VARDAMAN VIRTUAL FORESTRY COMPANY

HOW TO MAKE THE MOST UNDERSTANDABLE U.S. TIMBER INVESTMENT

The most understandable U.S. timber investment is the PPICâ or Pine Plantation Investment Contractâ because

1. No capital is invested in land, so return on it need not be estimated.
2. The forest was planted by man, usually on row-crop land or pastures.
3. It is 100% loblolly pine, the most widely used and researched species in SE U.S.
4. Numbers of trees, volumes, and values by quality classes are known at all times.
5. Area is established by GPS survey, and no acres are idle.  Irregular shapes are OK and can be re-located at any time.
6. Growth and volume by one-inch DBH and quality classes are predicted with PTAEDA2V.
7. Soil and location will allow logging in the wettest weather.

These characteristics make it easy for owners to understand how their investments are developing.

Risks of loss are also easy to understand.  Fire is a disaster at age 1, becomes less dangerous as the stand closes and fuel is reduced about age 6 or 7, and will usually do little damage after age 11 or 12.  Northern boundary of the purchase area for PPIC’s is Interstate 20, thereby avoiding almost all damage from icestorms.  Windstorm does little damage until age 10.  Southern Pine Beetle attacks are unlikely after the stand is thinned and fertilized at age 12 or 13.  Stumpage-price declines are meaningless except during scheduled thinnings at 12 or 13 and harvests at 21, 22, and 23.

The biggest disadvantage is lack of liquidity in a long-term investment.  PPIC’s are not traded in a public market and are rarely traded anywhere.  Offsetting this are protection against inflation given by timber’s status as a commodity, the deductibility of interest when the PPIC is bought on the installment plan, the postponement of tax bites until thinning and harvest, the taxation of all profits at long-term-gain rates, and its qualification for like-kind exchanges with timber alone.

After understanding and considering all of the above, the investor must still answer the major question: “What return on investment (ROI) will I require to invest in this PPIC?”  We’ve discussed this with many financial advisors for several years and studied the sales of them at various ages.  PPIC investors are like other investors in that they require high ROI’s for long commitments and lower ones as the trees get nearer to harvest.  This graph displays what we think about their requirements:

This graph is part of http://www.vardaman.com/greensheets/850.htm  We sold a PPIC to an experienced timber investor to yield 13.5% at age 12 and closed the sale while the thinning was being removed; the remaining stand of sawtimber-quality trees was very impressive.  Gambler 1 did not sell to yield 14.75%, and we decided that most persons who saw the display of its characteristics did not recognize the unique character of the trees in it.  We therefore cancelled both Gambler sales.  We will correct the graph whenever additional data require it.

Pulpwood prices have fallen, and many plantations have reached the age of thinning, so we believe that the potential supply of PPIC’s is virtually unlimited.  If those on www.se-timbersales.com do not meet your requirements, we will be glad to buy another for you.  You must tell us in detail what you want, however: the location within ___ miles of ____, size of PPIC (40-acre minimum), age of trees, required ROI, and whether you want a lump-sum or an installment purchase.

After we get your requirements, we will use PTAEDA2V to predict future cash flows from offered tracts.  For open fields, we determine SI-25 and establishment cost with the appropriate combination of first- or second- generation, large-size seedlings, site-prep, first-season herbicides, and mid-rotation fertilization.  For existing stands, we determine characteristics of the site and stand and then predict future cash flows with PTAEDA2V.  Finally we deduct all operating expenses and discount them with the ROI you give us to calculate payments to landowner.

We’ll start our search immediately and will charge you for our efforts ONLY if we present what you want and you either accept it or turn it down.