Positioning Your Timber Assets to Maximize Value

The age old question is how do you maximize returns on your planted pine investment? The answer is simple, right? Well, if not simple it at least seemed fairly consistent for the past three decades as foresters in the Southeast perfected the strategy of growing planted pines for 25-40 years to produce quality saw logs that commanded a premium price when compared to chip-n-saw and pulpwood. We simply planted quality seedlings, thinned the stand between ages 12 and 15 to remove inferior and diseased trees, used prescribed fire on a 2 or 3 year rotation, thinned a second time to remove overcrowded trees and to identify the crop trees, and finally clear cut the stand when all the trees were saw-timber and the market was good. This tried and true approach has proven effective because it satisfied landowners’ cash flow needs and allowed landowners the opportunity to sell their crop as different products over time and at increasing per unit values. However, to effectively, comprehensively, and objectively analyze a current timber investment, we must address three key issues. First, how have timber markets changed over the last decade, with particular attention paid to the diminished premium for saw logs (both chip-n-saw and saw-timber) when compared to pulpwood. Second, we must analyze recent trends in reforestation and third, we must also forecast what the market will do over the next 20-40 years to effectively and proactively develop a strategy that maximizes return on investment and provides ample flexibility in case of additional fundamental changes in the market. In other words, are recent changes experienced in the market place short term, long term, or cyclical?
Let’s begin with a quick analysis of historical data provided by Timber Mart-South. By visiting the web page of Timber Mart-South and selecting the link “South-wide average prices,” anyone can view the price trends for all three major southern yellow pine product classes diagrammatically. The table below provides a summary of the information about per ton stumpage prices contained in the Timber Mart-South graph.

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The premium for saw logs over pulpwood has fallen from approximately $33.00 per ton ten years ago to about $14.00 per ton today (in this south-wide example). While these numbers alone should get your attention, let’s discuss these prices and the trend they indicate in the context of your planted pine investment. How does a higher value for pulpwood and lower value for saw-timber affect management strategy and individual management practices? The numbers reflected above require foresters and landowners to thoroughly assess the market on a fundamental level. This means running the necessary economic analyses of net present value (NPV), return on investment (ROI), and internal rate of return (IRR) to determine how to best manage your timber investment within the context of your personal goals and the LOCAL market conditions. The correct management decisions will absolutely vary based on local markets, landowner objectives, risk assessment, site productivity, etc. If your timberland is situated within close proximity to sawmills or plywood mills and per ton stumpage prices for these products are consistently higher than “average” due to the short hauling distance, then growing saw logs is likely still the optimal approach. On the contrary, if your timberland is situated within close proximity to pulp mills, biomass mills, or wood pellet mills and per ton stumpage prices for these small wood products are consistently higher than “average”, then shorter rotation ages with a single cutting for a single product may prove to be more lucrative. If you are lucky enough to have a clear option then maybe this discussion is a moot point for you. However, since rarely in life are options so clear and since only having one clear option is not necessarily a good situation to be in as a seller of any asset, it is quite advisable to broaden your marketing options by developing a management strategy that is based on the best estimate of future market place fundamentals while leaving open the option of manipulating your management strategy to position your asset for sale in the event of changes in the market place.
Here’s what we can at least forecast with some certainty. Nearly every forest economist today suggests that saw-timber markets in the Southeast will improve over the next decade due to a revitalized housing market, restricted and decreased supply of lumber from Canada, and increased demand from abroad, particularly China and other Asian economies. In addition, the future of pulpwood and “small wood” markets look bright as well. Emerging markets for products like pellets and biomass for fuel have increased competition for raw material within pulpwood or “small wood” markets. Also, many of the emerging Asian economies are in their infancy when it comes to consuming products that western economies have consumed for decades. So, both the small wood (pulpwood) and the large wood (saw-timber) markets have a good future. What does that mean? Again, the foremost “demand side” question is, “at what rate each market will improve from today’s position.” The foremost “supply side” question is, “what supply of raw material will be in the market place over time?” While this improving forecast places growers and producers in an attractive position moving forward, we must not get complacent and be satisfied that “getting better” is as good as we can do. The timber industry is a global business these days and changes in supply and demand or in consumer habits thousands of miles away affect the wood basket here in the Southeast. We must be adaptive and understand that management strategies about the next thinning, the next herbicide application or burn, the next rotation, or the future market, must be adaptive and properly analyzed to maximize returns on the investment as a whole.
The tables below are a sample of the ingredients of the “saw-timber” and the “pulpwood” investment strategies. I have not actually calculated any of the investment returns because to do so might lead you to think that “the answer in this example” is the best answer for all situations. It clearly is not, and in this comparative I do not include income from pine straw raking or hunting leases, nor do I include expenses for ad valorem taxes, severance taxes, income taxes, fertilization, and herbicide application(s). All of those are logical expenses that may be deemed necessary or beneficial, but each must be separately analyzed to determine their effect on the overall return in each scenario.

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Again, the examples are used only to show the differences in cash flow expectations in two general strategies of forest management. Neither is right and neither is wrong, and certainly both can be subtly manipulated to match the market conditions that exist wherever your property is located.
We all hope our crops will come to market when all the stars align. Sometimes the stars have a better chance of aligning when you help steer the boat, so as you plan for your next crop of trees or manage the crop you presently own, think about the end goal and how each step in the process affects the end goal. Growing timber can be very financially rewarding, and remember you can actually have an effect on the ultimate outcome of your investment. Take time to analyze what you do, and seek the help of a professional forester to assist you with the analysis. You won’t be sorry.