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!