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REARRANGEMENT WITH SOIL SURVEY AND PTAEDA2V

To illustrate how to rearrange even a small tract, we selected one of 190 acres near our headquarters. The map below shows conditions on the ground in three parts of it, and we’ve added SI-50 from the Soil Survey (it’s 90 for all).

To help decide whether to keep it or sell it, the owner asked us to predict his ROI if he invested in each parcel. He estimated his costs to be $400/acre for the open land in the upper left corner, $200/acre to install the new crop with all techniques listed at http://www.vardaman.com/greensheets/1998sale.htm, and $5/acre for annual management and taxes. Using PTAEDA2V to predict timber volumes and evaluating them at current prices, we predicted a thinning of $105 at age 12, a harvest of $4,562 at age 22, and sale of the land at $400 two years later after the timber was removed.

Therefore, his per-acre annual cash flows for the next 24 years would be:

Consecutive Years	Cash Flow $
0	-400 for land –200 for plantation = -600
11	-5 for taxes and management
1	+100 for thinning -5 for taxes and management
9	-5 for taxes and management
1	+4,562 for harvest –5 for taxes and management
1	-5 for taxes and management to allow removal of timber
1	+400 for land –5 for taxes and management

Such a schedule produces an annual compound return of 9.92%.

Although SI-50 of the 90 acres of pine-hardwood timber across the center of the tract is the same 90, it can’t be planted for two years until the present stand is removed. Furthermore, because of conditions in the cutover, total cost of establishing the plantation will be higher. His cash-flow schedule will be for the next 26 years would be:

Consecutive Years	Cash Flow $
0	-400 for land –5 for taxes and management
1	-5 for taxes and management
1	-300 for plantation –5 for taxes and management
11	-5 for taxes and management
1	+105 for thinning –5 for taxes and management
9	-5 for taxes and management
1	+4,562 for harvest –5 for taxes and management
1	–5 for taxes and management
2	+400 for land –5 for taxes and management

Such a schedule produces an annual compound return of 8.66%.

Although SI-90, the delay in planting, and the extra cost are the same, the parcel with the stream in the lower right has the additional feature of being a predominantly hardwood site. We do not believe that it will be feasible to reduce the hardwood component of the stand to less than 10%.

Therefore, his per-acre annual cash flows for the next 26 years would be:

Consecutive Years	Cash Flow $
0	-400 for land –5 for taxes and management
1	-5 for taxes and management
1	-300 for plantation –5 for taxes and management
11	-5 for taxes and management
1	+94 for thinning –5 for taxes and management
9	-5 for taxes and management
1	+3,834 for harvest –5 for taxes and management
1	–5 for taxes and management
1	+400 for land –5 for taxes and management

Such a schedule produces an annual compound return of 7.86%.

On the day we made these predictions, AT&T 24-year bonds sold to yield 8.2%, so he decided to pass up the last two alternatives. Nevertheless, he recognized that he was guessing about land prices. If they were lower, he would be interested. To eliminate this uncertainty, he altered his timber-sale plan to ask for bids on the land or the timber or both and to reserve the right to reject any or all bids. There would be no extra cost and a big increase in certainty in doing so.

As you can see, this is not a game for big mutual funds or bond funds. It is THE game for every owner of at least 40 acres of timberland. Wise forest management includes putting each tract to work in its most profitable manner.