VARDAMAN VIRTUAL FORESTRY COMPANY

The Most Direct Link to Knowledge Workers in the Southeast Forest Economy

THE VARDAMAN 10% RETURN NETWORK

Late last year Jim Vardaman drove 5,000 miles from Texas to Georgia to Maryland for face-to-face interviews of JMV&CO clients with a serious interest in growing trees to make money. He wanted to learn why they had begun to convert their natural stands to high-technology pine plantations and what additional services they desired from us.

As you can imagine, their individual responses were unique, but there were several common themes. The consensus might be expressed in these words, "The information in your newsletters and seminars made sense to me in the beginning, matched much of what I observed on our land, and gradually built up my confidence to try something new. I wanted a better return for me and a well-managed asset for my heirs. I must have superb execution of my orders and knew you had a forester near my land. I still worry about the risks in getting the new stand established after a clearcut and would like more reassurance about this. I also want periodic reports on the values I'm building up in these little trees, and I hope you'll keep me posted on new scientific developments."

To respond to these wishes, we have established the Vardaman 10% Return Network (V10NET). Membership is limited to clients who have used us to prepare and execute formal management plans involving the conversion of natural stands to high-technology plantations, to the scientists who regularly advise us, and to the regeneration contractors who regularly work with us. There are no dues, no formal organization; V10NET is as informal as a typical computer network of persons with similar interests.

There are other benefits. To furnish basic information about the business of growing trees, we give to each member a copy of "How To Make Money Growing Trees" by James M. Vardaman (John Wiley & Sons, New York); we report new developments with a free subscription to the Green Sheet, our quarterly newsletter, and periodic JMV&CO publications that are not part of either of the foregoing. We have also developed a new system for evaluating pine plantations at a modest cost for each evaluation; the system is explained at length in the Green Sheet of 15 January 1996. Finally, we have explained below how we execute regeneration contracts and described our unique method of guaranteeing delivery of an investment with the desired potential.

JMV&CO does not guarantee that the owner will earn 10% above inflation from his plantation; whether he will achieve this goal depends primarily upon the events of the 20 years following establishment. JMV&CO does not guarantee survival of a certain number of trees at the end of the first growing season; the survival percentage by itself is not the true measure of productivity, for some trees could be living but overtopped or under such severe intra-species competition that adequate growth is impossible.

JMV&CO guarantees that it will deliver at the end of the first growing season a plantation that, under current conditions, is predicted by PTAEDA2V+ECONV to produce an annual, compound return of at least 10% above inflation for the first rotation. (PTAEDA2V is the timber growth-and-yield model developed by Dr. Harold Burkhart at Virginia Tech and his cooperators; ECONV is the economic analysis model developed by JMV&CO from its timber-sale and plantation operations.) We have explained the nature of the guarantee and the penalties for failure to meet it below.

The PTAEDA2V inputs for analyzing this plantation are as follows:

Cash flows from the thinning and harvest of this crop are as follows:

	Evaluation of Thinning			Evaluation of Harvest
DBH Class	CORDS	UNIT $ VALUE	TOTAL $ VALUE	MBF / Cords	UNIT $ VALUE	TOTAL $ VALUE
5	.505	15.00	7.57	.0000	20.00	.00
6	1.349	20.00	26.97	.0000	25.00	.00
7	.906	25.00	22.66	.0000	30.00	.00
8	.906	30.00	27.18	.7563	35.00	26.47
9	.770	35.00	26.94	3.9113	40.00	156.45
10	.388	35.00	13.58	3.2236	300.00	967.09
11	.766	35.00	26.82	4.0733	315.00	1283.08
12				2.9052	330.00	958.73
13				2.6107	345.00	900.71
14				2.4110	360.00	867.97
15				1.2365	360.00	445.15
Gross Thinning =			$ 151.72	Gross Harvest =		5605.65
Less 25% selling fee -			37.93	Less 4.5% selling fee -		252.25
Net Thinning =			113.79	Net Harvest =		5353.4

The ultimate test of an investment is the internal rate of return (IRR) on the capital in it. To calculate IRR, we ask the owner to set the estimated market value of his land if all trees are removed and to give us the amount of his annual expenses. With these amounts, our assumptions are as follows:

Market value of cutover timberland ..= $ 250.00/A.

One time planting costs .............=.. 281.35/A.

Annual property tax .................=.... 2.78/A.

Cash flows from thinning and harvest as shown above

No real change in timber prices over the period, but prices will change in proportion to inflation

By combining all data, we obtain the following schedule of cash flows, including sale of the land in year 21:

Year	$ Net Cash Flow		Year	$ Net Cash Flow
0	-531.35		11	-2.78
1	-2.78		12	-2.78
2	-2.78		13	-2.78
3	-2.78		14	-2.78
4	-2.78		15	-2.78
5	-2.78		16	-2.78
6	-2.78		17	-2.78
7	-2.78		18	-2.78
8	-2.78		19	-2.78
9	-2.78		20	5,350.62
10	-2.78		21	247.22

As you will see below, this schedule of cash flows is all-important in evaluating the plantation at the end of the first growing season.

The first step is to count the number of living seedlings under various growing conditions at enough points to show a true picture. We run parallel lines five chains (330 feet) apart and tally number and condition of seedlings on 1/20th-acre plots spaced five chains apart along the lines. So that our work can be checked by others, we mark the center of each plot and each seedling on it with plastic flagging. We make a separate tally of seedlings on each plot according to these categories: 1) free to grow, 2) overtopped or with intense competition from hardwoods, and 3) with intense competition from volunteer pines. Then we use PTAEDA2V to analyze the area in each category and predict IRR for it.

If all seedlings on 10% of the total area die during the first summer, but all others survive, only 90% of the area will be growing timber. Therefore, cash flow from the thinning will be $113.79 times .9 = $102.41 minus $2.78 = $99.63 and from the harvest will be $5,353.40 times .9 = $4,818.06 minus $2.78 = $4,815.28, and all other cash flows will remain the same. IRR for this schedule is 12.00%, so JMV&CO has met its guarantee.

If all those on 20% of the area die, the calculation is: $113.79 times .8 = $91.03 minus $2.78 = $88.25 and $5,353.40 times .8 = $4,282.72 minus $2.78 = $4,279.94. IRR for the schedule is 11.35%, so JMV&CO has met its guarantee. Similarly if 30% die, $113.79 times .7 = $79.65 minus $2.78 = $76.87, and $5,353.40 times .7 = $3,747.38 minus $2.78 = $3,744.60. IRR for the schedule is 10.62%, so JMV&CO has met its guarantee.

On the other hand, if 40% die, $113.79 times .6 = $68.27 minus $2.78, and $5,353.40 times .6 = $3,212.04 minus $2.78 = $3,209.26. IRR for the schedule is only 9.79%, so JMV&CO has not met its guarantee. The simplest way to settle the account is to reduce the owner's initial investment by an appropriate amount so that the revised cash flow schedule will yield 10.0%. The net present value (NPV) of these cash flows at a discount rate of 10.0% is $511.16. The owner's initial investment as shown above was $531.50, so JMV&CO must reduce this by $20.19. Since one year has now passed and the guaranteed rate was 10.0% plus inflation (let's assume 2.5%), JMV&CO's actual payment will be $20.19 times 1.125 = $22.71.

When only a percentage of the seedlings die, when site-preparation was less than perfect, or when intense competition from volunteer pines developed, we make new computer runs with PTAEDA2V for each condition to determine the volumes and values of thinnings and harvests. We substitute these values in the cash-flow schedules and calculate the IRR, and cash refund if needed, as above. We will be happy to demonstrate this process to you, so that you can see that, with a computer, it is not as complicated as it seems.

The tract used in the demonstration is extremely productive and is located in an outstanding timber market, so the treatments produced a very high IRR. We were delighted with such an initial IRR for it greatly reduced our risk. Under more common conditions, the spread between the initial IRR and the guaranteed 10% is much narrower.

If you are desire to become a member of V10NET, please call us at 800+455-4568, or send the enclosed reply card. If you will furnish a map or legal description of your tract, our forester will make a free-of-charge, no-obligation reconnaissance of it to determine its condition and what we need to analyze it. His report will describe in some detail what we will do next and what we will charge for doing it.

In many parts of the South, site index for loblolly pines and market prices for timber products are so low that earning 10% from timber growth is impossible no matter what cultural treatments you employ. If you ask us to analyze your tract and we have enough advance knowledge to know that 10% is impossible, we'll tell you immediately and suggest that you save the money that you would have paid us.