VARDAMAN VIRTUAL FORESTRY COMPANY

WHAT'S AN INVESTOR TO DO WHEN THE PINE SAWLOG STUMPAGE MARKET GOES WILD?

Ever since mid-1992, the pine sawlog stumpage market has turned up like a rocket. Each sale seems to bring a higher price than the one several days earlier, sometimes higher by more than 10%. Prices in many of our operating areas are now well over $300/MBF(Doyle), a level not often reached even in the strong markets of 1979.

What's going on? Although we know that trees won't grow to the sky, will their prices rise through the ceiling? This question is bound to trouble an investor who owns large volumes of sawtimber, but remembers when per-ounce prices were $800 for gold and $50 for silver and when oil prices were forecast by some to reach $100/barrel. Is the present market a temporary and delightful phenomenon for sellers, or have prices risen to a new and permanent plateau? What's the JMV&CO forecast?

There is none. JMV&CO always follows the advice supposedly given by Mark. Twain, "Never prophesy, especially about the future, but attempt to do all the right things as you go along. "In our opinion, one "right thing" for sure for all landowners is to get a copy of "The Long-Term Adequacy of World Timber Supply" by Roger A. Sedjo, senior fellow in the Energy and Natural Resources Division at Resources for the Future (RFF), and Kenneth S. Lyon, professor of economics at Utah State University. Current price is $30.00. Phone number for RFF's distributor is 410+516-6955; fax number is 410+516-6998; Visa and Master cards can be used.

We interviewed Dr. Sedjo in our last issue, but naturally we couldn't cover a 230-page book in one short article. If the future prices of timber are important to you, you'll find the entire book interesting and valuable. It contains extensive documentation to support the opinions in his interview and other facts that might surprise you. The following quote illustrates one of them.

"The decision about whether to make investments in regeneration can now be expanded to include the decision about where and when those investments might be made. Plantation forest investments now can be and often are made in regions and areas that were not previously important industrial wood producers... Eucalyptus market pulp now accounts for 12 percent of the world's market of bleached kraft pulp, up from 4 percent only eight years ago. Major sources of his pulp include Spain, Portugal, and Brazil. None of these countries was a supplier until recent years, and in none of these countries is eucalyptus an indigenous species."

Be sure to study Chapter 6, "The Role of Technological change." Readers of the Green Sheet will not be surprised to how powerful this change can be, and by remembering our many articles about the need to alter growth-and-yield models to take technological change into consideration, they will realize that Sedjo and Lyon were on the right tract to incorporate technological change into their Timber Supply Model (TSM). No other model-developers did so. The following quote gives one illustration of its impact.

"The increase in the United States in the use of hardwood for pulp production from 14 percent of total wood input in 1950 to 38 percent in 1986 demonstrates the long-term trend toward the substitution of short-fiber hardwood for traditional long-fiber conifer (USDA, Forest Service, 1988, p.15)....A similar phenomenon is occurring with solidwood, where new technology is allowing previously inferior and uneconomic roundwood to be substituted for the higher-quality sawtimber resource in the production of solidwood products. One of the outstanding examples of this phenomenon is the development of waferboard and oriented strand board (OSB), which have utilized the 'low-quality' wood. The lower price of this product and its wood inputs places a cap on the prices of plywood and on hardboard manufactured from eucalyptus chips in Brazil was announced for Gulfport, Mississippi on 29 January 1993.)

Getting and reading the book is a "right thing" for everyone, but Sedjo and Lyon make it clear that prophesies of the future are always risky and that there is nothing certain about forecast made by their TSM. Consequently, other "right things" for each person are up to him; we can't tell you and you can't tell us what to do. All JMV&CO can do, therefore, is to tell you what we as managers have decided to do on the one tract of timberland that we own with several partners.

Right thing 1. We believe that the current market conditions are temporary, so we are liquidating our sawtimber stands, which are growing at less that 6% annually. Because of the low growth rate, the land is producing us nothing except the ability to speculate in timber prices, so we will release it for more productive use.

Right thing 2. We will regenerate the cutovers with thoroughly-modern plantations that will greatly increase earning power of the land. If timber prices continue to rise for only a few years, we will compensate for failure to capture the highest price by extra earnings on the land. If prices continue to rise for 12 or so years, the Leland Speed Plantation demonstrates that we will have another crop to sell.

Right thing 3. We believe that, as Sedjo and Lyon show, technological change will continue to increase the use of smaller trees. Using our regeneration practices, we will have a crop of these in only ten to 12 years; if there is still a premium for large trees at that time, we will grow them for additional years.

Right thing 4. We believe that technological change will vastly increase the use of cheap hardwoods to replace costly softwoods and that this increases use is likely to cause hardwood pulpwood prices to double or more by 2000. Consequently, we intend to hold, and perhaps to cultivate in some way, the hardwood stands that we now own and to buy others containing small trees on nearby productive sites. The combination of 10+% in price increases and 7+% in physical growth appeals to us a great deal.

Our main reason for adopting this strategy is to avoid permanent loss of capital. The possibility that technological change will reduce the market for our trees is only a minor concern. Many of us have lived through several bitter experiences of watching timber prices go down faster that they went up: in Hurricane Camille in 1969, in the rise of the prime interest rate to over 20% in early 1980, and widespread Southern Pine Bettle epidemics of the mid-1980s. When we can lose $2,000 to $3,000 per acre in a very short time, we think that we should take the cash and start over again. And this is especially true when we can thereby also produce trees of outstanding quality and raise our return on investment to between 15% and 20%.

Will we be right or wrong, admired or laughed at? We'll take the risk. Should you follow our lead? It's up to you. Just remember that this is not a JMV&CO forecast; it's merely our plan for our own land.