VARDAMAN VIRTUAL FORESTRY COMPANY

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

THE RETURN-ON-INVESTMENT (ROI) FROM TIMBERLAND INVESTMENTS

We are often asked, "What can I expect in an annual return from my investment in timberland?" Questioners seem to think that the medium is not judged by the rules that apply to others. In current forestry publications, for example, we see academics using annual rates of 5%, sellers' agents stating that, in addition to tree growth, timber and timberland prices rise at 2% or 3% in addition to 3% inflation, and persons hoping to finance timberland purchases by offering to pay 6.5%-7.0% for the use of funds for this purpose. It seems to make no difference whether the commitment of funds is for five or 35 years and how liquid the investment might be during this period.

A lot of this fog would lift if you imagined yourself to be an investor and examined Section C of The Wall Street Journal. Turning to almost the last page, you would find a report on the New York bond market. On a typical day last week you would have seen that General Motors Acceptance Corp. bonds maturing in nine years yield 6.4% and AT&T bonds maturing in 24 years yield 8%. These are the bluest of blue chips and almost instantly liquid when the market is open. Even if you discount them because they are subject to the ravages of inflation and their dividends are ordinary income instead of long-term gain on assets, they are still very good choices for investors of all kinds.

Why then would you bypass them and invest in timberland? Diversification might be one reason, so how much is diversification worth to you, 0.5%, 2.0%? On the other hand, you'll give up lots of liquidity by moving into timberland, so how much is liquidity worth to you, 1.0%, 3.0%, more? These blue chips are among the world's safest investments, whereas timber blows down, burns up, is eaten by bugs, and fluctuates in price, so how much is safety worth to you? Even though you think trees are more beautiful than bonds, this decision is about increasing your net worth, not aesthetics. Opinions of outsiders are useless. Personal answers to these important questions are essential; they require careful thought and hard decisions by you. Let's assume that you choose minimums of 9.4% for terms shorter than 10 years and 11.5% for terms as long as 22 years.

When you consider planting a cutover and have determined its SI-25, you must follow the process at www.vardaman.com/greensheets/vital.php to see if the predicted ROI is 11.5+%. When you consider buying a 10-year-old stand, you must follow www.vardaman.com/greensheets/corthin3.php. It requires an on-the-ground measurement of a sample of the stand and prediction of future results with an accurate growth-and-yield model. Predicted ROI must then be 9.4+%, or you should choose another investment. These procedures cost money, as you can see from the two links, but one measurement in the rotation is usually enough. Then you won't have to worry whether your stock analyst has been as careful as you are; you will be able to see and feel your volume increases.

Investors in New York bonds can't predict the future any better than you and I can, so they assume that conditions won't change. If conditions do change, however, they re-evaluate their positions and increase or eliminate them. We suggest the same procedure in predicting future timber and timberland prices.

Such an analysis is especially valuable if you already own land. If its ROI is 5-7% (and this is true of millions of acres in SE U.S.), you should sell it while you have the chance. That's often a hard decision. It may be inherited land with sentimental value, and many investors hate to sell if they don't need the money. The troubles of Enron stockholders are all over newspapers and TV sets, and Vardaman eats lunch with several investors who have held WorldCom stock as it fell from above $60 to below $10. Commonsense calls for switching out of low-yielding assets, not hoping for a miraculous price recovery.

Our favorite sage Peter Drucker makes another point, "Before World War I, the largest single group in every country were farmers. Eighty years ago...it was considered axiomatic that developed countries - North America being the only exception - would increasingly become unable to feed themselves." Today all developed free-market countries except Japan "have become surplus food producers despite burgeoning urban populations. In all these countries food production is today many times what it was eighty years ago - in the United States eight to ten times as much. But in all developed free-market countries - including Japan - farmers are today, at most, 5 percent of population and workforce, that is, one-tenth of what they were eighty years ago."

There are lessons here for timberland investors. Twenty-odd years ago the first genetically-improved seedlings were available in small quantities. Today more genetic and morphological improvement in seedlings plus accurate growth-and-yield models plus site-prep improvements plus herbicide control of competing vegetation have enabled us to produce, on high-site land, double the ROI that can be produced on most other land in SE U.S. Other improvements are on the way. We who routinely use them are doing our best to become the sole suppliers of raw material to timber industries; we can grow two crops while many SE investors can grow only one. Since they backed the research to develop these techniques, industry leaders are aware of this situation. Many big-company sales of timberlands may have been precipitated by it. An analysis of one of them appears at www.vardaman.com/greensheets/k-c.php.

Therefore, we say to you, "Determine the ROI of timberland you own, and sell tracts that don't pass your investment test while there's still a market for them. Many timberland owners are still not aware of the situation or willing to adopt the techniques. Don't follow the lead of the indecisive, but hopeful Enron stockholder who held his stock until trading was suspended. Many prosperous urbanites want a place to get away from it all. Give them a chance to enjoy watching trees grow."