This is the first in a series related to the analysis of timber markets and wood baskets.

Across disciplines, we apply multiple tests to support a thorough analysis and final decisions. Reliance on a single measure can mislead and, ultimately, confuse. In medicine, a heartbeat confirms life, but tells us little of health. In finance, IRR speaks to the rate of return, but tells us little about the investment required or wealth created. And in assessing local timber markets, the “growth-to-drain” (GTD) ratio provides a snapshot of sustainability, but provides little insight, by itself, regarding the ability to support new wood-using facilities.

The sustainable economic management of private forestlands emphasizes a long-term balance between the growth and harvesting of timber. The GTD ratio simplifies the feasibility analysis of local timber markets to a single, easily communicated number. However, growth-to-drain provides an incomplete story.

A basic supply analysis requires three pieces of information specific to the wood basket or timber market of interest.

1. Inventory: what is the volume of standing trees in the market?
2. Growth: what is the annual, average growth of the forest (net of mortality)?
3. Removals: how much volume is harvested and removed from the forest each year?

 

Using these inputs, we estimate the GTD ratio by dividing growth by removals. If the ratio exceeds one, the local market grows more wood in a year than is harvested. If the ratio falls below one, the local market harvests more wood in a year than it grows. We also calculate net growth by subtracting removals from growth to provide an estimate of the “surplus” volume accumulating in the market each year. In the end, net growth, evaluated over time, can trump the GTD ratio for ranking timber markets and wood baskets. Wood-using mills and timber-selling landowners don’t live on a steady diet of ratios, they survive on a steady flow of logs and cash.

In practice, a thorough supply analysis accounts for how metrics such as GTD and net growth change over time and how they expect to evolve moving forward. In addition, we apply these criteria to different ownership types, species and product specifications. Millions of tons of pine pulpwood growth on public lands in a national park have little relevance to a wood pellet project. And a local market that grows ten times more hackberry than it harvests does not qualify as “sustainable” for a pine sawmill, though it could prove a beautiful place to build a home….

Forisk will detail supply assessment issues during “Timber Market Analysis” on August 11th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets.

In addition, Forisk will teach “Applied Forest Finance” in Portland, Oregon on July 14^th. The class covers the financial analysis of timberland and other forestry-related investments.