VARDAMAN VIRTUAL FORESTRY COMPANY

PPIC® = REARRANGEMENT OF RAW MATERIAL TO CREATE WEALTH

Prof. Paul Romer, Stanford University, whom we quoted last week, may never have practiced forestry, but he certainly hit the nail on the head when he described how we created wealth with PPIC’s.  As he said when talking about the vast increase in the world’s wealth, “There’s only one explanation for this increase in wealth…It’s not the raw material;…it’s this process of rearrangement.”  That’s all we did with selected loblolly pine trees and land in SE U.S.  Both occupy millions of acres here and are familiar sights alongside the Interstate Highways, so familiar that persons who don’t know how to measure tree growth and value increase can’t comprehend what we’ve done.  PPIC’s are not ordinary plantations, but you won’t realize this until you learn how old the trees are and measure how big they are.

The most important step in our process was to grow our trees on leased land instead of purchased land.  This immediately reduced the required initial investment in three ways: 1) it eliminated competition for land from “affluent weekenders” who are as much interested in hunting, recreation, and esthetics as they are in investing in trees, 2) it eliminated the need to pay for “waste land,” e.g., powerline rights of way, stream bottoms. etc., that can’t be used for growing loblolly pine trees, and 3) the landowner paid annual ad valorem taxes.  On the other hand, this rearrangement reduced our liquidity, which may be important to some investors.

Our opportunity to lease land arose because many parcels of 40 to 400 acres are now too small for profitable agriculture, so annual rentals for this purpose are often $20-25 per acre.  In some cases the owner was more than 65 years old, and he and his heirs had no desire or ability to continuing farming.  Since his conveyance to us allows him to buy back the PPIC at a substantial premium, a feature that would enable him to sell the whole tract if an unexpected opportunity came along, he allowed us to choose only what suited our purpose exactly.  Since the landowner gets more money from us than he can elsewhere, we created wealth for him, so he helps with administration and protects us from harmful regulation.

The land we selected was far above average in productivity.  All land in PPIC’s has SI-25 of 75-80; average for SE U.S. is probably 65-70.  It is essentially flat so rainfall soaks in, doesn’t run off.  It was in crops or pasture the summer before we planted it, so it had already been treated by farmers or cattlemen to produce vigorous plant growth.  We established its location and area by a Global Positioning System traverse that enabled us to exclude portions that didn’t meet our standards and to re-locate the PPIC at any time in the future.  Finally, all PPIC’s join all-weather roads that allow logging during very wet weather.

The trees we used were first- or second-generation genetically improved, a technique used by many landowners.  Our rearrangement consisted in growing them to extra-large size in the nursery, cultivating the ground to assure proper planting and survival, and spraying the plantation with herbicide during the first growing season to reduce competition from weeds and hardwoods.

As an unusual step in rearrangement, we tested many possibilities with PTAEDA2V, the co-op’s growth-and-yield model to determine how best to employ the unique characteristics of the trees and the site.  Key decisions involved planting density, thinning procedure, and harvest age.  Asking advice from foresters who don’t do this or are not familiar with the specific site is a costly waste of time.

Since we know our number of trees per acre and their volumes at all times, we can use stumpage rates published monthly on www.vardaman.com to calculate our return on investment (ROI) with a pocket calculator.  In our initial forecast, we assumed that timber prices will not change, and our selling prices continue this assumption.  Annual tree growth occurs in these monthly percentages: Apr 39, May 19, Jun 15, Jul 12, Aug 8, and Sep 7.  We change our selling prices to reflect both growth and the passage of time.  If we still own the PPIC as harvest time approaches, we may change the timing of it because of changes in the timber market.

Finally, our after-tax ROI, the ultimate measure of success, is enhanced by two features: 1) the interest portion of annual payments shown in schedules of predicted cash flows is deductible, and 2) postponement of the big pay-off until the harvest eliminates the repeated tax bites suffered with annual dividends.

We offer for sale five PPIC’s, three in Georgia and two in Louisiana.  Predicted cash-flow schedules, maps, and annual photos of the trees appear on www.se-timbersales.com.  You can recognize them by our ten-digit codes names, e.g., LA87040MMB.  The two numbers after the state name show the year in which the trees were planted in January.  The following three numbers show the area in acres.

If these don’t suit you, a huge number of tracts in the area south of a line from Houston to Shreveport to Atlanta to Norfolk and away from the coastal lowlands can be quickly converted into PPIC’s.  Tell us what you want and where, and with our branch-office network and Internet sites, we’ll quickly submit something close to it.

So you see, we did nothing magic; we just rearranged the most visible and familiar features of the landscape.  That’s why many of you could drive by them every day and never notice the super productivity.