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WHAT SHALL I DO ABOUT THINNING MY PLANTATION WHEN PULPWOOD PRICES TAKE A NOSEDIVE?

Postponing a pulpwood thinning when prices are low seems such a simple, money-making maneuver, but it’s not by a long shot.  First, prices may not recover to the level you desire.  Second, pulpwood-quality trees require just as much water, sunlight, and nutrients as sawtimber-quality trees, and competition from them reduces growth of sawtimber-quality trees, which usually sell for two or three times as much.  Third, overcrowding eventually causes mortality and may make the stand more susceptible to Southern Pine Beetle attack.  Fourth, cash flows are delayed.  Consequently, to provide a means to predict the financial consequences of this decision, in the hypothetical transactions described below, we’ve used data from an actual plantation in Georgia to show how PTAEDA2V can reduce uncertainty.

Last year on the installment plan, N. Vester bought a 139-acre PPICâ that developed from a CRP plantation.  He made a down payment of $81,900 and agreed to make future annual payments of $10,176 to landowner and for forest-management services.  Using PTAEDA2V and stumpage prices at the time of purchase, he planned to earn an annual compound return of 13.25% by thinning at age 12, fertilizing at age 13, and harvesting at age 22.  Here, on a per acre basis, are details of his plans for timber and cash flows during his ownership:

Stand At Age 12
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft.                     
5   132.0    40.3     18.5   367.9      2.9    0.0        
6   206.0    43.1     41.1   851.9      8.0    0.0        
7   172.0    45.2     46.3   992.4      9.9    0.0        
8   82.0    47.1     29.7   656.7      6.7    0.0        
9   12.0    48.1     5.2   117.5      1.2    0.0        
10   2.0    49.2     1.1   24.5      0.0    61.8        
Total   606.0         141.9   3010.8      28.7    61.8        

Thinning at Age 12
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft. Stumpage Values
5   132.0    40.3     18.5   367.9      2.9    0.0         43.50   
6   198.0    43.1     39.3   813.0      7.6    0.0         121.60   
7   68.0    45.1     18.1   387.4      3.9    0.0         66.30   
8   28.0    47.2     10.3   229.1      2.3    0.0         41.40   
9   2.0    48.2     0.9   19.9      0.2    0.0         3.80   
Total   428.0       87.1   1817.3      16.9    0.0         276.60   
less selling cost 55.32   
Total Proceeds 221.28   
Stand After Thinning
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft.                     
6   8.0    44.2     1.8   38.8      0.4    0.0        
7   104.0    45.2     28.2   604.9      6.1    0.0        
8   54.0    47.0     19.4   427.6      4.4    0.0        
9   10.0    48.1     4.3   97.6      1.0    0.0        
10   2.0    49.2     1.1   24.5      0.0    61.8        
Total   178.0         54.8   1193.4      11.8    61.8        

Harvest at Age 22
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft. Stumpage Values
8   2.0    66.7     0.8   24.1      0.2    0.0         4.40   
9   30.0    71.8     14.0   465.4      4.8    0.0         124.80   
10   38.0    75.8     21.4   752.7      0.0    2533.7         481.40   
11   60.0    77.9     39.4   1419.0      0.0    5074.1         1420.74   
12   26.0    80.7     20.4   760.8      0.0    2872.3         832.96   
13   20.0    81.4     18.1   678.6      0.0    2636.7         777.82   
14   0.0    0.0     0.0   0.0      0.0    0.0         0.00   
15   2.0    86.5     2.4   94.9      0.0    385.7         117.63   
Total   178.0       116.4   4195.4      5.1    13502.5         3759.75   
less selling cost 150.39   
Total Proceeds 3609.36   

Here is his original cash-flow prediction:

Total Due Payment Interest Principal Balance Dividend Other Description
2000 01/01 143,430       143,430     Start Rotation
01/01 81,900     61,530     Lump Sum
12/31       30,846   Dividend
12/31 10,176 8,179 1,997 59,533     Annual Payments
2001 05/31         13,900 Fertilization
12/31 10,176 7,891 2,284 57,249     Annual Payments
2002 12/31 10,176 7,589 2,587 54,662     Annual Payments
2003 12/31 10,176 7,246 2,929 51,732     Annual Payments
2004 12/31 10,176 6,857 3,318 48,413     Annual Payments
2005 12/31 10,176 6,417 3,758 44,655     Annual Payments
2006 12/31 10,176 5,919 4,256 40,399     Annual Payments
2007 12/31 10,176 5,355 4,820 35,578     Annual Payments
2008 12/31 10,176 4,716 5,459 30,118     Annual Payments
2009 12/31 10,176 3,992 6,183 23,935     Annual Payments
2010 12/31 503,144   Dividend
12/31 10,176 3,172 7,003 16,931     Annual Payments
2011 12/31 10,176 2,244 7,931 9,000     Annual Payments
2012 12/31 10,176 1,193 8,983 17     Annual Payments

Balance: 143,430.68    
Lump Sum: 81,900.00     01/01/2000
Annual Payment: 10,176.20    
Dividend 1: 30,846.43     12/31/2000
Dividend 2: 503,144.78     12/31/2010
Payout 1: 13,900.00     05/31/2001 Fertilization
Calculated IRR: 13.25636% / Year    

When the stand reached age 12, however, pulpwood stumpage prices were only half of what he had planned for. To assess the impact of selling at these prices, he ran the following cash-flow analysis:

Total Due Payment Interest Principal Balance Dividend Other Description
2000 01/01 147,470       147,470     Start Rotation
01/01 81,900     65,570     Lump Sum
12/31       15,423   Dividend
12/31 10,176 7,844 2,332 63,238     Annual Payments
2001 05/31         13,900 Fertilization
12/31 10,176 7,544 2,631 60,606     Annual Payments
2002 12/31 10,176 7,230 2,945 57,661     Annual Payments
2003 12/31 10,176 6,879 3,297 54,364     Annual Payments
2004 12/31 10,176 6,485 3,690 50,673     Annual Payments
2005 12/31 10,176 6,045 4,130 46,542     Annual Payments
2006 12/31 10,176 5,552 4,623 41,919     Annual Payments
2007 12/31 10,176 5,001 5,175 36,743     Annual Payments
2008 12/31 10,176 4,383 5,792 30,951     Annual Payments
2009 12/31 10,176 3,692 6,483 24,467     Annual Payments
2010 12/31 503,144   Dividend
12/31 10,176 2,919 7,257 17,210     Annual Payments
2011 12/31 10,176 2,053 8,122 9,087     Annual Payments
2012 12/31 10,176 1,084 9,092 -4     Annual Payments

Balance: 147,470.68    
Lump Sum: 81,900.00     01/01/2000
Annual Payment: 10,176.20    
Dividend 1: 15,423.21     12/31/2000
Dividend 2: 503,144.78     12/31/2010
Payout 1: 13,900.00     05/31/2001 Fertilization
Calculated IRR: 11.93015% / Year    

Since he wanted to avoid a 1.3% decrease in IRR and thought that pulpwood prices would recover next year, he predicted tree growth to age 13 and made the following cash-flow analysis:

Stand At Age 13
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft.                     
5   94.0    43.0     13.6   285.3      2.3    0.0        
6   184.0    45.6     36.6   799.2      7.5    0.0        
7   176.0    47.9     47.2   1071.6      10.7    0.0        
8   92.0    49.6     31.2   727.8      7.4    0.0        
9   54.0    50.9     22.9   543.1      5.6    0.0        
10   4.0    53.2     2.2   54.0      0.0    147.5        
Total   604.0         153.6   3481.0      33.4    147.5        

Thinning at Age 13
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft. Stumpage Values
5   94.0    43.0     13.6   285.3      2.3    0.0         34.50   
6   184.0    45.6     36.6   799.2      7.5    0.0         120.00   
7   98.0    47.7     25.6   577.8      5.7    0.0         96.90   
8   28.0    49.7     9.3   217.1      2.2    0.0         39.60   
9   22.0    50.7     9.1   216.5      2.2    0.0         41.80   
Total   426.0       94.1   2095.9      19.9    0.0         332.80   
less selling cost 66.56   
Total Proceeds 266.24   
Stand After Thinning
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft.                     
7   78.0    48.2     21.7   493.8      5.0    0.0        
8   64.0    49.6     21.9   510.7      5.2    0.0        
9   32.0    51.0     13.7   326.6      3.4    0.0        
10   4.0    53.2     2.2   54.0      0.0    147.5        
Total   178.0         59.5   1385.1      13.5    147.5        

Harvest at Age 22
DBH Class Number Trees Average Height Basal Area Total Volume o.b. Volume Cords Volume Scribner bd.ft. Stumpage Values
9   14.0    71.8     6.4   214.0      2.2    0.0         57.20   
10   74.0    75.1     40.4   1405.5      0.0    4651.6         883.80   
11   46.0    78.0     29.9   1076.7      0.0    3838.8         1074.86   
12   32.0    79.7     24.9   916.1      0.0    3441.9         998.15   
13   10.0    80.2     9.0   334.0      0.0    1294.0         381.73   
14   2.0    81.3     2.2   82.3      0.0    329.3         98.79   
Total   178.0       112.9   4028.5      2.2    13555.7         3494.53   
less selling cost 139.78   
Total Proceeds 3354.75   
Total Due Payment Interest Principal Balance Dividend Other Description
2000 01/01 145,334       145,334     Start Rotation
01/01 81,900     63,434     Lump Sum
12/31 10,176 8,023 2,152 61,281     Annual Payments
2001 12/31         37,113   Dividend
12/31   10,176 7,730 2,446 58,835     Annual Payments
2002 05/31       13,900 Fertilization
12/31 10,176 7,421 2,754 56,080     Annual Payments
2003 12/31 10,176 7,074 3,102 52,978     Annual Payments
2004 12/31 10,176 6,682 3,493 49,485     Annual Payments
2005 12/31 10,176 6,242 3,933 45,551     Annual Payments
2006 12/31 10,176 5,745 4,430 41,121     Annual Payments
2007 12/31 10,176 5,187 4,989 36,132     Annual Payments
2008 12/31 10,176 4,557 5,618 30,513     Annual Payments
2009 12/31 10,176 3,849 6,327 24,186     Annual Payments
2010 12/31 467,652   Dividend
12/31 10,176 3,050 7,125 17,061     Annual Payments
2011 12/31 10,176 2,152 8,024 9,037     Annual Payments
2012 12/31 10,176 1,139 9,036 1     Annual Payments

Balance: 145,334.00    
Lump Sum: 81,900.00     01/01/2000
Annual Payment: 10,176.20    
Dividend 1: 37,113.85     12/31/2001
Dividend 2: 467,652.15     12/31/2010
Payout 1: 13,900.00     05/31/2002 Fertilization
Calculated IRR: 12.61422% / Year    

As the calculations show, a rise in pulpwood prices to their original level is not enough to increase Vester's IRR to its original level.  There are two reasons for this: 1) The proceeds from the thinning will increase because of tree growth, but they will be delayed a year, 2) harvest proceeds will fall because the trees suffered one more year of competition from the pulpwood trees and had only nine years to respond to fertilization.

Neither Vester nor anyone else can predict even one second of the future, so his guesses about future prices may always be bad.  But PTAEDA2V predictions about the interaction of tree growth, fertilizer, thinning, and time are remarkably accurate.  That's because PTAEDA2V is an individual-tree, distance-dependent growth-and-yield model and is the product of 20 years research by a co-op of the biggest companies in the field.  Predictions by the new windows version are the best way we know of to reduce the guesswork about how to handle your property.

If you have Vester's problem, we'd be pleased to make the measurements and perform the PTAEDA2V calculations or teach you how to do them yourself.