VARDAMAN VIRTUAL FORESTRY COMPANY

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

TRIPLE R IS THE TRUE MEASURE OF FOREST MANAGEMENT

If you have owned more than 40 acres of timberland for even a short time and want to manage them wisely, you have probably run into some of the nationwide special vocabulary of forestry on how to reach your goal. Over the past 50 years, many recipes have had their season of popularity: sustained yield, forest health, multiple use, stewardship, ecosystem management, biodiversity, sustainable forestry initiative, or the honoring of persons whose forests look like city parks. If you tried to apply principles from these sources to your forest, you usually found that, as the peerless E. B. White wrote in "The Elements of Style," they are "private words, whose only virtue is that they are exceptionally nimble and can escape from the garden of meaning over the wall...words that at first glance seem freighted with delicious meaning but that soon burst in air, leaving nothing but a memory of bright sound."

If you gave up on getting advice from the big picture and asked several local foresters, one at a time, to suggest what to do, you surely found that they use still another special vocabulary. They recommend some of the following practices: cut selectively, wait for natural re-seeding, use controlled burning often, plant many seedlings to offset initial mortality, use genetically-improved stock, thin early, grow trees to large sizes that sell at premiums, convert the soil almost to garden status with machines, spray herbicides before or after planting or both, follow practices required to get government subsidies, do nothing until subsidies are available. All these techniques have a place in forest management.

After such a double dose of conflicting or incomprehensible advice, no one can blame you for being confused. The simple tested way to blow the fog off the window is this: TRIPLE R IS THE TRUE MEASURE OF FOREST MANAGEMENT.

By this we mean to say, "Ask your advisor to calculate the real rate of return (RRR or TRIPLE R) on your investment, including the land. If he cannot do this, ask him to estimate your cash flows from periodic timber sales. If he can't do this, get another advisor."

Once you know the cash flows from timber sales, you can do the calculation yourself. (You don't need a computer; just get a Sharp Business/Financial Calculator, Model EL-733A and instruction manual from stores like Service Merchandise for less than $30.) First, make a schedule of ALL cash flows by dates. Be sure to start with a minus amount for the total value of your tract. Then list minuses for ad valorem taxes and other management expenses and pluses for hunting lease or other cash income and estimates for your personal enjoyment. The final plus should be for the sale of land after the timber is harvested. After you enter this schedule in the calculator according to the instruction manual, press the "IRR" key, and the figure will be displayed in a few seconds.

Although this seems to be solely a matter of dollars and cents, you'll notice that you must put some value on intangible features like beauty or personal recreation. This is a very valuable exercise because even 40 acres of timberland constitutes a considerable amount of capital. You, your heirs, and all of society will be better off if you earn a suitable return on the capital under your control. (You probably realized long ago that the trouble with legislatures is that they pay little heed to the return on the capital that they regulate or dispense.)

You'll also find that it prevents mistakes in forestry. If you are tempted to convert a small stream bottom to a pine plantation, you'll almost surely find that the cost is so high and the return so low that Triple R is well below what you will require. You'll also spot the penalties for delaying action and the big effect of small costs like repeated prescribed burns.

One final word: Real return means return in addition to inflation, which in our case is return from timber growth alone. Since timber is a commodity and since commodity prices fluctuate with inflation, we don't use adjustments for inflation in our own investments. It's much easier to comprehend what's going on if you assume that timber prices will fluctuate in sync with the inflation rate.

If your Triple R is 5% or 6%, you can do a lot better by changing your management plan. If it's 10%, you are doing what most investors shoot for. If it's much over 12%, either you made a mistake in the calculation, or you have a wonderfully productive tract.