The human toll associated with hurricanes usually overshadows the impact these storms have on the forests of the region. But their effects have not been lost on SRS researchers Jeffrey Prestemon and Thomas Holmes, who have developed an economic model that describes the effects of such catastrophes on the region’s forest resources and the market environment in which timber producers and consumers operate.

From Hugo, A New Perspective

To understand how timber markets respond to meteorological catastrophes, Holmes and Prestemon, both research foresters with the SRS Forest Economics and Policy unit, went back to study the aftermath of Hurricane Hugo, which made landfall near Charleston, SC, in 1989 and affected forests from the coast all the way up to the mountains of western North Carolina. Hugo damaged some 1.3 billion cubic feet of hardwood and softwood timber worth an estimated $630 million in 2005 dollars.

“What we find is that there is almost always a price depression immediately after a major event like a hurricane, because people are salvaging timber,” says Prestemon. “While this depression had been familiar to market analysts and landowners, what we found—which was new—in looking at Hugo was that the forest losses that occur can actually lead the market to settle at a higher equilibrium price after the depression dissipates. Higher prices can persist over several years.”

The pair’s research indicates a three-stage pattern. Immediately after the catastrophe, local prices for logs and pulpwood go down as damaged timber is salvaged and enters the market, offering a surplus of timber. Then, as the salvaged wood clears the market, prices rebound, typically going higher than prestorm prices. The price rebound slowly subsides as timber inventories are replenished by the regeneration and growth of forests. The model assumes that salvaged timber clears the market in a year and that the best quality of salvage hits the market early in that year.

Prestemon and Holmes found that, during the price-drop phase, the market value of timber, both pulpwood and sawtimber, fell an average of 30 percent. The price during the rebound phase could exceed prestorm prices by 10 to 30 percent.

The model indicated that, absent other economic forces and catastrophic events, timber markets would return to pre-Hugo levels in a little less than 25 years. The rate of return to prestorm prices can be as short as a decade for pulpwood and for softwoods, which regrow more quickly, while the effect of the storm may take more than two decades to dissipate for larger diameter timber products and slow-growing hardwoods.

Weathering the Economic Aftermath

For owners of forested lands damaged by storms, Prestemon and Holmes suggest harvesting damaged wood—especially the sawtimber—as soon as possible, before factors like humidity and air temperature can bring on wood decay. For owners whose timberlands have escaped storm damage, they suggest postponing harvest until the damaged timber has cleared the market and the rebound has started.

“Consumer well-being increases briefly after a hurricane because of lower prices and greater quantity consumed,” says Prestemon. “But consumers are harmed over the long term, and damaged producers lose in the long term. While there are shortterm losses for timber producers not affected by the storm, this group can ultimately gain over longer periods because of the persistently higher prices they may receive.”

“Consumer well-being increases briefly after a hurricane because of lower prices and greater quantity consumed,” says Prestemon. “But consumers are harmed over the long term, and damaged producers lose in the long term. While there are shortterm losses for timber producers not affected by the storm, this group can ultimately gain over longer periods because of the persistently higher prices they may receive.”

The Hugo study did not examine storm impacts in terms of the size of timber holdings, but owners of large forest tracts can minimize their financial risks by diversifying the locations of their lands across the Southeast. Prestemon and Holmes suggest that owners holding properties farther from the Atlantic and Gulf Coasts may suffer less damage, and owners of softwood timber may face greater economic risks than owners of hardwood timber, though these suppositions will need further research for confirmation.

Property owners at risk of damage from hurricanes should consider having the value of their timber assessed periodically so that credible casualty losses can be estimated after catastrophic events, the study concludes.

The methodology used in the Hugo study originated in research Holmes conducted on damages from the southern pine beetle. “In evaluating large-scale catastrophic damages, the methodology up to that point was inadequate,” he said. “I realized that we had better economic tools available to measure impacts.”

Impacts of hurricanes prove to be distinctly local. Because timber is expensive to move very far, most of the mills and other first-level consumers are located close to the forests where it is cut, and there’s not a lot of impact in adjacent market areas.

“The timber mills are the first-level consumers,” Holmes says. “We really don’t know how far up the chain the price impacts go, whether they actually reach the final consumers. We don’t know much about market adjustments made above the mill level.”

The study of the timber market after Hugo marks the first time that economists have tackled the economic dynamics of a hurricane.

“No one had ever thought of looking for this phenomenon,” Prestemon said. “We suspected it, but this is the first time it was found.”

For more information:
Thomas Holmes at 919–549–4031 or
tholmes@fs.fed.us
Jeffrey Prestemon at 919–549–4033 or
jprestemon@fs.fed.us

 

 

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