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Forest Finance: When is the “Current Stand Approach” Useful for Valuing Timberlands?

When talking about timberland investing while having a beer or standing over the hood of a truck, not when signing checks or allocating capital…..

A reasonable estimate of a forest’s current economic value equals the standing merchantable volume multiplied by the current stumpage prices in the local market. Investors sometimes use this “back-of-the-envelope” technique to estimate the liquidation value of a timberland investment or forest-owning firm. However, this basic approach suffers from observable, value-destroying limitations.  Why? It ignores the potential for generating greater wealth by holding the forest to economic maturity, investing in forest management, identifying other revenues, or accounting for taxes or opportunity costs associated with the land and capital.

This snapshot value faces other weaknesses.  First, current realizable values for the standing timber will be low at any given point in time.  Also, for large timberland ownerships or plantations, the local market can rarely absorb a total liquidation (clear cut) of inventory without depressing local prices.  From a valuation standpoint, the former incents conservatism and the latter incents unreasonable optimism.  Generally, appraisers valuing forests completely avoid current stand valuations (in writing)…..

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.

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