When inflation rises, people talk about it. In my calls with forest industry investors and executives, these discussions center on current and future costs, prices, and cash flows. Generally, I observe that inflation increases fear by fogging the crystal ball of cash flow models and fueling uncertainty in planning sessions. However, inflation and other macroeconomic turbulence also embolden those armed with simple business strategies focused on fundamental performance of real assets and experienced teams. In those cases, I note that the questions are less about “what should we do?” and more about “what can we learn?”

Prices convey information.

In elementary school, I prized the Pontiac Firebird (click here for a tribute to Burt Reynolds and his “Smokey and the Bandit” Trans Am). Unfortunately, as a fourth grader with a fifty-cent allowance, I simply could not rake enough leaves or mow enough lawns to pay for one. In this way and at a young age, prices paid and charged taught me basic economic lessons related to competitive advantages (kids doing lawn work have few) and scarcity (Trans Ams).

In forestry, timber prices provide critical information about regional timber markets. For example, the lower per unit log prices in the U.S. South as compared to the Pacific Northwest reflect, in great part, the relative abundance of timber in the U.S. South. The prices, while incomplete as sources of local market intel, do help us understand the economic fundamentals required to profit in the region.

Regional forest industry fundamentals are known by those in the business. The moving of softwood lumber capacity across North America from Western Canada and the Northwest to the U.S. South, changes in timberland ownership, and factors driving pulp fiber costs comprise a few. However, the big shifts, which simply manifest the regional economic realities associated with supply and demand, take time in the forest industry. Years and decades, not days and weeks. So, as new macro events batter the woodshed, we ask, “how might this change our understanding of where things are already headed? And when?”

Prices allocate resources.

Consumer preferences affect the use of raw materials and natural resources. In the case of trees and forests, people buy lumber and paper and baseball bats and other products made of wood. When people choose between red oak or white oak for furniture, or between cedar or treated pine for decking, they inform a process that bids for the forest-derived raw materials from which these products are made. When we layer in other, “marketable” products such as carbon offsets, the market gains complexity or liquidity, depending on your view. This further reinforces the value of clear, reliable price signals by which forest owners can make decisions.

This allocation has potential implications if the marketplace ultimately views the use of trees for lumber versus, for example, carbon sequestration as direct alternatives (see “Preparing to Position Timberlands for Forest Carbon”) However, immediate and compelling questions focus on separating the speculative from the realizable cash flows associated with forest carbon in timberland transactions and valuations.

When I talk with timberland appraisers, we openly discuss the challenges of capturing emerging values and cash flows in their work. They understand, as well as anyone, that a great deal of the confidence and integrity associated with timberland investments links to prudent, consistently applied, and quantifiable estimates of value.

Improving an asset increases its present value.

Please take the easy wins. Land gets more valuable when you plant it and put it to work. While investors value and acquire timberlands based on their potential to generate cash flows in the future, these lands become immediately more valuable as we improve them with NPV-positive projects. Improved forest management, better roads, and new recreational leases get immediately reflected in any updated assessment of value. The future prospects for harvesting trees during poor weather by improving the roads or the reduced risk from installing fire breaks instantly increases the value of your forest over the neighbor’s, all other things being equal.

Please join us for our one-day, virtual “Wood Flows & Cash Flows” conference on August 25^th, 2022.