VARDAMAN VIRTUAL FORESTRY COMPANY

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VARDAMAN CONCEPT

Vardaman Investors Forest (VIF) contains 4,000+ acres in one block in northwest Louisiana. In the late 1980s we began to convert the natural stands into plantations utilizing the most modern technology available each time. There are now six, one having been established on January 1 of 1989, 1991, 1992, 1993, 1994, and 1995.

In some respects the plantations are quite uniform: estimated site index (25) of 66.4, 330 trees per acre planted, thinnings at age 12 or 13, and harvest at age 22 or 23. In other respects they are quite different: available technology increased each year, execution varied with weather, and stumpage prices fluctuated widely over the period.

To demonstrate the effects of these factors on the per-acre investment values of these plantations, we evaluated each one by the method used by all investors, i.e., we estimated what cash flows would be received or paid out if it were completely liquidated at the end of the first rotation and then discounted these amounts to the present. When it is applied to timberland investments, we call it the "Vardaman Concept."

First, using PTAEDA2V, our computerized growth-and-yield model, we estimated future yields in timber from both thinnings and harvests, which will remain the same unless there is an unpredictable casualty loss. Since we must use future timber values and no one can know what they will be, we assume that they will be what they were on each evaluation date. (We had no sales in which the volumes/acre were so high and the trees so uniform, so we suspect that the estimated values we used in the evaluation are lower than those that these plantations would have produced.) All timber will be sold for cash in advance after the year's growing season has been completed, and the land will be sold one year after the harvest. Finally we discounted these values at a compound rate of 10% to the date of evaluation.

To illustrate the process, we have shown in detail below the process for Plantation 1/1/89. Initial data for the computer run are as follows:

If timber and land prices remain the same, 1/1/89 will be worth $233.07 times 1.10 = $256.38 one year later. Although the little trees will be only about two feet tall, they will be one year closer to fulfilling the investor's expectations.

Using the Vardaman Concept with a discount rate of 10% (a rate that may have varied in past years) for all plantations, we calculate their per-acre dollar values on various dates to be as follows:

The table above shows effects of several factors on income-producing values:

1. 1/1/89 increased exactly 10% between 1/1/89 and 1/1/90 because there were no price changes and we used 10% discount. There was a small price rise during 1990, so the value rose 12.9% from 1/1/90 to 1/1/91. The huge price change occurred in 1993, so value increased 74.6% in that year. Prices fell slightly in 1994, so the value increased only 6.6% to 1/1/95. Average annual value increase during the six-year period from 1/1/89 to 1/1/95 was 19.4%.

2. Although timber prices fell from 1/1/94 to 1/1/95, value of 1/1/95 at establishment rose from 405 to 551. This was due to successful use of newer technology and reasonably good luck with the weather.

We believe that the Vardaman Concept is the best way to evaluate these young plantations and to think about them and future investments. Our reasons are as follows:

1. Until age 10 or later, they contain no merchantable timber that can be evaluated by sales.

2. Combined applications of all proven technologies are so rare and products of new technologies are becoming available so rapidly that very few buyers are familiar with productivity of such plantations, so there are few or no comparable sales. For example, we could not obtain large-size seedlings until 1/1/93, second-generation seedlings were not available until 1/1/94, and new, more effective herbicides appear every year.

3. No one can predict prices even a year in advance, and we are not even positive that PTAEDA2V's volume predictions are accurate (we can verify these by on-the-ground measurements at about age 8). Nevertheless, we will surely come closer to successful investment by adjusting our estimates every year than by one guess at the start.

A schedule of VIF's plantation dollar values on 1/1/95 is as follows:

These values depend heavily upon the discount rate used. The total value would be $1,393,250 at 12% and $2,793,961 at 8%.

Many other systems of evaluating pine plantations are not quite so useful because of these limitations:

1. They calculate value by adding components (including costs) and then increasing them at a fixed annual rate. There is thus little provision for constantly changing timber and land values.

2. They do not allow for differences in establishment technology.

3. They do not allow easy adjustments for differences in inflation rate, the rate for capitalizing cash flows, and volume estimates.

But thinking about them in this way does emphasize three important facts about plantation investments:

1. Site index makes a tremendous difference, and 66.4, which we got primarily from Soil Conservation Service data because the original stand was gone before we realized how critical site index would be, may be too low by several feet. We won't be able to tell from the planted trees until they are eight or ten years old, and several extra feet would raise values by 20% or more. If we invest in other tracts, we will seek those with site index of 75 to 80.

2. Technology, especially the elimination of herbaceous competition during the first year and woody competition after that makes a tremendous difference. And technology, even simple but very important things as decreasing the size of drops in a spray operation, is developing constantly.

3. Technological developments will help us very little from now on, just as they have little impact on today's natural stands. Except for unpredictable casualty losses, plantation yields are almost set in concrete the day that the trees are planted. We will be alert for developments that help existing plantations, but keeping track of values in the manner described above may be the best way to make money growing these trees in the future. If we should encounter buyers will much grander ideas than ours, we might do well to sell to them and start all over again.

Use of the Vardaman Concept is equally appropriate for evaluating natural stands. It is merely more expensive because, whereas PTAEDA2V provides the data base for plantations, the data base for each natural stand must be obtained by on-the-ground measurements. Once these figures have been obtained, however, they often will show disappointing returns because volume growth plus per-unit value growth of trees in most natural stands is usually less than 10% annually.