During a break at a recent workshop, a participant asked me, “Do we really need to manage forests to make money? Is it worth the extra effort instead of just letting trees grow back on their own?”
Short answer: Yes and yes.
Longer answer: Let’s apply basic finance to a forest and consider the following example:
You have a 1,000-acre forest of Southern Yellow Pine. Without intensive management, you could harvest 2,500 tons per year on a sustained yield basis. At $30 per ton, that produces $75,000 in annual cash flow. Your annual management expenses are $10,000, so you net $65,000. Assuming this cash flow in perpetuity with a 6% discount rate results in a net present value (NPV) of just under $1.1 million dollars ($65,000/0.06 = $1,083,333). That’s $1,100 per acre.
With more intensive management, you can increase the annual harvest to 4,000 tons on a sustainable basis. This increased volume results from a higher performing forest growing more wood with shorter rotations. At $30 per ton, that produces $120,000 in annual cash flow. You spend more, so your annual expenses are now $20,000 per year, netting $100,000. Assuming this cash flow in perpetuity at a 6% discount rate delivers an NPV of nearly $1.7 million dollars ($100,000/0.06 = $1,666,667). That’s $1,700 per acre.
For timberland investments, active forest management and responsible harvesting chart the path to stronger cash flows and higher valuations.
Click here to learn about and register for “Applied Forest Finance” on March 29th in Atlanta, Georgia. The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments.