Forest Stewardship: Timber Values

Advanced forest stewardship course, day 4: Timber Values

Tonight's class focused on values -- the value of timber, calculating the value of a future harvest, and looking at the big picture beyond cash flows.

 

Will Miller of Miller Shingle talked for over an hour about timber prices, types and mills. His charts were depressing -- timber prices are at dismal lows, and mill closures are disheartening. I learned some new terminology, so now I know the difference between J sort and K sort, between hook and sweep, and between a knot and a spike knot. I know how to pronounce Buse and Oeser without sounding like the tenderfoot I am. (Buse sounds like busey and Oeser rhymes with closure.)

 

Will handed out a spreadsheet of timber prices for the current month, organized by species and log size or type. All of his information was for west side timber, so he had no information about Ponderosas, nor for mills east of the Cascades.

 

Take-away: Don't harvest now, prices are too low, but the outlook for price recovery is gloomy.

 

The rest of the evening was on forest finance. The course's lead instructor (MBA in forest economics) talked us through various financial calculations. We started with the simple ones, like present value and future value. We worked through net present value (NPV), perpetual periodic series, and converting nominal figures to inflation-adjusted numbers. All of this led up to learning the Soil Expectation Value (also known as the Land Expectation Value).

 

SEV is NPV expressed as a perpetual periodic series. I never learned this one in business school. It takes into account the cost of the land, any existing timber at time of purchase, and all of the aspects included in a NPV calculation. SEV is specific to one situation and land use, i.e., forestry.

 

Take-aways:

Calculations like these are useful tools for comparing timber management options. Should I buy an available piece of forest land? Should I harvest it now or wait for the market to improve? How does that change if the existing timber is in decline? What species should I choose after harvest? What if excise tax rates change?

 

Calculations are not as useful for the non-market factors in timber management. What are my goals for land ownership? What value do we (or another organization) place on wildlife habitat? Aesthetics? Fire safety? When calculating the monetary output of a chunk of mud and mbf, It's important to keep the big picture in mind. If it were only mud and mbf, we wouldn't own ours; timber farming is a terrible business to be in now, strictly economically speaking.

 

Garbage in, garbage out. Assumptions are the key to any of these calculations. Some assumptions boil down to guesswork. The better the guess, the better the accuracy of the outcome. Many calcs are good only for comparisons; in that case, be sure you're comparing apples to apples. For example, try to use real numbers and real interest rates (not nominal, and certainly not a mix).

 

Note: Tonight's class follows two weeks (class days 2 and 3) of training on the Landscape Management System (LMS) software. LMS performs a wide variety of complex calculations and 3D visualizations on timber stands, and could be very useful to a part-time timber grower. The software is technically a kludge, one that crashed my PC twice and had to be removed each time. It can be downloaded from the WSU Extension. The class also took a field trip to practice taking inventory with sample plots.