VARDAMAN VIRTUAL FORESTRY COMPANY

A NEW-ECONOMY TIMBER INVESTMENT TO LEAD THE BOOM

All investment analysts on TV or in print media predict bright futures for “New Economy” companies and dimmer futures for “Old Economy” companies.  The best discussion we’ve seen on how to tell the difference between them appeared in The Economist Survey “The New Economy” in the 9/23/00 issue.  One characteristic of Old Economy companies, especially those in the forest products field, is vertical integration, and the Survey explained why this occurred.

“More than 60 years ago Ronald Coase, a Nobel-prize-winning economist, explained why firms are vertically integrated (as opposed to individuals buying and selling goods and services at every stage of production).  The main reasons, he said, were imperfect information and the need to minimize transaction costs.  A firm can either produce component parts or services itself or buy them from a supplier.  They will probably be cheaper if bought in the marketplace, but against that the firm will have to spend time and money on finding what is available, and on ordering the products.

“In the past, these transaction costs were high, so firms often preferred to do lots of things in-house, which made them bigger.  Vertical integration solved the problem of imperfect information.  But as the Internet increases access to information and reduces transaction costs between firms and suppliers, it makes it more attractive for firms to concentrate on what they are best at and buy in other goods and services from outside.”

We believe that this is what G-P is up to in selling its timberlands and that Kimberly-Clark, Packaging Corporation, International Paper Co., and others have the same idea.  Since the pension funds and other buyers seek to make money rather than produce raw material, have hired considerable forestry expertise, and will sell in wider markets, we think that their returns will be higher than those of the former owners.

Nevertheless, we believe that these new owners are in the Old Economy for three reasons:

1. Every large tract contains an almost-infinite variety of biological conditions, each of which requires separate management by an expert.  Since there are no reliable growth-and-yield models for hardwoods and since some conditions occur in small patches that entail expensive sample measurements, no forestry firm known to us can be an expert on all of them.
2. The natural stands existing on these tracts and the areas on which the next crop must always be regenerated naturally do not allow use of many techniques to enhance tree growth discovered by research since 1980.
3. The ownership of land, particularly in large tracts, will attract close scrutiny by environmentalists, who do not pay the costs of their requirements, and regulation by state or federal governments with the added costs and restrictions that these entail.

The only timber investment in the New Economy, one that allows foresters to “concentrate on what they are best at” and to produce the highest return of all, is a PPICâ, a Pine Plantation Investment Contractâ.  All capital in it is employed in trees, the right to grow them for a specific period, and annual inspections.  The most accurate, easiest-to-use growth-and-yield model, the Windows version of PTAEDA2.1V, allows the investor to evaluate his tract at any time without forestry assistance.

We own and offer for sale six of them on www.se-timbersales.com: LA87040MMB and LA98190MMB in Louisiana, GA95222SN, GA96244SN, and GA98058AW in Georgia, and AL88121JCS in Alabama.  Using LA87040MMB as an example, our CPA is preparing an analysis of the additional advantages for a taxable investor.  The number of other PPIC’s that can be bought on farmland now in CRP plantations or pastures or crops is very large.  Our computer contains the names and addresses of owners of more than 200,000 acres who had tendered them when we quit buying in 1999.