THIRD QUARTER 2008

Instability in the housing market during the third quarter continued to negatively impact pricing in the forest products industry, as log prices in the Pacific Northwest and the Northeast declined during the quarter, albeit, less than in the first half of the year.  The key exception to this trend was Southeastern sawtimber prices, which stabilized due to tight supplies at mills and logging shortages arising from hurricanes during September.¹  Despite weakness in the forest products industry, the NCREIF Timberland Index returned +1% in the second quarter, as transaction activity reflected strong values for timberland holdings.²  The infestation by the pine beetle of timberlands in Canada continues to put pressure on the U.S. market, as Canadian timber growers seek to harvest as much timber as possible before destruction by the pine beetle renders the timber unmarketable. 

Reflecting an ongoing disconnect between pricing in the forest products industry and the timberland markets, pricing for timberland acquisitions remained strong during the third quarter.  The most notable transaction was a $780 million deal between Plum Creek (a publicly traded timber REIT) and the Campbell Group for 450,000 acres of timberland in the U.S. South.³  In the Pacific Northwest, Green Diamond Resource Company was in the market with a 114,000 acre property in Coastal Oregon, which was expected to sell for over $300 million.  Large timberland packages are coming to market on an ongoing basis, which could drive prices lower in the coming months, as the impact of the credit crisis begins to impact valuations due to higher financing costs.  Additionally, Rayonier New Zealand announced that it plans to sell its 40% stake in a 340,000 acre timberland property in New Zealand in early 2009.⁴  Few sales by integrated paper and forest products companies are expected during the coming months, as Weyerhaeuser is the last remaining major paper and forest products company with significant timberland holdings and has given no indications that it plans to sell.