still below the prices in early 2018.
Early in the pandemic, we, and others, expectedthe pandemic to undermine house prices and de-mand, and, consequently, the demand for lumber.This widely shared expectation, as well as actualCOVID-19 outbreaks and restrictions, resulted inslower production at mills, furloughs, layoffs, andsome mill closures. However, it appears that thevery low interest rates have spurred housing de-mand and starts, and remodeling and renovationdemand also spiked during stay-at-home orders.The result was a sharp drop in supply while strongdemand remained, making lumber prices rocket upand pushing up log prices. These high prices havecontinued as wood manufacturers haven’t been ableto expand output to completely meet demand dueto supply chain and labor supply difficulties. Pricesare expected to remain high through the third quar-ter of 2021, before pulling back in the fourth quar-ter. Prices in 2022 are expected to remain higherthan they have been historically, though they’re un-likely to remain as high as they are now.
I
Timber Sales Volume. DNR now plans to offeraround 540 mmbf for sale in FY 21. Given the highdemand, it is unlikely that there will be any salespassed in without bids, so we are increasing our FY21 forecast to 540 mmbf. Forecast sales volumes infuture years are unchanged.
Timber Sales Prices. Sales prices throughoutFY 21 have been consistently high, with every salebeing above the five-year average of $340/mbf, andmany of them well above. We are increasing thesales price forecast for FY 21 to $395/mbf — fromour initial FY 21 forecast of $300/mbf in the June2020 forecast, $320 in September, $340 in Novem-ber, and finally $380/mbf in February. This is dueto the continued strong demand and prices.
Timber Removal Volume and Prices. The re-moval volume in FY 21 is decreased by 10 mmbfto 490 mmbf. Even after our harvest volume fore-cast reduction in February, harvest volumes to-datehave been less than we had expected. It appearsthat the fire salvage operations from the 2020 Ore-gon wildfires have continued to tie up much of thelog hauling capacity, suppressing harvests in Wash-ington state.
The removal volume forecast is unchanged in out-lying years.
The forecast average removal price for FY 21 is in-creased by $6/mbf to $337/mbf due to the contin-ued high average price of removals to-date and thehigh value of remaining inventory. Removal pricesin outlying years are increased as well, based onhigher sales prices in FY 21.
Timber Revenue. Forecast timber revenue inFY 21 is decreased slightly by $0.1 million to $165million. FYs 22 and 23 are increased, by $3.5 mil-lion and $0.3 million respectively.
Forecast timber revenues for the 2019-21 bienniumare essentially unchanged at $348 million, whilerevenues for the 2021-23 biennium are increasedby $4 million to $364 million.
Non-Timber Revenues. In addition to revenuefrom timber removals on state-managed lands,DNR also generates sizable revenues from manag-ing leases on uplands and aquatic lands.
The non-timber uplands revenue forecasts are in-creased by $1.5 million in FY 21 due to addi-tional revenue from back rent and lease increasesin communications, higher revenue from mineralsand hydrocarbon, and increased rights-of-way rev-enue.
The aquatic lease revenue forecast for FY 21is decreased again this forecast due to contin-ued low rent revenue from non-water-dependentrents.
The forecast geoduck revenue has been increasedmeaningfully for all forecast years due to better-than-expected prices in recent auctions. Typically,we are wary of increasing outlying years’ price fore-cast based on recent prices, but the recent pricessuggest that there is something of a mean rever-sion of geoduck prices. Prices dropped significantlyin mid-2019 as tariffs between the U.S. and Chinabegan affect demand. Then, in early 2020, theyfell sharply as the Chinese economy was essentiallyshut down. As China has gained a level of controlover the pandemic, demand has increased and itlooks like there’s a new equilibrium of between $7-9/lb. The new forecast reflects the lower side of thisrange.
FY 22 revenue is higher than the surrounding yearsbecause the revenue from the final two geoduckauctions from FY 21 will fall in that year.
Geoduck prices are not expected to increase muchabove the $7-9/lb. range. Aside from the COVID-19pandemic, there remains a trade war between theU.S. and China, with high tariffs on geoduck. Theseare expected to continue indefinitely, limiting Chi-nese consumption and continuing to push Chineseconsumers toward other luxury seafood.
Total Revenues. Forecast revenues for the 2019-21 biennium (FYs 20 and 21) are increased by $2.2million to $484 million. Revenues for the 2021-23biennium are increased by $11.2 million to $510 mil-lion.
Other notes to the Forecast. In addition thepossibility of a COVID-19 resurgence, a numberof sources of uncertainty may affect DNR revenuespecifically, and the overall economic activity morebroadly. These include: legal challenges to the sus-
II
tainable harvest volume and marbled murrelet con-servation strategy; uncertainty about the type andquality of stumpage DNR is able to bring to mar-ket more than six months out; the ongoing tradewar and political tension with China directly affect-ing timber and agricultural exports and prices; anduncertainty about the stability of the current highhousing starts level. Additionally, while the tim-ber sales volume estimates are based on the bestavailable internal planning data, they are subject toadjustments due to ongoing operational and policyissues.
From the beginning of 2018 until just before theCOVID-19 pandemic, the U.S. and China engagedin an escalating trade dispute. Prior to the pan-demic, the tariffs on geoduck were 25 percent andwere a significant driver of the drop in geoduckprices in late 2019. The log tariffs and a slow-down in housing starts were the major contributorsto the lower domestic price of logs through late2019. With the pandemic, tariffs were reduced to5 percent tariff on geoduck, wheat, and softwoodlogs. There’s no indication that tariffs betweenthe countries will be reduced further or removedsoon.
In addition to the coronavirus and the trade ten-sions discussed above, other things could under-mine Chinese demand for wood, such as the contin-ued loss of Pacific Northwest market share to inter-national and Southeastern U.S. competitors.
One issue on the horizon that should be mentionedis that Russia is moving forward with legislationbanning the export of timber from the beginning of2022. Given that Russia supplies around 12 percentof world log exports, the ban will have a signifi-cant impact on log supply across the world. In theshort term, this will likely push up log prices acrossthe world, and will mainly affect China, which getsa significant amount of logs from Russia. Thiswill also likely push up lumber and wood productprices. This has not been built into the forecastprices, but will likely be when the legislation is fi-nalized.
As always in the geoduck fisheries, paralytic shell-fish poison closures create uncertainty around har-vest volumes as well.
III
Table 1: June 2021 Forecast by Source (millions of dollars)Timber Sales FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25
Volume (mmbf) 496 488 534 540 500 500 500 500Change 20 - - - -% Change 4% 0% 0% 0% 0%
Price ($/mbf) 458 325 291 395 340 340 340 340Change $ 15 $ - $ - $ - $ -% Change 4% 0% 0% 0% 0%
Value of Timber Sales 227.1 158.8 155.3 213.1 170.0 170.0 170.0 170.0Change $ 15.5 $ - $ - $ - $ -% Change 8% 0% 0% 0% 0%
Timber Removals
Volume (mmbf) 528 508 529 490 520 520 510 500Change (10) 0 (0) 0 -% Change -2% 0% 0% 0% 0%
Price ($/mbf) 338 382 345 337 351 348 343 340Change 6.4 6.4 0.9 1.0 -% Change 2% 2% 0% 0% 0%
Timber Revenue 178.6 194.3 182.5 165.2 182.7 180.9 174.6 170.0Change (0.1) 3.5 0.3 0.6 -% Change 0% 2% 0% 0% 0%
Upland Leases
Irrigated Agriculture 10.4 8.9 9.0 8.8 9.0 9.0 9.0 9.0Change (0.2) - - - -% Change -2% 0% 0% 0% 0%
Orchard/Vineyard 8.5 9.0 8.8 8.2 8.2 8.2 8.2 8.2Change - - - - -% Change 0% 0% 0% 0% 0%
Dryland Ag/Grazing 6.6 6.6 6.2 5.7 6.0 6.0 6.0 6.0Change - - - - -% Change 0% 0% 0% 0% 0%
Commercial 10.9 10.2 10.3 10.8 10.8 10.8 10.8 10.8Change 0.4 - - - -% Change 4% 0% 0% 0% 0%
Other Leases 9.8 10.0 10.0 12.4 10.8 11.0 11.1 11.3Change 1.3 0.7 0.8 0.9 1.0% Change 12% 7% 8% 9% 10%
Total Upland Leases 46.1 44.6 44.3 45.9 44.8 45.0 45.1 45.3Change 1.5 0.7 0.8 0.9 1.0% Change 3% 2% 2% 2% 2%
Aquatic Lands
Aquatic Leases 12.0 13.5 12.7 10.1 12.5 12.5 12.5 12.5Change (0.8) 0.1 0.1 0.1 0.1% Change -7% 1% 1% 1% 1%
Geoduck 26.4 23.6 10.6 12.4 16.6 15.2 15.2 15.2Change 1.6 3.9 1.8 1.9 1.9% Change 15% 31% 13% 14% 14%
Aquatic Lands Revenue 38.4 37.1 23.4 22.5 29.1 27.7 27.7 27.7Change 0.8 4.0 1.9 2.0 2.0% Change 4% 16% 7% 8% 8%
Total All Sources 263.1 276.0 250.1 233.6 256.5 253.5 247.3 243.0
Change 2.2 8.2 3.0 3.5 3.0% Change 1% 3% 1% 1% 1%
IV
Table 2: June 2021 Forecast by Fund (millions of dollars)Key DNR Operating Funds FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25
041 RMCA - Uplands 40.6 39.9 33.5 31.9 38.1 40.3 40.0 39.4Change (0.5) (0.2) (0.0) 0.3 0.3% Change -2% -1% 0% 1% 1%
041 RMCA - Aquatic Lands 17.6 16.7 9.9 9.7 12.7 12.0 12.0 12.0Change 0.5 2.0 0.9 1.0 1.0% Change 6% 19% 8% 9% 9%
014 FDA 22.1 25.6 28.3 24.1 22.4 22.3 21.5 20.9Change 0.9 (0.2) 0.1 0.3 0.1% Change 4% -1% 1% 1% 1%
21Q Forest Health Revolving 4.4 7.5 7.9 12.5 16.0 9.1 7.6 7.7(0.8) 5.2 0.5 (0.8) (0.3)-6% 48% 6% -9% -4%
Total DNR Key Operating Funds 84.7 89.7 79.7 78.2 89.3 83.8 81.1 80.0Change 1.0 0.1 6.8 1.5 0.9 1.1% Change 0% 8% 2% 1% 1%
Current Funds
113 Common School Construction 62.6 64.2 59.5 52.2 61.2 66.1 66.1 65.2Change 0.3 (0.4) (0.2) 0.4 0.4% Change 1% -1% 0% 1% 1%
999 Forest Board Counties 59.6 69.5 68.7 59.8 54.0 54.5 52.8 51.3Change 2.4 (1.3) 0.0 0.6 0.3% Change 4% -2% 0% 1% 1%
001 General Fund 2.1 1.9 4.7 4.5 3.9 3.7 3.4 3.3Change (0.2) 0.1 0.1 0.1 0.0% Change -3% 1% 2% 2% 1%
348 University Bond Retirement 3.2 1.3 0.6 1.7 2.0 2.1 2.0 1.9Change (0.2) 0.1 0.0 0.0 0.0% Change -10% 8% 2% 1% 0%
347 WSU Bond Retirement 1.6 1.4 1.9 1.8 1.7 1.8 1.8 1.8Change 0.1 0.1 0.1 0.1 0.1% Change 4% 3% 4% 4% 5%
042 CEP&RI 5.3 2.7 3.6 2.0 2.9 3.9 4.1 4.1Change 0.1 (0.5) (0.2) (0.0) 0.0% Change 5% -16% -5% 0% 1%
036 Capitol Building Construction 6.2 9.8 4.4 6.7 7.8 7.9 7.6 7.4Change (1.0) (0.5) (0.1) 0.1 0.0% Change -12% -6% -1% 1% 0%
061/3/5/6 Normal (CWU, EWU, WWU, TESC) School 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2Change 0.0 0.0 0.0 0.0 0.0% Change 2% 3% 3% 3% 3%
Other Funds 1.1 1.2 1.1 0.7 1.1 0.4 0.2 0.1Change 0.3 0.9 0.3 0.0 0.0% Change 86% 372% 160% 36% 0%
Total Current Funds 141.7 152.1 144.7 129.5 135.0 140.4 138.1 135.4Change 2.0 (1.7) 0.0 1.4 0.9% Change 2% -1% 0% 1% 1%
(Continued)
V
Table 3: June 2021 Forecast by Fund (millions of dollars), cont’dAquatic Lands Enhancement Account FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25
02R 20.8 20.4 13.5 12.8 16.4 15.7 15.7 15.7Change 0.3 2.0 1.0 1.0 1.0% Change 2% 14% 7% 7% 7%
Permanent Funds
601 Agricultural College Permanent 4.2 4.1 5.4 5.3 5.7 4.6 4.0 3.8Change 0.5 0.3 0.2 0.1 0.0% Change 10% 6% 4% 3% 0%
604 Normal School Permanent 4.1 2.9 2.6 2.7 2.8 2.8 2.7 2.6Change 0.2 0.1 0.0 0.0 0.0% Change 6% 3% 1% 1% 0%
605 Common School Permanent 0.8 0.2 0.2 0.3 0.3 0.3 0.3 0.3Change - - - - -% Change 0% 0% 0% 0% 0%
606 Scientific Permanent 7.0 5.4 3.1 4.3 6.5 5.4 4.8 4.5Change (0.7) 0.7 0.3 0.1 0.0% Change -15% 12% 6% 3% 0%
607 University Permanent 0.3 0.7 0.1 0.4 0.5 0.5 0.5 0.5Change (0.0) 0.0 0.0 0.0 0.0% Change -4% 1% 1% 1% 0%
Total Permanent Funds 16.5 13.3 11.4 13.0 15.8 13.6 12.4 11.9Change (0.1) 1.1 0.5 0.3 0.0% Change -1% 8% 4% 2% 0%
Total All Funds 263.7 275.4 249.4 233.6 256.5 253.5 247.3 243.0
Change 2.2 8.2 3.0 3.5 3.0% Change 1% 3% 1% 1% 1%
VI
0
100
200
300
400
500
600
700
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mm
bf, S
crib
ner
Timber Sales Volume
050
100150200250300350400450500
20062007200820092010201120122013201420152016201720182019202020212022202320242025
$/m
mbf
Timber Sales Price
0
100
200
300
400
500
600
700
800
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mm
bf, S
crib
ner
Timber Removal Volume
0
50
100
150
200
250
300
350
400
20062007200820092010201120122013201420152016201720182019202020212022202320242025
$/m
mbf
Timber Removal Price
0
50
100
150
200
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Timber Revenue
0
100
200
300
400
500
600
700
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mm
bf, S
crib
ner
Timber Sales Volume
050
100150200250300350400450500
20062007200820092010201120122013201420152016201720182019202020212022202320242025
$/m
mbf
Timber Sales Price
0
100
200
300
400
500
600
700
800
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mm
bf, S
crib
ner
Timber Removal Volume
0
50
100
150
200
250
300
350
400
20062007200820092010201120122013201420152016201720182019202020212022202320242025
$/m
mbf
Timber Removal Price
0
50
100
150
200
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Timber Revenue
Figure 1: Timber Forecast Charts
VII
0.01.02.03.04.05.06.07.08.09.0
10.011.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Irrigated Agriculture Revenue
0.01.02.03.04.05.06.07.08.09.0
10.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Orchard & Vineyard Revenue
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Dryland Ag & Grazing Revenue
0.01.02.03.04.05.06.07.08.09.0
10.011.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$Commercial Revenue
0.01.02.03.04.05.06.07.08.09.0
10.011.012.013.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Other Upland Revenue
0.05.0
10.015.020.025.030.035.040.045.050.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Total non−Timber Upland Revenue
0.01.02.03.04.05.06.07.08.09.0
10.011.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Irrigated Agriculture Revenue
0.01.02.03.04.05.06.07.08.09.0
10.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Orchard & Vineyard Revenue
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Dryland Ag & Grazing Revenue
0.01.02.03.04.05.06.07.08.09.0
10.011.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$Commercial Revenue
0.01.02.03.04.05.06.07.08.09.0
10.011.012.013.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Other Upland Revenue
0.05.0
10.015.020.025.030.035.040.045.050.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Total non−Timber Upland Revenue
Figure 2: Other Uplands Forecast Charts
VIII
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Aquatic Lease Revenue
0.0
5.0
10.0
15.0
20.0
25.0
30.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Geoduck Revenue
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Total Aquatics Revenue
0
50
100
150
200
250
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Total Revenue
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Aquatic Lease Revenue
0.0
5.0
10.0
15.0
20.0
25.0
30.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
mill
ions
$
Geoduck Revenue
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Total Aquatics Revenue
0
50
100
150
200
250
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mill
ions
$
Total Revenue
Figure 3: Aquatics and Total Forecast Charts
IX
Contents
Forecast Summary I
Macroeconomic Conditions 1COVID-19 Pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Employment and Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4The U.S. Dollar and Foreign Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Wood Markets 7U.S. Housing Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
New Home Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Housing Starts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Housing Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Export Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Current Lumber Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Price Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Lumber Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Log Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Stumpage Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13DNR Stumpage Price Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DNR Revenue Forecast 16Timber Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Timber Sales Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Timber Removal Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Timber Sales Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Timber Removal Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Timber Removal Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Upland Lease Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Aquatic Lands Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Total Revenues from All Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Distribution of Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Tables1 June 2021 Forecast by Source (millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . IV2 June 2021 Forecast by Fund (millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . . V3 June 2021 Forecast by Fund (millions of dollars), cont’d . . . . . . . . . . . . . . . . . . . . VI
List of Figures1 Timber Forecast Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII2 Other Uplands Forecast Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII3 Aquatics and Total Forecast Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX4 U.S. Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Unemployment Rate and Monthly Change in Jobs . . . . . . . . . . . . . . . . . . . . . . . 26 Employment and Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Labor Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 U.S. Inflation Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Trade-Weighted U.S. Dollar Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 Crude Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611 Lumber, Log, and Stumpage Prices in Washington . . . . . . . . . . . . . . . . . . . . . . . 712 Lumber, Log, and DNR Stumpage Price Seasonality . . . . . . . . . . . . . . . . . . . . . . 713 New Single-Family Home Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814 Housing Starts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915 Case-Shiller Existing Home Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916 Log Export Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1017 Log Export Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1018 DNR Composite Log Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1319 DNR Timber Stumpage Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1520 Forecast Timber Sales Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1621 Forecast Timber Removal Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1622 Forecast Timber Sales Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1723 Forecast Timber Removal Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1724 Forecast Timber Removal Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1725 Forecast Timber Removal Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1826 Forecast Upland Lease Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1927 Aquatic Lands Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028 Geoduck Auction Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2129 Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Acronyms and Abbreviations
bbf Billion board feetBLS U.S. Bureau of Labor StatisticsCAD Canadian dollarCNY Chinese yuan (renminbi)CPI Consumer Price IndexCY Calendar Year
DNR Washington State Department of Natural ResourcesECB European Central BankERFC Washington State Economic and Revenue Forecast CouncilFDA Forest Development AccountFEA Forest Economic AdvisorsFed U.S. Federal Reserve Board
FOMC Federal Open Market CommitteeFY Fiscal YearGDP Gross domestic productHMI National Association of Home Builders/Wells Fargo Housing Market IndexIMF International Monetary FundITC U.S. International Trade Commission
mbf Thousand board feetmmbf Million board feetPSP Paralytic shellfish poisoningPPI Producer Price IndexQ1 First quarter of year (similarly, Q2, Q3, and Q4)QE Quantitative easing
RCW Revised Code of WashingtonRMCA Resource Management Cost AccountSA Seasonally adjustedSAAR Seasonally adjusted annual rateSLA Softwood Lumber Agreement
TAC Total allowable catchUSD U.S. dollarWDFW Washington Department of Fish and WildlifeWWPA Western Wood Products AssociationWTO World Trade Organization
Preface
This Economic and Revenue Forecast projects rev-enues from Washington state lands managed by theWashington State Department of Natural Resources(DNR). These revenues are distributed to manage-ment funds and beneficiary accounts as directed bystatute.
DNR revises its Forecast quarterly to provide up-dated information for trust beneficiaries and stateand department budgeting purposes. Each DNRForecast builds on the previous one, emphasizingongoing changes. Forecasts re-evaluate world andnational macroeconomic conditions, and the de-mand and supply for forest products and othergoods. Finally, each Forecast assesses the impactof these economic conditions on projected revenuesfrom DNR-managed lands.
DNR Forecasts provide information used in theWashington Economic and Revenue Forecast issuedby the Washington State Economic and RevenueForecast Council. The release dates for DNR Fore-casts are influenced by the state’s forecast scheduleas prescribed by RCW 82.33.020. The table below
shows the anticipated schedule for future Economicand Revenue Forecasts.
This Forecast covers fiscal years 2021 through 2025.Fiscal years for Washington State government beginJuly 1 and end June 30. For example, the currentfiscal year, Fiscal Year 2021, runs from July 1, 2020,through June 30, 2021.
The baseline date (the point that designates thetransition from “actuals” to predictions) for DNRrevenues in this Forecast is May 1, 2021. Theforecast numbers beyond that date are predictedfrom the most up-to-date DNR sales and revenuedata available, including DNR’s timber sales resultsthrough April 2021. Macroeconomic and marketoutlook data and trends are the most up-to-dateavailable as the Forecast document is being writ-ten.
Unless otherwise indicated, values are expressedin nominal terms without adjustment for infla-tion or seasonality. Therefore, interpreting trendsin the Forecast requires attention to inflationarychanges in the value of money over time, separatefrom changes attributable to other economic influ-ences.
Economic Forecast Calendar
Forecast Baseline Date Final Data and Publication Date (approximate)
September 2021 August 1, 2021 September 15, 2021November 2021 October 1, 2021 November 15, 2021February 2022 January 1, 2022 February 15, 2022June 2022 May 1, 2022 June 15, 2022
Acknowledgements
The Washington State Department of Natural Re-sources’ (DNR) Economic and Revenue Forecast is acollaborative effort. It is the product of informationprovided by private individuals and organizations,as well as DNR staff. Their contributions greatlyenhance the quality of the Forecast.
Thanks go to DNR staff who contributed to theForecast: Koshare Eagle, Tom Heller, Patrick Fergu-son, Kari Fagerness, Kathryn Mink, Michael Kear-ney, Sherry Land, Linda Farr, Michelle McLain, andTom Gorman. They provided data and counsel, in-cluding information on markets and revenue flowsin their areas of responsibility.
In the final analysis, the views expressed are ourown and may not necessarily represent the views ofthe contributors, reviewers, or DNR.
Office of Finance, Budget, and Economics
Kristoffer Larson, EconomistDavid Chertudi, Lead Economist
MACROECONOMIC CONDITIONS
Macroeconomic Conditions
This section briefly reviews macroeconomic condi-tions in the United States and world economies be-cause they influence DNR revenue — most notablythrough the bid prices for DNR timber and geo-duck auctions and lease revenues from managedlands.
COVID-19 Pandemic
The COVID-19 pandemic is no longer overshadow-ing all of the normal constituent parts of the fore-cast. However, it is still an important considerationfor the world economy and still poses a risk to theUnited States.
Since the last forecast, the number of fully vacci-nated people in the US has climbed from 20 millionto more than 135 million, with more than 168 mil-lion having received at least one dose. Additionally,the number of new daily infections, hospital admis-sions and deaths have continued downward after asmall wave in April, falling from a peak of 75,000cases per day, to around 16,000. This is well downfrom the almost 250,000 new cases per day in earlyJanuary. It is also the lowest point since the firstpeak in daily cases in early 2020.
It looks as if the risk of another spike in cases na-tionally has substantially diminished — though itseems that some areas of the country have muchlower vaccination rates and are at greater risk offurther ourbreaks laterin in the year. Althoughthere is still a risk that new strains of the diseasewill emerge, as fewer people get the virus there willbe less chance for it to mutate.
Although we don’t expect the pandemic to be anactive constraint on the economy, the path of re-covery from the economic mayhem caused by pan-demic, and how long it will take, is unclear. Themassive multiple fiscal stimulus packages and mon-etary policy response of the U.S. appears to havebeen enough to mitigate the worst of the damageso that, at least as far as GDP is concerned, the UShas fared relatively well. And importantly, personalincome and savings increased in 2020. This meansthat U.S. consumers, as a whole, are flush with cashto spend (though this is a very uneven situation,
with a significant portion of the population worseoff).
In addition to the real health and economic prob-lems that the pandemic have caused, the sudden-ness of the changes have increased the difficulty ofeconomic modeling. Broadly, economic models relyon historical data to try to forecast or understandhow the future will look. And most economic datathat feed into these models is delayed by at leasta month, and often longer. The suddenness andseverity of the coronavirus impacts mean that eco-nomic models are operating well outside of theirhistorical bounds. This causes "out of sample" or"generalization" errors — the current data is just sofar outside of the normal bounds that the modelsbecome ever more inaccurate.
These difficulties with economic modeling meanthat it is even more difficult than normal to predictwhere the economy will be, even in the near future.Already, the combination of a re-opening economyand relatively high savings have sharply increaseddemand. However, supply chain constraints havelimited the supply response, causing prices to spikefrom everything from cars to lumber. This will sup-press demand in the short term as the various sec-tors reach new price equilibria.
Regardless of the short-term trajectory of the re-covery, right now almost all of the major indicatorssuggest that it will be very strong.
U.S. Economy
Gross Domestic Product
Typically, GDP is a useful indicator of how the U.S.economy is growing overall. When GDP is grow-ing well, then generally there will be an increase injobs, spending, and overall economic welfare. Thisoften includes growth in housing spending and con-struction, which influences timber prices and DNR’sincome from timber. It is a useful indicator of howother, more directly relevant indicators, may movein the future.
Page 1 of 23 DNR Economic & Revenue Forecast
U.S. Economy MACROECONOMIC CONDITIONS
Figure 4: U.S. Gross Domestic Product
$14.0
$16.0
$18.0
-20%
0%
20%
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Chained
GDP
(trillions)
GDPGrowth
Rate
The COVID-19 pandemic caused the sharpest quar-terly GDP decline in history, first -0.86 percent inQ1 and then a staggering -9.62 percent in Q2 (-31.4 percent SAAR). However, it rebounded withgrowth of 33.4 (SAAR) percent in Q3 and 4.0 per-cent (SAAR) in Q4. This meant that the average an-nualized GDP was -3.5 percent for 2020, and leftchained GDP at roughly what it was in Q3 2018(Figure 4).
Typically, GDP growth rebounds after a recession,spiking to well above the historical average. Thisdidn’t happen with the Great Recession in 2008-09, but with the stimulus and the drop in COVID-19 cases, near-term economic growth is likely to bequite strong. Continuing to see the 2020 Q3 re-bound growth rate of 30+ percent is unrealistic, butseeing the 2020 Q4 growth of around 4 percent isnot.
In their December forecast, the FOMC projectedthat GDP would grow by between 3.7 and 5.0 per-cent in 2021, with a median estimate of 4.2 per-cent — up slightly from their September forecast.These growth rates in 2021 would be the highestannual GDP growth since before the Great Reces-sion and would leave GDP at about what it was atthe end of 2019. In their updated forecast in March,the FOMC projected real GDP growth of between5.8 and 6.6 percent (higher than any annual growthsince 1983).
Figure 5: Unemployment Rate and Monthly Changein Jobs
-20,000
-15,000
-10,000
-5,000
0
5,000
3%
6%
9%
12%
15%2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Mon
thly
Changein
Jobs
(inthou
sand
s)UnemploymentRate
Current high-frequency forecasts, such as the At-lanta Fed’s GDPNow and the New York Fed’s Now-cast, predict Q2 2021 GDP growth of between 4.3-10.3 percent (SAAR).
Employment and Wages
The labor market is the driving force behind con-sumption, which typically constitutes about 70 per-cent of GDP and naturally extends to the demandfor housing, the major driver of U.S. timber de-mand. The U.S. headline unemployment rate mea-sures the number of people looking for work as apercentage of the number of people in the laborforce. It had been trending downward since peak-ing at 10 percent in 2010 and was 3.5 percent inFebruary, one of its lowest points since 1969 (Fig-ure 5).
With the shutdown of the economy, the unemploy-ment rate shot up to 14.7 percent in April 2020, thehighest it has been since the Great Depression. Atthe same time, the labor force participation rate —that is, the percentage of the working age popula-tion that is in the labor force — decreased substan-
DNR Economic & Revenue Forecast Page 2 of 23
MACROECONOMIC CONDITIONS U.S. Economy
tially from 63.4 percent in February to 60.2 percentin April. The decrease in the labor force participa-tion rate meant that the increase in the unemploy-ment rate was a meaningful underestimate of theactual rate of unemployed people who would havepreferred employment.
Since mid-2020, both have improved, with the un-employment rate decreasing to 6.1 percent in April2021 and the labor force participation rate increas-ing to 61.7 percent.
Overall, despite the rebound, there are around 8million fewer jobs in April 2021 than in Febru-ary 2020 and about 3.5 million fewer people inthe labor force (that is, employed or looking forwork).
Figure 6: Employment and Unemployment
140,000
150,000
160,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
inthou
sand
sUnemployment
EmploymentTotal Workforce
UnemploymentInvoluntary Part-timeMarginally Attached
The speed of job re-growth slowed considerably inlate 2020—dropping from a high of 4.8 million new(or re-created) jobs in June 2020 to a 306,000 loss inDecember. Since then, job creation has picked up,averaging 451,000 jobs/month in January throughApril 2021. At this rate, it will take about 20months to recover all of the jobs lost since February2020.
It is unclear what job growth in the near future willlook like. It is likely that it will be characterized byfits and starts. Although job growth has been strongin some areas — services and, the leisure and hos-pitality sectors accounted for almost all of the jobgrowth in April — there has been little change, oreven a decline, in employment in other sectors. Ad-ditionally, there are numerous reports of employershaving difficulty filling roles. As in other sectors ofthe economy, this is likely due to everything open-ing up all at once, spiking demand while supplycatches up. It will likely take some time before la-bor markets reach a new equilibrium.
The FOMC forecast is for the 2021 unemploymentrate to be between 4.2-4.7 percent, down from theDecember forecast range of 4.7-5.4 percent.
Another way to get insight into the unemploymentsituation is to look at how many people have beenunemployed for a long period of time. The numberof long-term unemployed (27 weeks or longer) hasballooned from a low of 939,000 in April 2020 to4.0 million in January. The number of long-termunemployed has continued to rise, even as the un-employment rate has fallen. Only in April 2021 didit start to fall, dropping to slightly below 4.2 millionfrom slightly above 4.2 million in March.
Another metric of this is continued unemploymentclaims — a measure of the number of people whohave continued to file unemployment insuranceclaims after their initial claim. During the GreatRecession continued claims peaked at 6.6 millionin 2009. The most recent week’s estimate on June3, 2021, is continued claims of 3.5 million, downfrom 6.8 million in November. This is well belowthe recent peak of 24.9 million in May 2020, but isstill quite high historically.
Finally, the U-6 is an alternative measure of un-employment that includes involuntarily part-timeemployment (underemployment) and marginally at-tached workers, who are not included in the head-line unemployment rate but who, nevertheless, arelikely to be looking for work and would benefit frombetter job prospects. The U-6 also ballooned, in-creasing from 7.0 percent in February 2020 to 22.8percent in April 2020. Since then, it has fallen to10.4 percent in April 2021 (Figure 6).
Page 3 of 23 DNR Economic & Revenue Forecast
U.S. Economy MACROECONOMIC CONDITIONS
Figure 7: Labor Market Indicators
-10%
-5%
0%
5%
10%
15%
20%
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
%chan
gesince20
01(net
chan
geforun
employmentrate) Unemployment Rate (net change)
EmploymentWorking Age PopulationTotal WorkForceLabor Force Participation
Inflation
Aside from a short period in 2012, core inflationhas been below the FOMC’s target since the re-cession in 2008. Similarly to GDP forecasts, infla-tion forecasts have been consistently too high, witheach year predicted to break the cycle of weak in-flation, only to disappoint as the year progresses(Figure 8).
For policy purposes, the FOMC uses the core Per-sonal Consumption Expenditures (PCE) index asthe measure of inflation, which removes the morevolatile fuel and food prices. This measure showslong-term inflation at or below the 2.0 percent tar-get since September 2008. Core PCE growth av-eraged between 1.4 and 1.7 percent from 2015-2017,rose to average 1.9 percent in 2018 and fell back toaverage 1.5 percent in 2019.
Inflation in 2020 remained low, at 1.5 percent. Inthe last few months, inflation expectations for 2021have shifted above the 2.0 percent target, with theFOMC expecting core inflation between 2.0 and 2.3percent for the year. This is up from its Decemberforecast range of 1.7-1.8 percent.
Inflation has recently increased more sharply thanin the previous few months, with the April annual-ized core inflation measures higher than any pointsince 2000. This has precipitated a lot of discussionand worry about potential runaway inflation. How-
ever, as many economists have noted, employmentis still very low, and short-term jumps in the infla-tion rate are to be expected as economies open upand issues with ramping up production are workedthrough. Right now, there is no reason to suspectthat inflation will prove to be a problem in the nearfuture and, even in the medium term, the Fed has anumber of tools at its disposal to ensure that infla-tion doesn’t get out of control.
In a fairly striking policy change, the FOMC an-nounced in September 2020 that it would "aim toachieve inflation moderately above 2 percent forsome time so that inflation averages 2 percent overtime and longer-term inflation expectations remainwell anchored at 2 percent." This is a marked de-parture from policy in the last 10 years, when therewere a number of (sometimes contentious) interestrate increases, even though inflation was well below2 percent.
Figure 8: U.S. Inflation Indices
-2%
-1%
0%
1%
2%
3%
4%
5%
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Ann
ual%
Change
Headline CPI Core CPI Core PCE
Interest Rates
Interest rates are a powerful tool used by theFederal Reserve bank to influence the U.S. econ-omy. An increase in interest rates will generallyslow down economic growth — business invest-ment slows down because borrowing money be-comes more expensive, so job and wage growthslow down (constraining consumption). Similarly,it becomes more expensive for consumers to bor-
DNR Economic & Revenue Forecast Page 4 of 23
MACROECONOMIC CONDITIONS U.S. Economy
row, impeding demand in the housing and automarkets. In normal times, a decrease in interestrates will expand investment, employment, wages,and consumer credit. The opposite of all of this isalso true—decreasing or low interest rates can helpdrive economic expansion.
From December 2008 to December 2015, the Fed-eral Reserve held the federal funds rate in the 0.0-0.25 percent range. To keep rates that low forthat long was unprecedented and reflected the im-mense damage done by the Great Recession. Dur-ing that time, the Fed pledged to keep the rates nearzero until it judged that there had been sufficientprogress toward its dual-mandate of maximum em-ployment and around 2.0 percent inflation.
Beginning in December 2015, the FOMC graduallyraised interest rates from 0.0-0.25 percent rangeto 2.25-2.5 percent range by the end of 2018. Itsnotable that these increases were made based onprogress in the recovery of employment and infla-tion, and a strong economic growth outlook, ratherthan employment or inflation that had reached anythreshold. Given this history, it is a significantchange that the FOMC has backed away from thispolicy, promising to keep rates very low until theaverage inflation is around 2 percent.
In response to the economic threat of the novelcoronavirus pandemic, the FOMC held a specialmeeting in March and dropped the federal fundsrate to 0.1 percent. In addition to the new policy,the FOMC outlook released on September 16 wasextraordinary, showing that its median projectionsare for a 0.1 percent federal funds rate until 2022 atleast. Its projections were unchanged in December,but updated in March, when the projected 2022 in-terest rate range increased from 0.1-0.6.
The U.S. Dollar and Foreign Trade
The trade-weighted U.S. dollar index climbed dra-matically from 2014 through late 2016. Through2015 and 2016, this was largely due to the relativestrength of the U.S. economy, which, although fairlyweak, was growing faster than most other advancedcountries. Although the value of the U.S. dollar wasbelow its 2015 peak for most of 2016, the results of
the U.S. presidential election pushed the exchangerate well above its previous high. From mid-2017to May 2018, the dollar dropped back, but then in-creased above its earlier 2016 high. Between Febru-ary and April 2020, the U.S. dollar trade-weightedindex jumped almost 6 percent, largely due to a"flight to safety" from the uncertainty caused by thepandemic (Figure 9). Since April 2020, it has fallenback significantly, and is about where it was in mid-2018.
The lower dollar means that timber and lumberfrom the Pacific Northwest has become less expen-sive for international buyers and, conversely, tim-ber and lumber imported into the U.S. becomesmore expensive. This will tend to support lo-cal prices and DNR’s timber and agricultural rev-enues. Wildstock geoduck revenue will also be pos-itively affected because geoduck is primarily mar-keted abroad.
Figure 9: Trade-Weighted U.S. Dollar Index
100
110
120
130
2011
2013
2015
2017
2019
2021
U.S.D
ollarIndexValue
Nominal Dollar Real Dollar
Foreign trade and access to export markets is nor-mally important for DNR revenues. Chinese de-mand for timber and lumber was a major supportfor lumber prices after 2010, even though DNR tim-ber cannot be exported directly. Additionally, muchof the soft white wheat produced in Washingtonis exported to Asia and the vast majority of thePacific Northwest geoduck harvest is exported toChina.
Prior to the COVID-19 pandemic, there were ongo-
Page 5 of 23 DNR Economic & Revenue Forecast
U.S. Economy MACROECONOMIC CONDITIONS
ing trade tensions between the U.S. and China withboth countries implementing tariffs. Although a"Phase One" trade deal had been signed before thepandemic to deescalate the trade war, there weren’tactually any apparent changes to tariffs. Of theproducts relevant to DNR revenue, softwood logsare subject to a 5 percent tariff. Geoduck, wheat,and many orchard/vineyard agricultural products(such as apples) are also subject to a 5 percent tar-iff, apparently due to the pandemic. Prior to thepandemic, they were taxed with a 25 percent tar-iff.
It appears that the new U.S. administration is fo-cused on matters other than resolving the tradewar, so we don’t expect any easing of tariffs any-time soon. For timber this is likely to be immaterial.Domestic lumber, and timber, demand is largelydriven by the housing market, which is booming.This will likely support prices, regardless of the ex-port markets.
Figure 10: Crude Oil Prices
$20
$40
$60
$80
$100
2014
2015
2016
2017
2018
2019
2020
2021
$/barrel
(real,SA
)
West Texas Intermediate Brent Crude
Petroleum
Crude oil and its derivatives strongly affect produc-tion, transportation, and consumption in the worldand U.S. domestic economies. Broadly, a drop in oilprices acts like a tax cut for consumers and can en-courage consumption. Additionally, all other thingsbeing equal, lower petroleum prices will decreasediesel fuel prices and will make transportation-
sensitive industries—such as Pacific Northwest log-ging and agriculture—more competitive in interna-tional markets.
As with everything else, the coronavirus pandemichas had a major impact on oil prices, even send-ing the spot prices negative for a short time (Fig-ure 10). However, since then, prices have recoveredto around $58/barrel in real terms—slightly belowthe 2019 average price. These are fairly low priceshistorically, so they are unlikely to put much of adrag on economic growth.
DNR Economic & Revenue Forecast Page 6 of 23
WOOD MARKETS
Wood Markets
Timber stumpage revenue constitutes about 70 per-cent of total DNR revenues on average. There-fore, DNR is vitally concerned with understandingstumpage prices, log prices, lumber prices, and therelated supply-and-demand dynamics underlyingall three. This section focuses on specific marketfactors that affect timber stumpage prices and over-all timber sales revenue generated by DNR.
Figure 11: Lumber, Log, and Stumpage Prices inWashington
$200
$300
$400
$500
$600
$700
$800
$0
$100
$200
$300
$400
$500
$600
$700
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
CoastLum
berPrice
$/mbf
Log
andStum
page
Prices
$/mbf
WA Log DNR Stumpage Derived Stumpage
In general, timber stumpage prices reflect demandfor lumber and other wood products, timber sup-ply, and regional lumber mill capacity. There is aconsistent, positive relationship between log pricesand DNR’s stumpage prices, despite notable volatil-ity in stumpage prices (Figure 11). High log pricesmake access to logs more valuable, increasing pur-chasers’ willingness to pay for stumpage (the rightto harvest). Volatility in stumpage prices arise notonly from log prices, but also from the volume oflumber and logs held in mills’ inventories and fromDNR-specific issues, such as the quality and typeof the stumpage mix offered at auction, the region,
and the road-building requirements of a particularsale.
The relationship between lumber and log pricesis less consistent. Lumber prices are significantlymore volatile, and both the direction and size ofprice movements can differ from log prices. Thisis due to both demand and supply-side factors. Onthe demand side, mills will often have an inven-tory of logs in their yards, as well as an inven-tory of "standing logs," so they do not always needto bid up log or stumpage prices to take advan-tage of high lumber prices. From the supply side,landowners often do not need to sell their timber,so when prices fall too far, they can withhold sup-ply and allow their trees to grow and increase inquality.
Figure 12: Lumber, Log, and DNR Stumpage PriceSeasonality
80%
85%
90%
95%
100%
105%
110%
115%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Mon
thly
Priceas
%of
Ann
ualP
rice
Lumber Log Stumpage
There are differences in price seasonality betweenlumber, logs, and stumpage, as illustrated in Fig-ure 12. These prices are affected by a degree ofseasonality that is largely the result of when eachof these commodities will be used. For instance,lumber prices tend to be higher starting in Febru-ary, when housing construction starts to pick up,and decline through fall as demand wanes, whilestumpage prices tend to be highest in December-March, when harvesters are lining up harvestablestock for the summer. DNR stumpage price volatil-ity is also affected by the firefighting season and the
Page 7 of 23 DNR Economic & Revenue Forecast
U.S. Housing Market WOOD MARKETS
quality of the stumpage mix, which varies through-out the year but tends to be lower from July throughSeptember.
U.S. Housing Market
This section continues with a discussion of the U.S.housing market because it is particularly importantto overall timber demand in the U.S.
New residential construction (housing starts) andresidential improvements are major components ofthe total demand for timber in the U.S. From 2000-18, these sectors have averaged 69 percent of soft-wood consumption — 37 percent going to housingstarts and 32 percent to improvements — with theremainder going to industrial production and otherapplications.
The 2007 crash in the housing market and the fol-lowing recession drastically reduced demand fornew housing, which undermined the total demandfor lumber. Since the 2009-11 trough, an increase inhousing starts has driven an increase in lumber de-mand, though not to nearly the extent of the peak.Prolonged growth in starts is essential for a mean-ingful increase in the demand for lumber.
Figure 13: New Single-Family Home Sales
0.00
0.40
0.80
1.20
1.60
0
4
8
12
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Sing
le-fam
ilyho
mes
(millions)
Mon
thsof
inventory
New Home SalesInventory‘Normal’ SalesCompleted for Sale
As with almost every other part of the economy,the coronavirus pandemic created a lot of uncer-tainty in the housing market. Since the initial col-lapse in activity, both starts and new home sales
have risen significantly — largely driven by stronghousehold balance sheets and record-low mortgagerates.
New Home Sales
Unsurprisingly, new home sales plummeted duringthe 2008-09 recession, reaching a record low of306,000 (SAAR) in 2011 before beginning a slowrise (Figure 13). New home sales increased from440,000 (SAAR) in 2014 to an average of 616,000in 2017, still well below the long-term (1963-2010)"normal" rate of 678,000 (SAAR) sales per year.In 2018, new home sales averaged 651,000 (SAAR)through May, before dropping meaningfully to av-erage 593,000 for June-December. From November2019 through January 2020, new home sales rosesteeply, to peak at 756,000, the highest it had beensince the recession.
From January through April 2020, new single-family home sales fell back to 570,000 (SAAR) asthe initial effects of the pandemic took hold. How-ever, April was the bottom. From then, new homesales quickly grew well beyond their January 2020highs to a peak of 977,000 (SAAR) in August, aver-aging 934,000 in the latter half of the year. In Jan-uary 2021, 993,000 (SAAR) new homes were sold,and have averaged 907,000 (SAAR) per month—24 percent more than highest peak month between2008-2020.
Based on the consistent high number of sales, verylow interest rates for the foreseeable future, solidhousehold balance sheets, and strong demand, newhome sales are expected to remain high for sometime, although they may be offset by more existinghousing coming on to the market.
Housing Starts
In April 2009, U.S. housing starts fell to the low-est point since the Census Bureau began trackingthese data in 1959. U.S. housing starts picked upin 2011 and continued to rise, largely because of in-creases in multi-family starts. Single-family startswere more or less flat after the recession through2012, but rose slowly through most of 2019 (Figure14).
DNR Economic & Revenue Forecast Page 8 of 23
WOOD MARKETS U.S. Housing Market
Starts picked up meaningfully in the last quarterof 2019 to average 1.3 million (note that all of thehousing starts figures are SAAR), above the 1.25million average for 2018. Although this was wellabove the 2012 average of 0.78 million, it is stillwell below the pre-recession long-term average of1.6 million.
Starts hit 1.6 million in January and February 2020before dropping sharply in April to 0.9 million.Again, as with sales, April 2020 was the nadir,and starts climbed back quickly increased to morethan 1.5 million in October through January. Jan-uary through April, starts have averaged 1.6 mil-lion.
Figure 14: Housing Starts
0.0
0.5
1.0
1.5
2.0
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Starts(m
illions)
Total StartsSingle-Family StartsMulti-Family Starts
Like sales, expectations for starts for the foresee-able future have been increased based on the cur-rent rebound, very low interest rates, and underly-ing demand.
It’s notable that the share of single-family starts hasincreased markedly in the past year. In January2020, around 62 percent of the new starts were sin-gle family. In January 2021 this share had grown to70 percent. Single family housing uses more lumberthan multi-family housing, so the increase in over-all starts in 2021 will reflect higher lumber demandthan the starts in early 2020.
Housing Prices
U.S. housing experienced six unprecedented yearsof falling or flat prices following the recession.House prices started rising again only in 2012 aseconomic and employment indicators continued toimprove. Figure 15 charts the seasonally adjustedS&P/Case-Shiller Home Price Index for the 20-citycomposite, which estimates national existing homeprice trends, as well as the Index for Seattle.
Nationally, after increasing in most months sincebottoming out in January 2012, the Case-Shiller 20-city composite price index growth slowed signifi-cantly from May 2018 to late 2019. Seattle houseprices had been growing much faster than nationalprices, doubling from its low in February 2012 toJuly 2018, while nationally house prices increasedby 62 percent. From late 2019, the index startedgrowing strongly again.
Figure 15: Case-Shiller Existing Home Price Index
100
125
150
175
200
225
250
275
300
-30%
-20%
-10%
0%
10%
20%
30%
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Hom
ePriceIndex
Ann
ual%
chan
ge
NationwideSeattle
Although the pandemic initially stalled nationalprice growth, the national Case-Shiller ended theyear with 9.7 percent year-over-year price growthin December. Locally, the Seattle Case-Shiller In-dex actually fell from a high of 267.1 in March to a
Page 9 of 23 DNR Economic & Revenue Forecast
Export Markets WOOD MARKETS
low of 265.9 in June, but prices grew rapidly in thelatter half of 2020. In December, the year-over-yearprice growth was 12.5 percent.
This rapid price growth is the result of both strongdemand—largely due to low interest rates but alsopossibly due to demand from tele-workers look-ing for homes outside of cities—and very limitedsupply. The inventory of homes for sale plum-meted as fewer people put their homes up fore sale,likely not wanting to have potential buyers walkingthrough.
Export Markets
Although federal law prohibits export of logs frompublic lands west of the 108th meridian, log ex-ports can still have a meaningful impact on DNRstumpage prices. Exports compete with domes-tic purchases for privately sourced logs and strongexport competition pulls more of the supply fromthe domestic market, thereby raising all domesticprices. However, changes in export prices do notnecessarily influence domestic prices in a one-to-one relationship.
Figure 16: Log Export Prices
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2005
2007
2009
2011
2013
2015
2017
2019
2021
$/mbf
(nom
inal)
Export PriceFEA Domestic PriceMill Survey Domestic Price
Export prices are almost always higher than do-mestic prices, a difference which is referred to asthe "export premium" (Figure 16). The export pre-mium is primarily due to the characteristics of theexport markets, which can include a demand for
higher-quality wood, a high value placed on long-term contracts, and high transaction costs.
Note that the export prices shown in Figure 16 areweighted by DNR’s typical species mix, not thespecies mix of actual export volumes.
The primary markets for logs and lumber fromWashington are China and Japan. Japan primarilyimports Douglas-fir and has been relatively consis-tent, averaging 1.8 million m3 per year since 2009.China primarily imports hemlock, but has beenmuch more variable in its demand.
After entering the market meaningfully in 2010,demand from China was a major support for logand lumber prices in Washington (Figure 17). Thatstarted waning in late 2014 as China’s economichealth wavered, the U.S. dollar appreciated whilethe value of the euro and ruble dropped (mak-ing U.S. timber comparatively more costly), and a25 percent Russian tariff on log exports was re-duced.
Surprisingly, exports to Japan in 2020 actually in-creased by about 7 percent. However, exports toChina continue to fall, and were down 41 percent in2020 compared to 2019.
Figure 17: Log Export Volume
0
100
200
300
400
500
0
50
100
150
200
250
20002002200420062008 2010 2012 2014 2016 2018 2020
Dou
glas-fir
(1,000
cubicmeters)
Hem
lock
(1,000
cubicmeters)
ChinaJapan
There is currently legislation in Russia that wouldban log exports. This could strongly affect China,where many mills were built near the Russian bor-
DNR Economic & Revenue Forecast Page 10 of 23
WOOD MARKETS Current Lumber Prices
der to take advantage of cheap logs. The Russianexport ban is designed to support local mill opera-tions. In the longer term, it may mean that Chinastill has access to cheap lumber, as they will likelybe the main export market. However, in the shortterm, it will likely increase Chinese dependence onother log exporters, including the Pacific North-west.
Current Lumber Prices
Lumber prices have skyrocketed in the past eightmonths, to around double the highest price from2000-2019.
Broadly, there are at least four key things thathave made lumber prices explode in the past 12months:
• housing starts and home improvements;
• the loss of supply from British Columbia;
• lead time and inventory management forprojects; and
• the production capacity of mills and theircaution about expanding.
The high prices have been across the board inwood-based building materials (all building mate-rials, really). But the story for lumber is represen-tative of most other wood products as well.
First, as mentioned above, housing starts are thedominant driver of lumber demand in the U.S.,making up almost 70 percent of demand histori-cally.
Single-family housing starts collapsed from Febru-ary 2020 at 1.1 million units (SAAR) to 0.7 millionin April 2020. At the same time mills drasticallyslowed down, either actually completely stoppingproduction or seriously reducing it – putting peo-ple out of work or furloughing them. Some of thosepeople went to other lines of work, making it harderto ramp up production later. Notably, this is gen-erally the time when mills are ramping up produc-tion, building up their inventory in preparation forhigher demand for the housing construction sea-son.
However, April was the nadir. From there, startsincreased dramatically every month; by Augustthey were higher than any month from 2008-2019.Starts peaked at 1.3 million (SAAR) in December,shooting up demand for lumber, and have remainedabove the December 2019 peak. Mills started in-creasing production again in July, but took a whileto ramp back up. While production was still catch-ing up, orders were piling up and piling up forthe future. Since December, starts have been be-tween 1.1 and 1.2 million (SAAR) – every monthhas had more starts than any month in the past13 years.
Remodeling and renovation started climbing ear-lier and peaked much earlier, but were also muchhigher than previous years. In 2019, home improve-ment consumption peaked at 1.78 billion board feet(bbf) in September. In 2020, June had just underthat at 1.73 bbf and then every month from July toNovember had more lumber consumption than thepeak in 2019.
The huge increase in residential improvementsstarted this wave in demand. That demand tookup much more lumber than previous years, startedto bid up prices, and took up supply that wouldhave been inventory to fill orders for home build-ing.
Second, this all happened with the backdrop ofBritish Columbia’s supply falling off a cliff from2018. The beetle kill harvest there, which increasedharvest volume from 2000, is basically done andmills have started closing, shutting down a key lum-ber import supply. With that decreased supply andthe closing mills, there’s less flexibility in supply –it just can’t be ramped up as easily. This likely de-creased the elasticity of supply, so that even smallincreases in (unexpected) demand resulted in sharpincreases in price.
Third comes from the orders piling up for the fu-ture. The snowball of lumber orders started rollingin mid-year 2020 with the surprising home im-provement demand. It kept getting bigger becauseeveryone wanted wood, but the new supply wasstill taxed and mills hadn’t built up their invento-ries.
Page 11 of 23 DNR Economic & Revenue Forecast
Price Outlook WOOD MARKETS
When home-building started picking up, home-builders also needed lumber. Typically, homebuilders buy their lumber in advance, tying up pro-duction into the future. But they don’t always get itright, so some need wood as soon as possible. How-ever, nobody has lumber available because all of themills’ output has already been bought months inadvance. Those who need wood immediately havetwo choices, buy on the cash market at exorbitantprices and/or buy up unsold stuff in the future. Andit’s not just buy it up, but bid it up to make sure theyhave the supply they need.
The home building demand is, of course, linkedto house prices. Builders are willing to pay higherprices for lumber because the houses they arebuilding have high prices. Housing demand rightnow is such that many home builders are sellingthe homes far in advance of building them – sothey are guaranteed to sell at current high prices,and the company can preorder the lumber at thehigh price of lumber, knowing that their profit islocked in.
Fourth, the Great Recession was devastating tomills. For instance, the number of lumber millsin Washington went from 68 mills in 2006 to 37in 2016 (according to the Washington Mill Survey).The remaining mills survived because they are cau-tious about expanding capital, taking on debt orhiring too many people. They’re part of a cyclicalcommodity market, so they know it has booms andbusts. Lumber is fairly cyclical, so if a companytakes on a lot of debt and expands during a boom,then the bust will bankrupt them.
Mills saw the high prices in July and August 2020and likely thought that it was a nice bonus, butunlikely to last – as the recent spike in 2018 didn’t.Mills did expand production some, but slowly, whileselling off their future production. West Coast lum-ber production increased from mid-2020, but bythe end of the year was only up to what it wasin peak 2019. Only in the past couple of monthshave mills increased output to close to peak outputin 2018 (when West Coast lumber prices spiked to$635/mbf).
Additionally, even though it seems like mills are try-ing to expand output now, they are apparently hav-
ing difficulty finding the labor for it.
Like the reduced production from BritishColumbia, having fewer mills in Washington statelikely limited the flexibility in the lumber supply,further reducing the elasticity of supply.
In addition to the major drivers above, there arealso supply chain issues – particularly glue for ori-ented strand board and plywood, and transport is-sues for everyone. For instance, companies wereapparently offering bonuses of $1,500/day for logtruck drivers in Oregon to haul fire salvage becausethey were having difficulty finding drivers.
There is also likely some financial speculation go-ing on as well. Lumber is traded on futures mar-kets and futures are financial contracts that can betraded by anyone. So when the price increasessharply, some people are likely purchasing con-tracts to speculate on it, which increases the volatil-ity of prices, at least in the short term.
Price Outlook
Lumber Prices
As shown in Figure 11, lumber prices started in-creasing rapidly in late 2017. In June 2018, priceshit $635/mbf, higher in real terms than any since2000. However, from June 2018, prices droppeddramatically to a low of $324/mbf in November2018 — a 47 percent drop. Prices through Oc-tober 2019 made a modest recovery to average$371/mbf before jumping to $411/mbf in December2019.
Lumber prices continued to recover through the be-ginning of 2020, but fell when the pandemic began.As discussed above, since late 2020, lumber priceshave skyrocketed. However, they have fallen fromthe outrageous highs of $1,800/mbf that some fu-tures contracts reached. The outlook for lumberprices is that they will remain very high through atleast the third quarter of 2021, when housing con-struction starts to slow down. After that, prices areexpected to fall to around the $800/mbf range —still exceptionally high, but much closer to historichighs.
Prices into 2022 are expected to continue to decline
DNR Economic & Revenue Forecast Page 12 of 23
WOOD MARKETS Price Outlook
to much more normal range, averaging around$500/mbf, as the backlog in orders is clearedout.
Log Prices
Figure 18 presents prices for Douglas-fir, hemlock,and DNR’s composite log. The latter is calcu-lated from prices for logs delivered to regionalmills, weighted by the average geographic location,species, and grade composition of timber typicallysold by DNR. In other words, it is the price a millwould pay for delivery of the typical log harvestedfrom DNR-managed lands. The dark green line forthe DNR composite log price on Figure 18 is thesame as the light green line on Figure 11.
Log prices appear to have also bottomed in April2020 and had recovered by August, but they haveobviously not reached the same extremes as lumberprices. Prices are not likely to see those same ex-tremes either, because timber harvesters and millsoften have an inventory of standing timber to drawfrom, so they don’t always need to bid up new logs.Prices have continued to rise since August 2020and are expected to peak in Q1 2021, before slowlydecreasing through the rest of the year.
Calendar year 2021 is still expected to have a higheraverage price through they year than 2020, thoughprices will likely fall a bit later in the year. Pricesfor 2022 are expected to remain close to what theywere in 2018 – around $700/mbf.
Stumpage Prices
Timber stumpage prices are the prices that suc-cessful bidders pay for the right to harvest timberfrom DNR-managed lands (Figure 19). At any time,the difference between the delivered log price andDNR’s stumpage price is equivalent to the sum oflogging costs, hauling costs, and harvest profit (Fig-ure 11). Subtracting the average of these costs fromthe log price line gives us a derived DNR stumpageprice.
When actual DNR stumpage prices differ signifi-cantly from the derived stumpage prices, a correc-tion is likely to occur. Currently, stumpage pricesare a bit lower than we’d expect, given log prices
— having diverge in recent months as stumpageprices have fallen. While log and lumber prices bot-tomed out in April 2020, DNR stumpage prices fellthrough May 2020, to a low average auction priceof $215/mbf. However, they rebounded earlier thanexpected, jumping to $347/mbf in July, which typi-cally has the lowest auction prices of a year. Sincethen, DNR timber auctions have had very strongprices, so that the average stumpage for FY 21 is$400/mbf for sales through April 2021.
As always, these prices also depend heavily uponthe characteristics of the sales, particularly the typeand quality of the wood, the type of logging, andthe costs associated with road-building and main-tenance. Right now, sales prices may also be moreheavily influenced by the ready availability of thesales – that is, whether purchasers can begin har-vesting soon or whether they have to do a lot ofpreparatory work.
Figure 18: DNR Composite Log Prices
$100$200$300$400$500$600$700$800
$0
$50
$100
$150
$200
$250
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Log
Prices
$/mbf
Dou
glas-firPrem
ium
$/mbf
Douglas-fir Composite DNR Log Hemlock
DNR Stumpage Price Outlook
DNR currently contracts with a forest economicsconsulting firm that provides log and timberstumpage price forecasts, as well as valuable in-sights into the housing, lumber, and timber mar-kets. By modeling DNR’s historical data on its priceforecasts, we arrive at a stumpage price outlook(Figure 19, note that the FEA "forecast" series re-flects the species and class characteristics of typical
Page 13 of 23 DNR Economic & Revenue Forecast
Price Outlook WOOD MARKETS
DNR timber; the original series were West Coastaverages, and are not shown).
It is important to note that these are nominal priceexpectations.
DNR Economic & Revenue Forecast Page 14 of 23
WOOD MARKETS Price Outlook
Figure 19: DNR Timber Stumpage Price
$100
$150
$200
$250
$300
$350
$400
$450
$500
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026$/mbf
(nom
inal)
Historical Stumpage
Jun 2021 Forecast
Feb 2021 Forecast
FEA
Page 15 of 23 DNR Economic & Revenue Forecast
DNR REVENUE FORECAST
DNR Revenue Forecast
This Revenue Forecast includes revenue generatedfrom timber sales on trust uplands, leases on trustuplands, and leases on aquatic lands. It also fore-casts revenues to individual funds, including DNRmanagement funds, beneficiary current funds, andbeneficiary permanent funds. Caveats about theuncertainty of forecasting DNR-managed revenuesare summarized near the end of this section.
Timber Revenue
DNR sells timber through auctioned contracts thatvary in duration. For instance, contracts for DNRtimber sales sold in FY 2019 needed to be har-vested between three months and three years fromthe date of sale, with most being around two years.The purchaser determines the actual timing of har-vest within the terms of the contract, which is likelybased on perceptions of market conditions. As aresult, timber revenues to beneficiaries and DNRmanagement funds lag behind sales.
For the purposes of this chapter, timber that is soldbut not yet harvested is referred to as "inventory"or "under contract." Timber volume is added to theinventory when it is sold and placed under con-tract, and it is removed from the inventory whenthe timber is harvested.
Figure 20: Forecast Timber Sales Volume
400
500
600
700
800
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
mmbf,S
cribner
TS Volume FebTS Volume Jun
Timber Sales Volume
The sales volume forecast for FY 21 is increasedto 540 mmbf, the amount that DNR plans to of-fer (Figure 20). Given the high demand, it is un-likely that there will be any sales passed in withoutbids. Forecast sales volumes in future years are un-changed.
FY 15 was the first year of the new sustainableharvest decade (FY 15 through FY 24) for WesternWashington, though the new Sustainable HarvestCalculation wasn’t officially adopted until Decem-ber 2019. However, multiple lawsuits have beenfiled that put the status of the new sustainable har-vest estimates into question. Without certainty onthe sustainable harvest limit, annual Westside salesvolumes forecasts are unchanged at 450 mmbf forfuture years. Together with projected Eastside tim-ber sales of 50 mmbf for each of the next severalyears, we arrive at a projected annual timber salesvolume of about 500 mmbf for FYs 22-25.
Figure 21: Forecast Timber Removal Volume
0
100
200
300
400
500
600
700
800
900
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
mmbf,S
cribner
Removals to DateSales Under ContractSales in FY 21Sales in FY 22Sales in FY 23Sales in FY 24Sales in FY 25
Timber Removal Volume
The FY 20 removal volume was 527 mmbf (Fig-ure 21). The FY 21 volume harvest forecast is re-duced by 10 mmbf to 490 mmbf due to continuedslow harvest activity. It appears that this is dueprimarily to an enormous amount of fire salvagetimber coming out of Oregon. Burned timber mustbe harvested quickly to recover any value out of it
DNR Economic & Revenue Forecast Page 16 of 23
DNR REVENUE FORECAST Timber Revenue
and the salvage operations are tying up a lot of theavailable log hauling capacity. Removal volumes inoutlying years are unchanged.
Figure 22: Forecast Timber Sales Price
$100
$200
$300
$400
$500
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
$/mbf
TS Price FebTS Price Jun
Figure 23: Forecast Timber Removal Price
$150
$200
$250
$300
$350
$400
$450
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
$/mbf
TR Price FebTR Price Jun
Timber Sales Prices
The price results of monthly DNR timber salesare quite volatile (Figure 11). As discussed inthe stumpage price outlook, the DNR sales price(stumpage) forecast is informed by West Coast logand stumpage price estimates from a forest eco-nomics consulting firm. The sales price forecast forFY 21 are increased by $15/mbf due to consistently
high demand and auction prices. Sales prices infuture fiscal years are unchanged.
Timber Removal Prices
Timber removal prices are determined by salesprices, volumes, and harvest timing. They can bethought of as a moving average of previous tim-ber sales prices, weighted by the volume of auc-tioned timber removed in each time period. (Fig-ure 23).
The expected increase in FY 21 sales prices, ahigh average removal price for harvests to dateand an increase in the value of timber inventoryhave increased removal price expectations throughFY 24.
Figure 24: Forecast Timber Removal Value
0
50
100
150
200
250
300
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
$no
minal
Removals to DateSales Under ContractSales in FY 21Sales in FY 22Sales in FY 23Sales in FY 24Sales in FY 25
Timber Removal Revenue
Figure 24 shows projected annual timber removalrevenues, broken down by the fiscal year in whichthe timber was sold. Revenue estimates reflect allof the changes described above.
Forecast revenues for the 2019-21 biennium remainessentially unchanged at $348 million (+$0 mil-lion) and revenues for the 2021-23 biennium areincreased to $364 million (+$4 million).
Page 17 of 23 DNR Economic & Revenue Forecast
Timber Revenue DNR REVENUE FORECAST
Figure 25: Forecast Timber Removal Revenue
$100
$150
$200
$250
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Nom
inal
Revenue
($millions)
Timber Revenue FebTimber Revenue Jun
DNR Economic & Revenue Forecast Page 18 of 23
DNR REVENUE FORECAST Upland Lease Revenues
Upland Lease Revenues
Upland lease revenues are generated primarily fromleases and the sale of valuable materials other thantimber, on state trust lands (Figure 26).
Overall, upland lease revenues are increased mean-ingfully in FY 21 by $1.3 million due to higher-than-expected revenue from a number of differentsources. Communication lease revenue forecast isincreased again this forecast, this time by $0.6 mil-lion in FY 21. This is due to lease renewals thatrequired payment of back rent and increases in thebase rent, which has also increased the forecast inoutlying years. Other lease revenues are increasedby $0.3 million in all forecast years, due to in-creased revenue from the rights-of-way which hasbeen improving their processes to bring revenuecloser to market value.
Additionally, commercial rents are increased forFY 21 by $0.4 million. This is the amount thatseemed at risk of delayed payment this fiscal yeardue to the pandemic. However, businesses wereable to meet their payments on time, despite thepandemic.
Finally, mineral and hydrocarbon rents have re-mained higher than expected due to increasedquarry production.
These increases in revenue have offset a $0.2 mil-lion reduction in forecast irrigated agricultural rev-enue. It’s unclear what exactly has driven revenueto be lower than expected, though there were somebilling issues that may have caused it. This newforecast is based on current data, though it is possi-ble that this revenue source will end up being whatwas previously forecast.
Figure 26: Forecast Upland Lease Revenue
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Nom
inal
Revenue
($millions)
Commercial Feb Commercial Jun
Dryland Ag Grazing Feb Dryland Ag Grazing Jun
Irrigated Ag Feb Irrigated Ag Jun
Orchard Vineyard Feb Orchard Vineyard Jun
Other Leases Feb Other Leases Jun
Page 19 of 23 DNR Economic & Revenue Forecast
Aquatic Lands Revenues DNR REVENUE FORECAST
Aquatic Lands Revenues
Aquatic lands revenues are generated from leaseson aquatic lands and from sales of geoduck. Inthe past, on average, leases have accounted forone-third of the revenue and geoduck sales ac-counted for the remainder. However, prices forgeoduck have plummeted since the beginning ofFY 20, so we are now forecasting geoduck to makeup a bit over half of the aquatic lands revenue forFY 21.
The aquatic lease revenue forecast is decreased by$0.8 million in FY 21 due to continued very lowto-date revenue in non-water-dependent rents andslightly lower other revenue offsetting higher-than-expected revenue in aquaculture (Figure 27).
By late 2019, geoduck prices had already fallensubstantially because of the slowdown in Chineseeconomic growth and the impact of the tradewar. After the lockdown in China due to COVID-19, harvest of geoduck destined for China basi-cally stopped, leaving only about 10 percent of thenormal daily harvest—which is bound for otherinternational locations or for domestic consump-tion.
Demand from China recovered substantially bymid-2020. We had assumed that harvest volumeswould recover reasonably quickly to the roughly 95percent of sales volume that we typically see. How-ever, that was too optimistic and harvest volumeslagged for much longer. Our harvest volume as-sumptions are 85 percent of the sales volume forthe foreseeable future.
Prices held up much better than we had feared atthe outset of the pandemic. The April 2020 auc-tion offered indemnification for purchasers if theydid not harvest all of their contracted pounds—which led to a surprising $8.98/lb. average price(Figure 28). However, the June 2020 auction hadan average price of $8.46/lb. and, importantly, didnot offer a blanket indemnification. Prices for theJuly and September, 2020, auctions fell to $5.05/lb.and $6.11/lb., respectively. The December price re-bounded to $8.64/lb. — higher because this auc-tion harvest period covered Chinese New Year, typ-ically a period of very high demand. In January
2021, prices fell back to $6.82/lb. before fetchingalmost $10/lb. in the February auction. The mostrecent auctions, in April and the beginning of June,fetched $10.35/lb. and $9.54/lb, respectively.
Forecast geoduck revenue is increased in all years,due to prices falling in the $8-10/lb range for thelast several auctions (barring January). The consis-tency of these prices, combined with the fact thatthey have fallen in what is seasonally a lower pricedtime of the year, suggests that demand has indeedreturned from China. Our updated price forecastfalls in the $7-9/lb range, building in risk of priceshocks compared to recent prices.
At this point, we don’t expect to see prices returnto consistently being between $10-12/lb, or evenabove, though this is obviously still possible. Thetrade tensions with China don’t seem to be easing,and Chinese consumers are moving to other luxuryseafoods instead of geoduck.
It’s notable that the FY 22 geoduck forecast is muchhigher than the surrounding years. This is be-cause of the timing of some of the latter sales inFY 21, which will have their revenue come in inFY 22.
Figure 27: Aquatic Lands Revenues
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
20062007200820092010201120122013201420152016201720182019202020212022202320242025
Nom
inal
Revenue
($millions)
Aquatic Leases FebAquatic Leases JunGeoduck FebGeoduck Jun
There are, as always, potentially significant down-side risks to geoduck revenues, even in the nearterm and in addition to the pandemic, that are im-portant to consider but difficult to forecast:
DNR Economic & Revenue Forecast Page 20 of 23
DNR REVENUE FORECAST Aquatic Lands Revenues
• Harvests (and therefore revenues) could bedeferred or lost if geoduck beds are closeddue to occurrence of paralytic shellfish poi-son.
• Harvests are slowed or delayed due to injuryor death of divers.
• Early in 2021, heavy rains overwhelmedsewage treatment plants in the Puget Sound,spilling untreated sewage into the sound andclosing geoduck tracts for several weeks. Al-though program staff were able to offer alter-native harvest from different tracts, this typeof risk will continue as climate change growsmore severe.
• Furloughs at the Washington State Depart-ment of Health have delayed PSP and arsenicanalyses and have led to lost fishing days inthe past couple of months. It is unclear ifthese will continue or how disruptive theywill be.
• In light of recent Washington Departmentof Fish and Wildlife surveys of closed SouthPuget Sound geoduck tracts showing declin-ing recovery rates, and evidence of activepoaching, future commercial harvest levelsmay be further reduced.
Figure 28: Geoduck Auction Prices
$0.0
$4.0
$8.0
$12.0
$16.0
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
$/po
und
HistoricalJun ForecastUpper 1 SELower 1 SE
Page 21 of 23 DNR Economic & Revenue Forecast
Total Revenues from All Sources DNR REVENUE FORECAST
Total Revenues from All Sources
Forecast revenues for the 2019-21 Biennium (FYs20 and 21) are increased by $2.2 million to $484million, and revenues for the 2021-2023 bienniumare increased by $11 million to $510 million (Figure29).
Figure 29: Total Revenues
$150
$200
$250
$300
20062007200820092010201120122013201420152016201720182019202020212022202320242025
Nom
inal
Revenue
($millions)
Total FebTotal Jun
DNR Economic & Revenue Forecast Page 22 of 23
DNR REVENUE FORECAST Distribution of Revenues
Distribution of Revenues
The distribution of timber revenues by trust arebased on:
• The volumes and values of timber in the in-ventory (sales sold but not yet harvested) bytrust;
• The volumes of timber in planned sales forFY 21 by trust, and relative historical timberprices by DNR region by trust; and
• The volumes of timber by trust for FYs 22-25 based on output of the sustainable harvestmodel and relative historical timber prices byDNR region by trust.
Because a single timber sale can be worth morethan $3 million, dropping, adding, or delaying evenone sale can represent a significant shift in revenuesto a specific trust fund.
Distributions of upland and aquatic lease revenuesby trust are assumed to be proportional to historicdistributions unless otherwise specified.
Management Fee Deduction. The underlyingstatutory management fee deductions to DNR asauthorized by the Legislature are 25 percent or less,as determined by the Board of Natural Resources(Board), for both the Resources Management Cost
Account (RMCA) and the Forest Development Ac-count (FDA). In biennial budget bills, the Legisla-ture has authorized a deduction of up to 30 percentto RMCA since July 1, 2005. In 2015, they beganauthorizing an RMCA deduction of up to 31 per-cent.
At its April 2011 meeting, the Board adopted a res-olution to reduce the RMCA deduction from 30 to27 percent and the FDA deduction from 25 to 23percent. At its July 2011 meeting, the Board decidedto continue the deductions at 27 percent for RMCA(so long as this rate is authorized by the Legisla-ture) and at 23 percent for FDA. At its October2011 meeting, the Board approved a resolution toreduce the FDA deduction from 23 to 21 percent.The Board decided in July 2013 to raise the FDAdeduction to 25 percent and the RMCA deductionto 29 percent. In August 2015, the Board raised theRMCA deduction up to 31 percent for the 2015-2017biennium.
The Forecast uses the 31 percent deduction for theall forecast years. This assumes that the Legislaturewill continue to approve RMCA deductions of up to31 percent.
Given this background of official actions by theLegislature and the Board, the management fee de-ductions assumed in this Forecast are:
FY 21 FY 22 FY 23 FY 24 FY 25FDA 25 25 25 25 25RMCA 31 31 31 31 31
Page 23 of 23 DNR Economic & Revenue Forecast
