Biden’s policy priorities bode well for U.S. timberland investing

Key takeaways

  • Tailwinds for the U.S. timberland sector may gain momentum from policy initiatives backed by the Biden administration.
  • A shift in federal housing policy could broaden and ease the availability of mortgages, particularly to lower-income segments of the market.
  • We believe increased flexibility in immigration policy and, by extension, an increased supply of labor should help facilitate the growth of the timber sector.
  • Reentry into the Paris Agreement is another plus, supporting new investment interest in timberland motivated by a more explicit valuation of the carbon-capturing capabilities of forests.

The U.S. forest product sector and timber demand entered 2021 with strong forward momentum. Housing starts were at the highest level in 19 years, softwood lumber prices reached all-time highs, and prices for softwood sawlogs were trending higher. The tailwinds for the timber sector that were developing in much of 2020 should gain some added support from policy initiatives that the Biden administration is considering to support the economy and the job market. U.S. Treasury Secretary Janet Yellen’s accommodative monetary policy, coupled with aggressive fiscal stimulus, should be a major boost to residential construction activity in 2021. Forest product manufacturers should also benefit from an expected easing of restrictions on immigration by the Biden administration. In addition, the role of timberland as a natural climate solution should be increasingly recognized and valued with action on climate change occupying a top spot on the Biden agenda.

Housing

U.S. forest product and timber markets proved resilient in 2020, due to robust residential construction activity for both new home construction and repair and remodeling of existing homes. For the year 2020, U.S. housing starts totaled 1.4 million units, an 8% increase over 2019. In addition, the mix of new home construction shifted to single-family homes, with the share of them jumping from 69% in 2019 to 72% in 2020.¹ Single-family construction uses more wood products than multifamily construction, in light of the dominant single-family construction system, which emphasizes wood rather than concrete and steel.

U.S. housing starts began 2021 strong

U.S. housing starts (seasonally adjusted annual rate, millions). This chart shows that 2020 U.S. housing starts were up 8% over 2019.

Source: U.S. Bureau of Labor, January 24, 2021.

The strong construction activity of 2020 translated into a surge in softwood lumber and wood panel prices and a corresponding lift in timber prices. The Random Lengths softwood lumber composite reached a high of $947 per thousand board feet (MBF), on average, during the month of September, 165% above 2019 levels.² The impact of the robust wood product markets on timber values was the most pronounced in the U.S. West Coast, which is characterized by a tight demand/supply balance for timber, and by the final quarter of 2020, timber values were gaining forward momentum across the United States.

U.S. prices for solid wood reach record levels, and Western log prices follow

Lumber and timber prices
This chart shows that the Random Lengths softwood lumber composite reached a high of $947 per thousand board feet (MBF), on average, during the month of September, 165% above 2019 levels.

Source: Fastmarkets RISI, January 28, 2021. MBF refers to thousand board feet.

Mortgage rates are currently near historical lows, and the U.S. Federal Reserve has signaled that it intends to maintain rates at low levels in 2021 even in the face of temporary flare-ups in inflation. This accommodative monetary policy has resulted in extremely favorable credit availability for new home buyers, and these conditions are likely to hold steady in 2021.

Addressing mortgage equity may increase credit availability

 Quarterly Housing Credit Availability Index (HCAI) Q1 2000–Q3 2020 (%). This chart shows that credit availability has tightened as of the 3rd quarter of 2020—with the Housing Credit Availability Index (HCAI) reaching a historic low.

Source: Housing Finance Policy Center, January 28, 2021.

The Biden administration's $1.9 trillion COVID-19 stimulus package can be meaningful, quickly following the $0.9 trillion stimulus package passed in December 2020. As a result of the 2020 federal stimulus programs and curtailed consumption during the pandemic, the U.S. savings rate surged. Preliminary data for 2020 shows total savings for 2020 was $1.6 trillion higher than in 2019, providing the financial wherewithal to home buyers in the coming year.³

Increased federal support for the rapid deployment of the COVID-19 vaccination should bolster the economic recovery and help push the unemployment rate lower. The combination of continuing low interest rates, stronger job markets, and healthy household savings should boost consumer confidence and provide a strong foundation for robust demand for housing and construction activity in 2021.

An additional boost to housing markets may develop from the Biden administration’s executive order directing the Department of Housing and Urban Development to take steps necessary to redress racially discriminatory federal housing policies, in particular addressing mortgage discrimination.⁴

Credit availability has tightened as of the third quarter of 2020, with the Housing Credit Availability Index (HCAI) reaching a historic low. The HCAI tracks the percentage of owner-occupied home purchase loans that are likely to default. An HCAI moving lower indicates that lenders are less willing to tolerate defaults and are imposing tighter lending standards. A shift in federal housing policy could broaden and ease the availability of mortgages, particularly to lower-income segments of the market.

Immigration and climate change policy

In addition to the support for housing resulting from the Biden administration’s agenda, the timber sector should also benefit from the administration's move to more accommodation on immigration issues and its strong commitment to addressing global climate change. We believe an eased stand on immigration compared with the Trump years improves the outlook for availability of labor. In recent years, labor availability in both the construction sector and in moving timber out of the forest and into mills has been challenging. As the economy recovers from the pandemic and unemployment rates head lower, increased flexibility in the labor supply should help facilitate the timber sector's growth.

Many corporations and other organizations are already formulating goals to achieve net-zero, or even net-negative, emissions by 2050. The Biden administration’s efforts to tackle climate change bode especially well for the timberland asset class, underscoring the importance of trees, based on their ability to sequester carbon, as an option for businesses and other organizations to meet their carbon reduction targets.

The Biden administration’s creation of a Climate Envoy—former U.S. Secretary of State John Kerry—marks the first time the National Security Council will include an official dedicated to climate change. President Biden’s choice of former Michigan Governor Jennifer Granholm, a strong advocate for zero-emission policy initiatives, to head the Department of Energy and the immediate reentry into the Paris Agreement are further strong positives for timberland, suggesting the development of new investment interest in timberland motivated by a more explicit valuation of the carbon-capturing capabilities of forests.

 

 

 

 

 

 

U.S. Bureau of Labor, January 24, 2021. 2 Fastmarkets RISI, January 28, 2021. 3 wsj.com/articles/the-risks-of-too-much-stimulus-11612307861, February 2, 2021. politico.com/news/2021/01/26/biden-executive-orders-racial-equity-462663, January 26, 2021.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowed to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional.

Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

532634

Thomas G. Sarno

Thomas G. Sarno, 

Global Head of Timberland Investments

Manulife Investment Management

Read bio
Keith A. Balter

Keith A. Balter, 

Senior Advisor, Strategic Initiatives, Timberland and Agriculture

Manulife Investment Management

Read bio
Mary Ellen Aronow

Mary Ellen Aronow, 

Director of Forest Economics, Timberland

Manulife Investment Management

Read bio