What is a tree worth? For investors and forest owners, the value of a tree is determined by the returns on the capital committed to owning, growing and marketing the tree. In forestry, financial analysis supports our efforts to estimate this value while making decisions related to the optimal (economic) rotation, when to harvest, how to manage (silvicultural), and the buying and selling of timberlands.
For investors, the fundamental value of an asset derives from the cash flows generated by the asset. The price of an asset can vary from this fundamental value over time because of uncertainty associated with future cash flows or from different investment theses and priorities. So the application of finance in forestry addresses three sets of questions:
- First, how do we identify, screen and value timberland acquisitions or forest management decisions? This set of questions deals with the “investment decision” and includes proper valuation (appraisals) and the ranking of different forest management plans.
- Second, how do we pay for this investment? This deals with the “financing decision” and addresses the relative advantages and disadvantages of applying debt, paying with cash, or issuing equity.
- Third, how and when is the appropriate time to divest – sell – the property, or to harvest timber to maximize profits? We refer to this set of questions as the “exit decision”, which includes how to evaluate “woods run” or “special” prices in a given local market.
In short, forest finance tools give investors a means for selecting the best option given their forest management objectives. These tools address the question, “What approaches can we use to value and rank potential forestry investments and determine whether or not they satisfy our investment objectives?”
Click here to learn about and register for “Applied Forest Finance” on March 6th in Atlanta, Georgia. The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments. For those located in Northwest, Forisk will be co-hosting a similar course on March 21st in Portland with the Western Forestry & Conservation Association.