VARDAMAN VIRTUAL FORESTRY COMPANY

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

THE PRICE OF TIMBER: WHERE IT HAS BEEN

Many readers of our Green Sheet have noticed and been happy about the recent sharp rise in timber prices, and some are tempted to believe that this is just a speed-up of the normal rise of timber prices. Others who remember the prices of the late 1970s are even happier about the rise, for they will never forget the grim 1980s when interest rates were high and timber prices fell out of bed; they are merely thankful to get back to even. All investors in timberland (and you are one if you own at least 40 acres) naturally have a vital interest in why timber prices change and how their investments compare with others available to them.

One reason they change, and a powerful one, is inflation. To demonstrate its effect, we have removed inflation from JVM&CO's Index of Pine Sawtimber Stumpage Prices in the graph above. (To show how timber and lumber prices generally move together, we have also removed it from the Random Lengths Framing Lumber Composite Price, which we have used with permission for some years.) The graph below shows what we call the "real" price of timber, i.e., the price in relation to prices of other items. You can see that the purchasing power of timber owners dropped about 50% during the 1980s and has just now returned to the 1978 level.

To reduce these prices to the 1978 level, we divided the price each year by 1 + the cumulative impact of inflation. The divisors for these years are as follows:

If you don't like our method of calculating our divisors, choose your own. By any method you are sure to find that a huge percentage of the price rise in timber since 1978 was due to inflation.

Squeezing inflation out of these prices is a valuable exercise for several reasons. First, it focuses your attention on the "real" components of the return on timberland investments: 1) the steady increase in total physical volume of the trees and 2) the steady increase in their sizes so that they are cheaper to log or can be made into more valuable products or both. By excellent management to produce more to sell each year, each landowner can increase his individual income from these sources whether prices rise or not.

Second, it enables each investor to reduce investments of all kinds to a common denominator and decide which is "really" the best. For example, JMV&CO carries a small amount of its reserves in a checking account that pays interest of 2.6% annually. Since inflation now runs about 3% annually, we recognize that we are losing ground with this sum and, therefore, keep it to the minimum size for its special purpose.

Finally, it causes you to watch for evidence of changes in real prices. Timber is an unusual commodity in that its real price rose gradually from about 100 years up to 1950, stayed flat until the spike upward in the late 1970s, fell back to the 1950s level in the 1980s, and has now returned to the 1978 level. We've already eliminated the effects of inflation and of timber growth, so any noticeable change in this price level will raise or lower anticipated returns by the amount of the change. Nobody can predict as much as one second of the future, so you are on your own in evaluating this factor, and your guess is as good as anyone's. Our purpose now is to call your attention to this possibility.

Since growing trees for sale takes a decade or more and since inflation seems likely to be with us forever and will change every month, foresters have always used real rates of return to evaluate investments. It's a good practice for everyone. In the current climate of 3+% inflation, the real return is minus on interest-bearing checking accounts and about 3% on 30-year U.S. Treasury bonds. At the same time the real return on JMV&CO super plantations is at least 7% and may be more than 10%

THE PRICE OF TIMBER: WHERE IT WILL BE

"What is the price of timber now? Will I get more for it if I wait until next year? A JMV&CO manager somewhere hears these questions several times a day. If we were to interpret the questions with strict accuracy, we could only answer, "We don't know." Lest you think that we are stupid or evasive, however, we'd like to explain why.

First you have to understand how all markets work, and we don't know a better authority that Ludwig von Mises, whose "Human Action: A Treatise on Economics" has been a classic on this subject since it was first published in 1949. In it Dr. Mises first lays the groundwork: "Stability is an empty and contradictory notion. The urge toward action, i.e., improvements of the conditions of life, is inborn in man. Man himself changes from moment to moment, and his valuations, volitions, and acts change with him. In the realm of action there is nothing perpetual but change."

He goes on to state that buyers "look first at the prices of the immediate past which are mistakenly called present prices. Of course, they never make these prices enter into their calculations without paying regard to anticipated changes. The prices of the immediate past do not influence the determination of future prices. It is, on the contrary, the anticipation of future prices of the products that determines the state of prices of the complementary factors of production.

"The fact that yesterday people valued and appraised commodities in a different way is irrelevant. The consumers do not care about the investments made with regard to past market conditions and do not bother about the vested interests of entrepreneurs, capitalists, landowners, and workers, who may be hurt by changes in the structure of prices. Such sentiments play no role in the formation of prices.

"The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are not constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formations of exchange ratios between the various commodities. Every new datum brings about a reshuffling of the whole price structure."

We've often pointed out that each timber buyer wants trees for a slightly different purpose and has a different inventory of and demand for standing timber, and that's why the bids on a given tract will often vary by large amounts. Furthermore, on a given day the same 14-inch tree will bring one price in northwest Louisiana, another in southeast Georgia, and a third in central North Carolina, and the price will change in each place with the amount of recent rainfall. Finally, Dr. Mises points out another reason that most persons overlook: "the innate and acquired equality of men differentiates their adjustment to the conditions of their environment." One sees great value where another sees little.