This post includes themes from the (virtual) Applied Forest Finance course on April 3^rd, 2025. Early registration ends March 20^th! Class attendees will receive eBooks for the soon-to-be released 7^th Edition of Forest Finance Simplified and 2^nd Edition of Aunt Fanny Learns Forestry!

Introduction

Forest finance is the language and analysis of managing forest resources as investments. In forestry, financial analysis supports investment decisions such as the optimal rotation, silvicultural strategies, and the buying and selling of timberlands. Like a golfer choosing the appropriate club, forest owners and investors choose from a set of tools the best option given their forest investment objectives.

Forestry, Finance, and Frameworks

Financial analysis depends on two economic concepts. One, we prefer more money rather than less. Two, we prefer dollars today rather than dollars tomorrow. In forest finance, these concepts encourage us to maximize net present value (bigger is better) and invest in forest management that shortens rotations (time value of money). They remind us to always consider the opportunity cost of putting capital into forests versus our next best investment alternative.

Basic financial tools and frameworks help organize our thinking to make optimal decisions given what we know at the time. As forestry pioneer and educator Carl Schenck wrote years ago:

“No capitalist and no forester is forced to adopt a financial formula or equation when determining the merits of an investment. The equation merely illustrates a logical manner of financial thinking….”

With a few questions and basic equations, we can organize our thinking to assess the competitiveness of any investor seeking to buy or sell timberland in each business environment. For example, consider the roles of discount rates and time horizons as either enabling or constraining investor valuation efforts.

Discount rates reflect the “appropriate” hurdle rate or expected return for a given asset or opportunity. Time refers to either the length of the expected investment – “what is the investment period?” – or the timing – “when?” – of a potential investment decision. A corporation may have zero flexibility with the discount rate because they have a rate mandated by the Board of Directors. Alternately, an institutional investor may have some flexibility with the discount rate, but little room to adjust timing, as they need a project of exactly 10 or 20 years for reasons related to cash flows, value preservation, or diversification.

The Logic of Ignoring Sunk Costs

In forestry, we sometimes struggle with “sunk costs.” Yet, when gauging the current value of our timberland investment against new investment opportunities, we must, first, ignore sunk costs and, second, evaluate forest investments based on their ability to generate income and returns moving forward.  The only time we have complete control over our portfolio is today.

When evaluating our current timberland holdings, we revisit key questions, such as:

1. Do my reasons (my investment thesis) for holding the asset still apply?If the investment helpfully diversifies my portfolio and generates cash as needed relative to other opportunities, then ignore the noise and focus on other issues. Your timberlands are doing what they are supposed to do.
2. Have my timberlands reached financial maturity?This is when the owner’s cost of keeping an asset exceeds expected returns. We approximate financial maturity in forestry by comparing the annual increase in forest value with the investor’s expected rate of return from other investments of similar risk and duration. If we can do better elsewhere, we should feel compelled to do so. If we cannot, then grab a beer, sit on the porch, and enjoy the view.
3. How do I evaluate short-term opportunities to enhance the performance of this forest asset? Marginal analysis supports forest management and intermediate harvest decisions for existing stands. It answers “when to harvest?” and “when does forest management pay?” and “should I accept this ‘woods run’ offer to bring all logs to the pulp mill?” Incremental differences in costs and benefits “on the margin” clarify decision making for specific treatments or harvest decisions.

Conclusion

For a range of objectives, finance represents a trade-off between today and tomorrow. To paraphrase forest economist David Wear of the U.S. Forest Service, an investment is the dedication of today’s resources to tomorrow’s production. Investing in something now – a factory, research, or timberland – means giving something today to gain in the future. The tools of finance help us assess whether each forest investment opportunity meets our specific objectives.