VARDAMAN VIRTUAL FORESTRY COMPANY

The Most Direct Link to Knowledge Workers in the Southeast Forest Economy

REAL HELP WITH THE RIGHT ASSUMPTIONS; REAL TROUBLE WITH THE WRONG ONES

"What’s the Monetary Value of Your Premerchantable Timber?" is the title of a lucid, helpful article by Dr. Steve Bullard and Dr. Tom Monaghan of the Department of Forestry at Mississippi State University. It appears in the 32^nd edition of the Forest Landowner Manual, a fact-filled publication that can be obtained from Forest Landowners Association, Inc., PO Box 95385, Atlanta, GA 30347-0385. Sooner or later this question comes up for every landowner, and the authors set forth easy-to-follow procedures for answering it. We can’t reproduce all five pages, but we’ve discussed below the most important principles in calculating the return on investment (ROI), by far the most interesting figure for all landowners.

In the example used by the authors, the landowner’s initial per-acre investment is $400 in land and $150 in plantation establishment, a total of $550. Twenty years later he expects per-acre sales of 45 cords of timber @ $50 = $2,250 and one acre of land @ $600 = $600, a total of $2,850. Using a pocket financial calculator, you can see that the compound annual interest rate or pre-tax ROI is 8.57%, and the calculation seems to be very simple. It’s not, and that’s where trouble might come.

We discussed the article at length with Dr. Bullard, a first-rate scientist. He stated an obvious truth: they had to use both present and future hypothetical values in order to do the calculating. They made no attempt to predict the future; they merely used assumptions that are very common among many timberland investors. If you intend to use the procedure to evaluate your tract or a prospective purchase, several facts should be considered:

1. The timber volume to be produced. Several tested growth-and-yield models, computerized and otherwise, are available for loblolly pine and at least one for several other species. The one you choose should predict volumes by one-inch DBH classes. This factor in the equation is probably the easiest to predict with accuracy, and the total of 45 cords they used is quite common.

2. Both land and timber are commodities and subject to the fluctuations in price common to all commodities. Perhaps you remember when gold sold for $800 per ounce versus the present $290 and oil sold for nearly $50 per barrel versus the present $19. Trees don’t grow to the sky, and timber and land prices may fall or fail to rise at anything like the rates at which they rose in the past.

At the present time in most of southeastern U.S. the current price of pulpwood is $40 per cord, and if this remains unchanged for 20 years, the expected timber sale at age 20 will be only 45 cords @ $40 = $1,800. We know of no credible studies that have documented land prices rising 50% in 20 years, and if they remain unchanged, the land component of the 20-year sale will be only $400. In such a situation, the ROI from $550 to $2,200 in 20 years is = 7.18%, only about 1.4% larger than that of 30-year U.S. Treasury bonds.

In determining the timber flows in PPICsâ , we use PTAEDA2V, by far the best growth-and-yield model that we know of. In evaluating them, we use prices obtained in nearby, sealed-bid sales and assume that they will remain unchanged during the term of the investment. Therefore, the ROI that we forecast will come solely from timber growth (quite predictable) and not from guesses about future prices. If we get the real price increases that are assumed by many other agencies commenting on timber and land investments, our actual ROI will be much larger than predicted.