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Commentary

The threat from the mountain pine beetle

14 Aug 2011 by Jim Fickett.

British Columbia has lost about half its commercial pine to the mountain pine beetle and, though the infestation peaked in 2004, the total loss will still rise to 60%. The epidemic is not as far along in the US, with the total losses per year still rising strongly from 2008 to 2009 (the last year with complete data), and perhaps peaking this year. Total losses in 2009 were about 2.5% of the American west's forest land, so the west as a whole is not suffering as badly as British Columbia. However some areas are worse hit than others and, for example, Idaho lost about 9% of total forest in each of 2008 and 2009. Strangely, some US timber companies have nothing to say about how they are dealing with the threat.

I am interested in finding a timberland investment (and still searching). I find it odd that, on the one hand, there are terrible headlines about a projected 60% of all commercial pines in British Columbia being killed by the mountain pine beetle, and more headlines about the beetle spreading in the US but, on the other hand, I've read a number of annual reports from companies with a presence in the western US, and have seen no serious discussion of the beetle's impact. Is it really the case that large fractions of the lumber industry in Canada are being shut down, probably for decades, but there is no significant commercial harm in the US? The best industry report I found when doing the general piece on forest products a few months ago warns,

The level of long-term risk in timberland has been under-acknowledged. While the standard measures of return volatility indicate relatively low risk, timber rotations transcend business cycles, exposing timberland to longer term risk. The Mountain Pine Beetle is a case in point.

It is clear from public documents that

  • the mountain pine beetle epidemic is still spreading, and consuming millions of acres per year of forest
  • the total fraction of the forest disappearing is relatively small, but in some areas of high concentration a large fraction of the trees are being killed

The best overview comes from the Forest Health Protection division of the Forest Service. From the 2010 report, with data from 2009, here is a graph of the number of acres killed per year in the American west by the mountain pine beetle (click for larger image):

The amount killed in 2009 was about 9 million acres. To put that in perspective, there are about 750 million acres of forest in the US, and about 363 million acres of forest in the western US. So in 2009 about 2.5% of the west's forest were killed by the mountain pine beetle. The west as a whole, then, has a problem which, though severe, is much less severe than that of British Columbia, where about 50% of the commercial pine is already dead.

However the problem is not evenly spread. Here is the breakdown for 2009 by state:

Idaho is the second-worst hit and, as it happens, one of the companies I'm researching, Potlatch, has more than half of its total holdings in Idaho. So it is interesting to look in a little more detail at Idaho.

The Forest Health Monitoring program of the Forest Service has regional reports, and the one for the interior west says that 1.9 million acres of forest in Idaho were killed by the beetle in each of 2009 and 2010. There are about 22 million acres total of forest in Idaho, so Idaho is currently losing about 9% of its forest per year. Considering that these infestations last many years, that is a very serious loss rate. The Idaho Department of Lands says,

Stakeholders [in a broad assessment of risks to forestlands] noted that the Mountain Pine Bark Beetle (MPB) is the most serious pest problem in Idaho. For this reason, MPB was considered equal in importance to the combination of all other forest health sub-issues.

Although the epidemic may have crested, it is at least possible that the eventual damage for Idaho could be on the same scale as for British Columbia.

What about Potlatch, in particular, as one example of a company that does not say anything of substance about the pine beetle on its website, in its SEC filings, or in presentations? Here is a rough map of Potlatch's holdings in Idaho:

Compare that first with data from aerial surveys of damage in Idaho as of 2010:

The copper color shows damage from the mountain pine beetle, and the overlap with Potlatch lands seems slight.

But now look at the Idaho Department of Land's map of risk of future damage from the pine beetle:

There is a large overlap between the red areas of high risk and the apparent location of Potlatch lands. One can't deduce how many acres Potlatch is likely to lose from these maps, but it certainly seems plain the there is a risk worth discussing. In general, I think that one should be suspicious if a timber company has nothing to say about how they are protecting themselves from the beetle.