Making Cent$

We all know that pine trees have value. That’s generally why we grow them – to cut and transform into lumber, paper, utility poles, plywood, boxes, and a myriad of other useful products that make our daily lives what they are. We also know that mature trees can be measured, the volume can be estimated (timber cruise), and a merchantable value placed on them. But what about the trees that aren’t big enough to cut yet?

Over the years, I have often heard landowners and others comment that young trees aren’t worth anything because they are too small to harvest. But actually, nothing could be further from the truth. Young trees are referred to as “pre-merchantable” and they do indeed have value. That value generally increases as the trees age, until one day…. Voila! They are now merchantable. In actuality, there is often a “gray area” of time when the trees are not quite big enough or maybe they are just big enough….. depending on who is making that determination. During this “gray area” of time, trees can often be placed into either the merchantable or the pre-merchantable category.

Foresters who are experienced in timber appraisals have ways to calculate the value of these young pines. These methods often utilize growth and yield models to estimate what volume of timber a stand of trees will produce at a given age. The models take into account the age, species, and stocking of the trees, as well as the site index. The site index is a measure of the productivity of the site, or site quality, for that species and is based on actual measurements taken in broad studies over time. The site quality is generally a function of the height of the trees, while the diameter is generally a function of the stocking. In other words, good soil produces tall trees faster than poorer soil.

Now, back to the growth and yield model: The forester can use these models to fairly accurately project the volume of timber that will be produced by a site at some time in the future. Using those estimated volumes, a value is generated from those volumes based on the appraiser’s knowledge and research of prices for the geographic area. This establishes what is known as the future value. Typically, the future value is then discounted back to the present using a discount rate (interest rate) that reflects the risk and illiquidity involved. In most cases, it will also reflect the desired rate of return of a prospective buyer/investor. This discounted future value results in what is known as the present value.

What the pre-merchantable value really says is, “What would a prudent investor pay for these pines that aren’t ready to cut yet if he/she expects to get a certain rate of return on their investment?” The real litmus test is often whether or not that value seems reasonable. In other words, would someone really pay that for these pines? Although timber is generally a relatively good, safe long term investment, it is not without its risks. Those risks can come in the form of fire, insects, disease, extreme weather (tornado, hurricane, ice storms, volcano eruptions, etc.), political decisions, and uncertain markets. The appraiser must factor in these risks for a particular tract using a higher or lower discount rate. A higher rate lowers the present value (more risk) while a lower rate increases the value (less risk).

So, you see, those young pines aren’t “worthless” after all, and in fact can carry substantial value. That value is generally well recognized in the forestry arena, but is often underestimated by buyers and sellers of property. Keep that in mind next time you look at your young pine stands, and remember, they are increasing in value every day!

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.

[table id=1 /]

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.

 [table id=2 /]                [table id=3 /]

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.

Your Forest Management Plan: The Road Map to Success

Imagine going on an extended trip without looking at a map or plugging in to your GPS device. There will almost certainly be some detours, backtracking, and dead ends along the way. In all likelihood, you would eventually get to your destination, but wouldn’t the trip have been a lot more efficient if you had planned your route? A written Forest Management Plan is the equivalent of your “Road Map to Success” in arriving at your destination in the most efficient way. Having a written plan can be your road map to success in managing your forest.

In the case of your plan, the “destination” is your management objective(s). Your primary objective might be maximizing timber revenues. Or it could be optimizing wildlife habitat in general or for a specific wildlife species. Maybe soil and water conservation, aesthetics, or outdoor recreation is your primary focus. Many landowners want to incorporate some elements of all of these into their management plan, but the primary objective should be the one that’s driving the bus. Whatever your objectives, your natural resources professional will have to know what those are in order to prepare a plan that works for you. Otherwise, you will have a road map that takes you to the wrong destination.

A good Forest Management Plan will not only describe the property in detail and address your objectives, but will have many other components. Those components will include various maps (location, topographical, soils, timber type), stand specific recommendations, and a proposed timetable for implementation. The plan should not only tell you the what but should also tell give you the why, when, and how so that you can understand and implement the recommendations. Although the plan should be your “fingerprint” which is unique to you, any good natural resource professional should be able to pick it up, read it, and be able to efficiently implement the plan.

In addition to helping you reach your objectives, your management plan also provides other benefits. It consolidates your information in one place so that you don’t have to go looking for it. The plan also reinforces your agricultural status in most states, and it can make you eligible for entry into the Tree Farm system, which will allow your property to be “certified” under Tree Farm’s umbrella certification. The plan may also be desired or required for certain cost share programs.

You should keep in mind that a written management plan should be a flexible tool, not one that is rigid and unbending. It should be consulted on a regular basis and revised to reflect changes in the weather, markets, financial needs, and objectives. Sit down at least once a year with your natural resources professional to review the plan and make needed adjustments. If you are taking an extended trip, don’t you make changes in your route or schedule along the way due to factors such as road construction, traffic, weather, or desired side trips?

At Southern Forestry Consultants, we do much of our written management plan work in the hot summer months. The mostly indoor work fits in well with 95 degree heat and humidity! The summer also comes after our most hectic seasons: tree planting and prescribed burning. During the summer, we don’t take our foot off the gas, but at least we don’t have the pedal on the floor! It’s a good time for us to spend time with you reviewing your plans and objectives. If your current Forest Management Plan was written using stone and chisel, or if you don’t have a plan at all, contact your SFC forester or biologist to get started preparing your “Road Map to Success.”