Two Forestry Experts Give You Their Take on Timber
Maximizing Returns on Your Planted Pine Investment
What to grow? Pulpwood or Sawtimber?
By: Michael J. Dooner
The age old question is how do you maximize returns on your planted pine investment? The answer is simple, right? Well, if not simple it at least seemed fairly consistent for the past three decades as foresters in the Southeast perfected the strategy of growing planted pines for 25-35 years to produce quality saw logs that commanded a premium price when compared to chip-saw and pulpwood. We simply planted quality seedlings,
thinned the stand between ages 12 and 15 to remove inferior and diseased trees, used prescribed fire on a 2 or 3 year rotation, thinned a second time to remove overcrowded trees and to identify the crop trees, and finally clear cut the stand when all the trees were saw timber and the market was good.
This tried and true approach has proven effective because it satisfied landowners’ cash flow needs and allowed landowners the opportunity to sell their crop as different products over time and at increasing per unit values. However, to effectively, comprehensively, and objectively analyze a current timber investment, we must address three key issues. First, how have timber markets changed over the last decade, with particular attention paid to the diminished premium for saw logs (both chip-n-saw and saw-timber) when compared to pulpwood. Second, we must analyze recent trends in reforestation and third, we must also forecast what the market will do over the next 20-30 years to effectively and proactively develop a strategy that maximizes return on investment and provides ample flexibility in case of additional fundamental changes in the market. In other words, are recent changes experienced in the market place short term, long term, or cyclical?
Let’s begin with a quick analysis of historical data provided by Timber Mart-South. By visiting the web page of Timber Mart-South and selecting the link “South-wide average prices,” anyone can view the price trends for all three major southern yellow pine product classes diagrammatically. The table below provides a summary of the information about per ton stumpage prices contained in the Timber Mart-South graph.
The premium for saw logs over pulpwood has fallen from approximately $33.00 per ton ten years ago to about $14.00 per ton today (in this south-wide example). While these numbers alone should get your attention, let’s discuss these prices and the trend they indicate in the context of your planted pine investment. How does a higher value for pulpwood and lower value for saw-timber affect management strategy and individual management practices? The numbers reflected above require foresters and landowners to thoroughly assess the market on a fundamental level. This means running the necessary economic analyses of net present value (NPV), return on investment (ROI), and internal rate of return (IRR) to determine how to best manage your timber investment within the context of your personal goals and the market conditions.
The correct management decisions will vary based on local markets, landowner objectives, risk assessment, site productivity, etc. If your timberland is situated within close proximity to sawmills or plywood mills and per ton stumpage prices for these products are consistently higher than “average” due to the short hauling distance, then growing saw logs is likely still the optimal approach. On the contrary, if your timberland is situated within close proximity to pulp mills, biomass mills, or wood pellet mills and per ton stumpage prices for these small wood products are consistently higher than “average,” then shorter rotation ages with a single cutting for a single product may prove to be more lucrative. If you are lucky enough to have a clear option then maybe this discussion is a moot point for you. However, since rarely in life are options so clear and since only having one clear option is not necessarily a good situation to be in as a seller of any asset, it is quite advisable to broaden your marketing options by developing a management strategy that is based on the best estimate of future market place fundamentals while leaving open the option of manipulating your management strategy to position your asset for sale in the event of changes in the market place.
Here’s what we know, or at least what we can forecast with some certainty. Nearly every forest economist today suggests that saw-timber markets in the Southeast will improve over the next decade due to a revitalized housing market, restricted and decreased supply of lumber from Canada, and increased demand from abroad, particularly China and other Asian economies. In addition, the future of pulpwood and “small wood” markets look bright as well. Emerging markets for products like pellets and biomass for fuel have increased competition for raw material within pulpwood or “small wood” markets. Also, many of the emerging Asian economies are in their infancy when it comes to consuming products that western economies have consumed for decades. So, both the small wood (pulpwood) and the large wood (saw-timber) markets have a good future.
What does that mean? Again, the foremost question is, at what rate each market will improve from today’s position, and what supply of raw material will be in the market place over time? While this improving forecast places growers and producers in an attractive position moving forward, we must not get complacent and be satisfied that “getting better” is as good as we can do. The timber industry is a global business these days and changes in supply and demand or in consumer habits thousands of miles away affect the wood basket here in the Southeast. We must be adaptive and understand that management strategies about the next thinning, the next herbicide application or burn, the next rotation, or the future market, must be adaptive and properly analyzed to maximize returns on the investment as a whole.
The tables below are a sample of the ingredients of the “sawtimber” and the “pulpwood” investment strategies. I have not actually calculated any of the investment returns because to do so might lead you to think that “the answer” is the best answer for all situations. It clearly is not, and in this comparative I do not include income from pine straw raking or hunting leases, nor do I include expenses for ad valorem taxes, severance taxes, income taxes, fertilization, and herbicide application(s). All of those are logical expenses that may be deemed necessary or beneficial, but each must be separately analyzed to determine their effect on the overall return in each scenario.
We all hope our crops will come to market when all the stars align. Sometimes the stars have a better chance of aligning when you help steer the boat, so as you plan for your next crop of trees or manage the crop you presently own, think about the end goal and how each step in the process affects the end goal. Growing timber can be very financially rewarding, and remember you can actually have an effect on the ultimate outcome of your investment. Take time to analyze what you do, or seek the help of a professional forester to assist you with the analysis. You won’t be sorry.
Michael J. Dooner is President of Southern Forestry Consultants, Inc., a Society of American Foresters Certified Forester, and has been in the consulting forestry business in this area for 35 years. He serves on the Florida Farm Bureau state board of directors and as Vice President of the Florida Forestry Association. Contact Mr. Dooner at 229-246-5785 or email@example.com.
Pine Tree Farming with Short Rotations – A New Normal?
By: Perry Clements, III
The traditional long-term rotation ages for pine plantations in the southeast will always be an option for timberland owners as long as there are sawmills and premium paid for sawtimber products.
However, with increasing pulpwood prices due to increased demands and lower supply in our area, shorter rotations are much more attractive now than they have been in the past. In fact, just a few years ago shorter rotations were not even an option from a financial standpoint. This was mainly due to very low pulpwood prices.
Traditionally, pines are planted with the intent of growing them for at least 30-35 year rotations. Several thinnings would be conducted during the life of the stand to keep the trees healthy and sustain their vigor so that their growth and development could be optimized for sawtimber development.
Growth and yield models have shown that long-term rotation ages when combined with aggressive, intensive management can yield, on average, 8-10% compared for the entire duration of the rotation.
Intensive management means proper site preparation, site control, fertilization and routine, timely thinning.
Advantages to Long-Term Rotations include:
- Periodic income from thinnings
- Development of wildlife habitat
- Good timber investment
Disadvantages to Long-Term Rotations:
- Exposure to weather catastrophes.
- Exposure to loss due to fire, insects, disease, etc.
- Weaker investment compared to short rotations.
Growth and yield models have shown that short rotation ages (11-15), when combined with intensive management, can yield, on average, 12-15% or even more.
Advantages to Short Term Rotations:
- Short rotations increase income streams by providing income more often.
- Decreases exposure to weather catastrophes.
- Less exposure to loss due to fire, insect and disease.
- Potential for increased investment opportunity.
Shorter rotations are market driven, meaning if the pulpwood market is favorable then a clearcut may be an option. Short rotations are mostly windows of opportunities and should only be considered if markets are advantageous at the time of the first thinning.
Our firm recommends to plan for a long rotation. However, if the conditions are favorable and if the plan is agreeable to the longterm goals of the landowner, then a short rotation becomes an option.
Factors that Affect the Investment Decision for Long-Term Versus Short-Term Rotations Include:
- Soil Quality
- Site Index
- Stand Density
- Stumpage Price
For sites that are optimal for slash pines with low competition and where pine straw production is a practical reality, the increased income from pine straw can drive the return on investment percentage above 15%.
Especially in today’s financial environment, the above mentioned returns are very strong and easily surpass many other investment opportunities.
Our Analysis Can Be Achieved by Investing in the Following:
- Proper site preparation and planting techniques (herbicides)
- Genetically improved superior pine tree seedlings
- Competition site control
- Fertilization if needed
Timber Markets (Future Outlook)
Long Term Pine Lumber Production
For the foreseeable future, the timber market outlook for Southwest Georgia looks better than at any time in the past. The Southeast is one of the three major sources of softwood lumber products in the United States and Canada. With Canada experiencing substantial timber losses due to the mountain pine beetle, Canadian imports into the United States are declining. In fact, Canadian sawmill companies are investing in the Southeast at an increasing rate.
The Pacific Northeast in recent years has over-harvested to keep up with China’s demand for lumber products and not kept up with the increasing demand for lumber in the U.S. If new housing starts rise and investments continue to be made in the Southeast, mill facilities predictions are that by 2017 timber prices for sawtimber will meet or exceed the 2005-2007 peaks we saw during those times.
The above will result in the Southeast becoming the number 1 region for lumber production in North America.
Pine Pulpwood—Short Term Wood Production
The future of this sector of the timber market in the Southeast looks very promising with consumption and use slightly increasing and supply on a decline due mostly to land use changes and reduction of pine tree planting over the past decade. This sector points to an increasing market.
Wood pellets and OSB plants are competing for the same products. The wood pellet industry in Georgia alone has grown from none to nine facilities in the last six years and plants continue to be built across the state. Most of the pellets from these plants are exported through the Savannah port to Europe for electrical generating plants.
The pulpwood market has its ups and downs due to weather fluctuations but remains strong and is forecasted to stay that way. During the last couple of years we have experienced pulpwood prices beyond our expectations.
In a nutshell, we believe that for timberland owners who are intensively managing their trees, the return on their investment will have very positive results whether long term or short term rotation management.
For landowners wishing to learn more about their rotation options please contact Charles Rozier and Associates Consulting Foresters at 229-246-4509 or email Perry Clements at firstname.lastname@example.org.
Perry Clements is a Georgia Registered Forester with Charles Rozier & Associates in Bainbridge, Georgia. The firm is a full service consulting company that also offers brokerage and appraisal services. They have combined experience of more than 50 years of timber management. Perry has expertise in timber appraisals, timber sales, market analysis, forestry herbicides, and loblolly plantation establishment.