Aunt Fanny adjusted her aviator sunglasses, put her hands on her hips and looked up at the loblolly pine tree in front of her.  “Nephew, talk to me about timber prices.  What’s this pine tree worth?”

“This tree here is pretty straight and about 50 feet tall,” I said. “No obvious defects such as forks low in the stem or big cankers or cavities.  And it’s got a diameter of about 11 inches right here at four-and-a-half feet off the ground.  That’s where we compare trees by size.”

“Seems arbitrary, Nephew,” said Aunt Fanny.

“Different trees have different shapes, just like people.  So we try to measure their size in as consistent a way as possible.  This, along with tree height, helps us estimate their volume, which tells us how much wood we’ve got to sell,” I said. “Trees are typically thicker or wider at their base.  This is the butt of the tree, which can mislead us on how much wood we’ve actually got here.”

Aunt Fanny slowly scanned the tree from the base near the ground up into the branches of the crown.  “I see how the tree gets skinnier up near the top.  It’s like a super stretched-out candy corn.”

I laughed. “At 11 inches, in this local market, we’d call this a ‘chip-n-saw’ tree.  It’s a small sawlog.”

“Chip-n-saw?” said Aunt Fanny. “The name sounds backwards to me.”

“It refers to the mill technology.  A ‘chip-n-saw’ mill specializes in cutting these smaller logs.  While they will cut some lumber, a decent portion of the log will be chipped up and sent to a pulp mill for making paper.  A ‘chip-n-saw’ machine can do the sawing and chipping at basically the same time.”

“Sounds like tree purgatory,” said Aunt Fanny.  “Big enough to get in the door, but not quite big enough to be fully appreciated by the mill.”

“Well, that’s the thing with timber prices.  They take into account how the tree gets used,” I said.

“What do you mean?”

“Here in this market, trees get sold by the ton.  A chip-n-saw tree is worth about $20 per ton.  If the tree had a major defect and couldn’t get sold to a chip-n-saw mill, we’d send the entire stem to a pulp mill for about $10 per ton.”

“What if we got out of purgatory and had a bigger tree?” asked Aunt Fanny.

“At about 12 inches or bigger, trees in the South become ‘sawtimber’ and can go to sawmills that cut bigger boards.  They could pay $30 per ton or more, depending on the size and quality of the tree.”

“So bigger is better in forestry,” she said. “That right, Nephew?”

“For the most part, yes, Aunt Fanny. As long as we get there in a reasonable amount of time.”

I paused and looked around at the other trees.  “Nephew, your wheels are turning.  What’s the rest of the story?”

“Well, if we focus too much on per ton prices, we forget the key value drivers under our control.  Per unit timber prices provide an incomplete view of timberland investments.”

“Nephew, prices are important.  I care about the price of milk for my Shredded Wheat, the price of gas for my 280ZX and the price of Wild Turkey for my afternoon snack.  Surely timber prices matter.”

“Yes, of course.  I just wanted to put the prices in context.  Today’s timber price is a function of today’s technology and yesterday’s timber price is a function of yesterday’s technology. Sawmills are more efficient, and forests are more productive.”

“So you’re saying my customer needs less wood and I’m producing more?  That does not sound like favorable economics,” said Aunt Fanny in her ‘banker’ voice.

“There’s a lot going on here. Mills and foresters are constantly adapting to each other.  Prices go up and down over time, but we get a sense for averages and baselines.  For your forest, when thinking about the returns, it’s really about cash flow per acre per year.  And land appreciation, if any.”

 

Click here to learn about and register for “Applied Forest Finance” on February 3rd in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments. This includes examples and discussion related to timberland returns and value drivers.