Baptist, Bootleggers and Biomass

When I moved to North Mississippi to buy land in the late 60’s, I landed in a “dry county” where it was illegal to buy or have alcoholic beverages in your possession. Like most folks, I enjoyed an occasional adult beverage. And coming from an Italian family, this was a pretty foreign concept to me. I asked “Why?” and the answer came back “because of the Baptists and the bootleggers”!

It was a coalition of two diverse groups with very different reasons and objectives. The Baptists supported the “blue laws” for religious, moral and ethical reasons and the bootleggers supported the same laws for reasons of personal financial gain (although it was pretty widely known that some members of the latter group were widely outspoken members of the former group!). The differences in their motives were irrelevant with respect to their ability to create a strong coalition that maintained a common objective.

A similar coalition has evolved to oppose the development and use of renewable energy, specifically biomass. The group is composed of environmentalists, power companies and the pulp and paper industry. Strange bedfellows again.

The news media’s focus on renewable energy is pretty much confined to solar and wind and what might be. Here is a graph of what is - courtesy of The Energy Information Administration.


Renewable energy currently supplies a meager 7% of the nation’s energy consumption. A year ago it was 6% and 90% 0f that was equally split between hydropower and biomass. All of the rest combined represented less than 10% of that meager 6%! The significant growth in renewable energy in 2007 came from biomass, and to a lesser degree, from wind. Now, let’s take a look at the coalition and what is driving it.

Environmentalists: The environmental community has been a strong proponent of renewable energies up until the point of actually supporting their implementation. Following is a look at the rational and frequent hypocrisy of its “support” for renewable energy.

On Hydropower
Hydropower dropped from 45% of renewable energy consumption to 36% of renewable energy consumption in one year. Hydropower production of electricity has come at the expense of free flowing rivers and I know of no environmentalists that support the expansion of hydropower by damming additional rivers. In fact, I know of very few Americans at all that support expansion of hydropower by flooding more rivers. Even if there was support, it would be squashed by the “discovery” of an endangered minnow or mussel. There will be no more hydropower sites added and some likelihood that there will be calls to restore some rivers to a natural state creating a loss of hydropower. There may be some gains in efficiency but, for all practical purposes, what we have today is all we can expect. Increases in renewable energy will have to come from other sources.

On Wind
Wind and solar represented the energy mantra of the environmental community until engineers dramatically improved the efficiency of windmills to the point of making them actually cost-effective in many (windy) situations. The environmental downside of windmills includes damage to certain species of birds (call in the Endangered Species Act again) and aesthetics. The only places that aesthetics are at issue are the mountains, oceans, deserts and the places in between.

This is a link to a Grist article entitled The Wind and the Willful: RFK Jr. and other prominent enviros face off over Cape Cod wind farm, By Amanda Griscom Little. It starts with the following quote.

A long-simmering disagreement within the environmental community over a plan to build a massive wind farm off the coast of Cape Cod, Mass., is now boiling over into a highly public quarrel.

It is a good article illustrating the conflict in the environmental community. When the NIMBY attitude combined with the political clout of the Kennedy clan, the entire world watched as the environmental hypocrisy and political power of the Kennedy family emerged to create the reality of what it will take to actually implement renewable energy projects.

On Solar
Here are a few extracts from a FOX News article Feinstein: Don't Spoil Our Desert With Solar Panels.

“Sen. Dianne Feinstein said development of solar and wind facilities in California's Mojave Desert would violate the spirit of what conservationists had intended when they donated much of the land to the public.”
“"It would destroy the entire Mojave Desert ecosystem," said David Myers, executive director of The Wildlands Conservancy.”
"This is unacceptable," Feinstein said in a letter to Interior Secretary Ken Salazar. "I urge you to direct the BLM to suspend any further consideration of leases to develop former railroad lands for renewable energy or for any other purpose."

Need I say more?

On Biomass
There are others much more in tune than me with the battles that have raged recently over the definition of biomass in this year’s Energy Bill but I have seen enough of the terminology to understand the role of the environmentalists. In an effort to suppress a fear that natural forests would be converted to plantations they were successful in creating a definition that excluded most trees from the definition. In the end, more rational heads prevailed within the environmental community and they worked to provide a reasonable, workable definition. Still, biomass growing on our federal lands has been excluded as a source of renewable energy. And that’s a lot when you consider that about 1/3 of our forests are on federal lands.

On Nuclear Energy
Nuclear power is not technically classified as renewable but it too, is an option that could replace much of the coal and biomass for electrical production. One publication by an environmental organization claims that 30,000 deaths a year are caused by particulates from U. S. coal-fired power plants yet none (that’s zero) have ever been caused by a nuclear power plant. Environmentalists have done a very effective job at scaring the American public to the point where it is questionable whether we can look at nuclear power in a rational manner. IF we are going to do it, some folks in the environmental world will have to play a leadership role. What would the environmentalist’s position be if 30,000 people were killed each year in nuclear accidents? We have options and it is up to all of us to pursue them in rational manners without the scare tactics.

Power Companies:
The power companies have an industry pretty much built on coal. It’s not that they love coal, it’s that coal is the least expensive way to produce electricity and their customers want low cost power. As an industry, biomass as a replacement for coal is an expensive proposition and they want to hold their costs down so there is a good reason for the resistance to the move to biomass.

But not all power companies are in the same boat. A large part of the cost of coal is freight. The largest cost component of biomass is transportation. So look where the resource is and it is pretty easy to see which states have an economic incentive to support or oppose the utilization of biomass. Transporting low sulphur coal from Colorado to Georgia or wood from Georgia to Colorado doesn’t make a lot of sense economically or environmentally. The utilization of energy resources close to the power facility makes a lot of sense and that is what we are seeing evolve from the plans of the power companies. The power companies outside of the nation’s “woodbasket”, sitting on coal reserves, are and will continue to be a part of the coalition. The companies in the Southern woodbasket will remain a part of that coalition UNTIL the 15% renewable energy standard really is a standard, then biomass becomes the least expensive option. In fact, in the South, it is pretty much the only option for both carbon neutral and renewable energy so some of the companies are moving quickly to secure their woodbasket.

Pulp and Paper Industry:
The pulp and paper companies, like the power companies, are looking at both costs and their ability to survive. They are faced with increased global competition, severely declining demand and now a new threat that is competing for both their raw material and one of their primary energy sources. Although they probably use more renewable energy than any other industry, don’t expect them to embrace a national shift to biomass that will make it even more difficult for them to compete or survive. Inflation, followed by a weak dollar, may save the industry but “hope is not a strategy”. The industry must fight for its survival on all fronts and we should expect to see little change on the biomass front.

The question that the industry poses is whether or not the forest can sustain both the pulp and paper industry and a robust biomass industry. Collectively, is it sustainable? One solid argument is that the economic value of the pulp and paper industry (employment, value added, and multipliers) is much greater than can be achieved by the biomass industry. Below is a graph produced by the South Carolina Forestry Commission that illustrates how important pulp and paper is to the forestry sector in that state.


On the value added issue, it is questionable. The resource supply chain for the two industries is identical – stumpage, harvest, transport to mill, and woodyard handling. I’m not sure how many more people a pulp mill employs relative to a pellet mill. If you throw in the paper mill, you have to throw in the power generation plant on the other side of the equation. I’m not sure how much difference there really is AND I’m not convinced that there isn’t room for both. I just don’t accept the argument that it has to be one or the other.

The industry is crying “sustainability”. And they are doing it in an organized and deliberate fashion. As a 40-year veteran of the pulp and paper industry, I am disappointed with the industries position. Twenty years ago the industry would have taken a strong positive approach and embarked upon an effort to substantially increase planting, growth and future availability of wood. Landowner assistance programs would be growing and new ones would be sprouting. Tree improvement programs would be well-funded in an effort to grow more and better trees on each acre. This time the industry has taken a position that is negative to all of the components of their entire wood supply chain. Negative to the growers of the wood, the loggers who harvest it and to those that transport the wood to the mills. People remember such things.

Some Final Thoughts:
If a shift to renewable energy is to be successful, some environmentally responsible environmentalists must step up to the plate and show some leadership. It is doubtful if an effective renewable energy policy can be developed with an environmental community unified behind antagonistic policies for every form of renewable energy but hemp. Additional hydroelectric sites are out of the question. That leaves wind, solar, geothermal and biomass. The environmental community must decide how best to utilize and mix the combination of those four renewable energy options or oil, gas and coal will be the answer. The environmentalists continue to fiddle as Rome burns.

The power companies are looking strictly at cost. Most of them have some level of governmental support, usually in the form of a monopoly supported by government control of prices. If a national goal of energy self-sufficiency, with a strong component of renewable energy and carbon reduction, is the goal, the pricing issue is something the power companies can understand. That problem can go away quickly if Americans want renewable energy and are willing to pay for it. If Americans are not willing to pay for it, then the power companies are right on target with their objections.

The pulp and paper companies have traded a level of self-sufficiency (typically in the neighborhood of 25% - 30%) for the cash received for selling their land. This was a deliberate decision done after weighing the options and now the industry must live with it and it may not be pretty. The market will determine what products the new timberland owners will grow and sell. The pulp and paper industry has long touted its ability to compete in a fair and level playing field. The playing field has changed as the nation seeks energy independence, renewable energy sources and reduced carbon emissions.

If the anti-renewables coalition is not broken, Rome will be in ashes.

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Tree Planting in the South Continues Decline

Last week I had an opportunity to speak at the annual Southern Forest Tree Improvement Conference at Virginia Tech. The subject that I was asked to talk about was "The Relevance of Tree Improvement to Changing land Ownerships and Objectives". By the time I finished my presentation, I think that I had reversed it and actually talked about the opposite or "The Relevance of Changing land Ownerships and Objectives to Tree Improvement". At any rate, in the process of putting together the information, I created one graph that should be of interest to more than just the geneticists and biotech folks.

Each year Steve Chapman, with the Georgia Forestry Commission, conducts a survey on the prior year's tree planting in the South. He contacts each of the State Foresters for the data and then he compiles it. The project takes a great deal of time and is a very important service to everyone involved with timberland in the South. Actually, given the importance of the Southern forest to the nation, this project has importance to everyone. We should all be thankful to both Steve and the Georgia Forestry Commission for their efforts.

Last year Steve had provided me with the historical data and I looked at the trends which were not real positive. I also noticed that not all State Foresters placed a high priority on cooperating with Georgia on the project. That is very unfortunate. I graphed the data with the intention of posting it here. I decided to try to get the missing data first so I sent emails to the State Foresters that didn't provide Steve with data and asked them to add the missing data. No response.

When I was asked to speak to the Tree Improvement folks, I knew it was important to them to understand how the demand for seedlings was changing so I contacted Steve again to see how he had made out with the 2008 survey. Most of the State Foresters had responded but data from two states was still unavailable. He sent me what he had and I adjusted for missing data by using previuos years data wherever annual data was missing. Not the best numbers but the best available and that is what I used to make this graph.

The picture isn't pretty. Planting dropped off considerably after the 2001 peak and has continued through 2008. Planting levels have not been this low since the 1950's!

Let's look at the reasons behind the decline and speculate about the implications. A year or two ago I was working on a project for a pulp and paper company and we were discussing this trend and one of the Wood Procurement people made the observation that he had not been doing any clearcutting - only thinnings- for a year. So maybe the lack of planting is not so important to the long term wood supply as the graph might indicate.

There is clearly some sound logic behind this observation. During the late 1980's, national planting levels peaked at the three million acre mark and the lion's share of that was in the South. Today we are thinning those plantations and that is what is providing much of the resource for pulp production. In addition, the shift in timberland ownership from pulp and paper companies to institutional owners has probably resulted in a lengthening of pine rotations by a couple of years as the ownership objectives shifted from maximizing mean annual increment to maximizing return on investment. High planting levels of the late 80's and lengthening rotations have clearly provided a thinning opportunity. So..., we are living on the investment of previous tree planters.

The other clear driver behind the lack of planting is the sawtimber market. Low demand resulting in low sawlog prices means reduced sales and reduced final harvest cutting (clearcuts) and that results in a reduced need for planting.

It all sounds pretty logical so maybe the reduced planting is not such a bad thing. The question that is not answered is "Are there a significant number of clearcuts that are not being replanted because of poor markets?" A"Yes" answer would be a bad thing. --Brian

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RMK Gets the Adirondack Finch Pruyn Timberland

It appears that The Nature Conservancy has sold the 90,593 plus acres of the former Finch Pruyn lands in the Adirondacks to a subsidiary of the Danish pension fund ATP. The sale was handled on a sealed bid basis by LandVest (see details). The land will be managed by RMK Timberland and is subject to both a Fiber Supply Agreement with the current owners of the Finch, Pruyn mill and a conservation easement. According to my sources in Denmark, the purchase price was 180 million Kroners. If I’ve got my conversions correct from Kroners to Dollars, the price would be $361 per acre. The price/acre clearly reflects the result of the conservation easement. The location map to the left includes the entire TNC purchase of 160,000 acres. --Brian

The Dichotomy in Timberland Valuation

The issue in today’s post concerns why the transaction price of timberland has shown little or no decline in value but the stock price of the publicly traded companies that own timberland has declined dramatically. I will also look at what I think is happening in the timberland market today and how I see the market for timberland investment. But first, let’s set the stage.

In January, I did a post that included some graphs developed from my timberland transaction file. I was looking to see if the data supported a wide-spread belief that timberland values had dropped. The thinking was that housing starts declined, which caused a drop in lumber prices, which caused a drop in stumpage prices (all true), which caused a drop in timberland prices. You can read that post here How Much Did Timberland Values Fall in 2008? The data did not support the logic and did not show any evidence of a significant decline in timberland values. (For those that sent emails saying my opinion was wrong – that was not my opinion, it was just the data). I also wondered what the NCREIF Timberland Index would look like when it was released. The publicly accessible portion of the NCREIF website showed quarterly returns that compound to a 9.5% total return for the timberland in its index in 2008 but the components of the return are not broken out. A recent report by Brookfield Timberlands Management, distributed by Forestweb, shows the NCREIF return broken down by earnings and capital appreciation.

NCREIF TIMBERLAND INDEX

The significant decline in the blue portion of the graph reflects the decline in housing/lumber/stumpage/earnings. The green portion, Capital Appreciation, can be viewed somewhat (not perfect) as a surrogate of the change in timberland value as determined from tract sales and appraisals of tracts – all of which are a part of the index. Note the green from 2000 to 2002. This data certainly contains no indication of a 2008 decline in the price of timberland either.

Below is another graph that I found interesting. It is from the Timberland Report VOL. 10, NO. 2; by the James W. Sewall Company, a highly respected firm with a very long record in the timberland investment community.

From my perspective, the important take-a-way from this graph is that the old correlation between timberland values and housing starts fell apart. We can speculate as to why and we can speculate as to whether the correlation will return but it’s pretty clear that the conventional wisdom has not prevailed during this economic downturn. Another graph in the report reinforces the historical correlations between housing starts and stumpage prices. That correlation did hold as all timber owners know only too well. You can read the entire Sewall report here(recommended).

Now, let’s take a look at the price of common stock in some of the publicly traded companies that have timberland holdings that represent a significant share of the companies’ assets and see how share prices were impacted last year. Ownership structures of these companies include timber REITs, “C” corporations and limited partnerships but for my purposes today, I will refer to them collectively as “timberland companies”. Let’s look at this chart I made from Google.

It’s hard to see but the blue line just above Weyerhaeuser (green line) is the S&P 500. Weyerhaeuser took an early hit because it has such a major direct investment in housing. I read somewhere that it is the 17th largest home builder. The rest of the timber companies fell about the same amount as, and in synch with, the general market. My conclusion is that the timber companies stock price tracks the stock market rather than with the timberland market. Not a “pure play” in the bunch. Down about 50% when timberland prices held pretty steady.

I have long been a skeptic of the “pure play” concept of acquiring timberland companies (or an ETF) as a surrogate for timberland ownership. Even if 100% of the assets owned by the company were timberland, I would still be a skeptic and here is why.

Timberland investors use metrics based on a time horizon of 10 to 50 or more years. The key metrics are based on a discounted cash flow (DCF) analyses over that time horizon. If you would like to read more about timber valuation than you really want to know, you can do that here. The metrics used by those that analyze stock value are usually based on very short term future cash flows of a year or two (no need to discount those!). The inherent assumption is that the stock price will respond to very short term (a few quarters or few years at most) cash flows and that the stock will be bought or sold in that time frame. Some of the most referenced metrics are based on what happened last year rather than what is expected to happen in the future (current P/E for example). The Warren Buffets in the crowd that actually do take a long term view of stock investing are a clear minority today and I’m sure that DCF is an integral part of their valuation. Don’t misunderstand me. I’m not saying that one way is right and that the other way is wrong, only that they produce different results and that creates a dichotomy in value and an opportunity for long term investors. Given all this, is it any wonder that the stock of the timberland companies has fallen dramatically with the general market decline? The value of their timberland portfolio is based upon the very depressed earnings reflecting current stumpage prices rather than the DCF of future stumpage prices!

At this point, I reach two conclusions (and I know that some will not agree)

1. Timberland values have fallen little if any, and
2. The timberland value component of the timberland companies’ stock price has fallen dramatically
   

And therein is the opportunity.

Here is another stock chart just like the one above except Forestar Group has been added. If ever there was a pure play for timberland/HBU, this is it. Other than some OGM, that is its only asset!

The “Pure Play” Fallacy

In spite of that, the stock price of Forestar dropped over 80% - the worst of the group. So much for the “pure play” concept. If you want to invest in timberland, you need to own timberland, not stock!

Think about this. Is it possible that the assets of Forestar were worth five times as much in June as they were in November? Some folks sure didn’t think so. To name a couple, Holland Ware and Carl Icahn. Both recognize the dichotomy in valuation methodology between timberland and the valuation of the stock in timberland companies! Both made some serious money with that little bit of information and a lot of cash. Buy at $3 - $4/share, offer $15.00 (still undervalued), sell at $12 or so. Not bad. And the $15/share offer? Even that was well under the underlying value of the timberland/HBU asset.

Okay. We understand what happened in 2008. What is happening to timberland prices now and what will happen in the future? I still have seen no significant decline in transaction prices regardless of the emails I get claiming dramatic declines in prices (no transaction details attached). There is a slowing of transactions, at least one announced major transaction (St. Joe) did not close and several tracts that were put on the market were pulled off. What does this mean for the future?

It may mean that prices will fall. It may mean that buyers are holding their cash until this economic downturn, recession, depression, or crisis begins to resolve itself. I don’t know what the future holds but I do know that there is a lot of pension fund and other cash out there that will be invested somewhere. Today it is going into money market accounts and just kind of sitting there. Barron’s reported about a week ago that there was $4 trillion in money market funds which is about one-half the market cap of the entire U. S. stock market. That is a lot of money and I doubt that it will all stay in cash. At some point, some will go back into the market, some to commodities, some elsewhere and some to timberland.

Long term, I remain bullish on timberland but, in the short-term, I think that stock in the timberland companies is a better investment. The downside is less than timberland and the upside is much, much greater. If you follow Holland Ware, you won’t starve. --Brian

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Visit my website at Timberland Strategies

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Valuing Timberland V – The Discount Rate

This is the fifth and final post of a series on timberland valuation. If you missed the first post, which included an Overview plus a discussion on Disaggregation, you can read “Valuing Timberland I” here. The second post focused primarily on productivity and how that fits into today’s appraisal systems which use discounted cash flow techniques to determine the value of timberland. You can read “Valuing Timberland II” here. The third post focused on estimates of timber volumes and values, how we get them, and how to forecast them for future year’s cash flows. Read “Valuing Timberland III” here. The subject of the last post, Valuing Timberland IV, was on the methodologies used in discounted cash flow analysis. Today I’ll focus on the discount rate to be used in the cash flow model.

The “discount rate” is essentially the same thing as the interest rate used in any financial calculation. We have to get the series of future cash flows “discounted” back to the present so we pick the appropriate interest rate to do that. As an example, say you wanted to buy a tract of land and your credit union would lend you the money for 6%. You know there is some risk associated with this so you assign another 2% for risk. You would use a discount rate of 8%. Sounds simple to me.

Let me start off by saying “I don’t know what discount rate to use”! This question is argued by investors, economists and corporate finance types. But understand this, selection of the discount rate is the most important decision made during the valuation process. Let me illustrate.

Many years ago (I was working as a Land Acquisition Forester at the time) I decided to reread Thoreau’s “Walden” which led me to “In the Maine Woods”, “A Week on the Concord and Merrimack Rivers” and “Cape Cod”. Considering my job, Thoreau really got my attention with the following words from “Cape Cod”.

“Between the Pond and East Harbor Village there was an interesting plantation of pitch-pines, twenty or thirty acres in extent, like those which we had already seen from the stage. One who lived near said that the land was purchased by two men for a shilling or twenty-five cents an acre. Some is not considered worth writing a deed for.”

Thoreau had traveled across the Cape in the 1850’s and I had noticed and made mental note of these same pitch pine plantations while visiting there. So what would a Land Acquisition Forester think… “Man, what a buy that would have been!”

What if an investor knew what the values on the Cape would be like in 2008? Would he have bought some of that timberland for $0.25 acre? Maybe, maybe not. Let’s consider the opportunity and create a simple analysis. Let’s say that the investor could foresee all that wonderful HBU land on the Cape and actually KNEW what 2009 land prices would be like. Keeping it simple (so we can isolate the impact of discount rate selection), assume he leased the land out “for taxes” so he had no cash flows (positive or negative) other than the purchase and sale of the land. The data below shows the value of a $0.25/acre investment compounded forward for 150 years.






So…, would the investor have bought the land (for his descendents!!). It very clearly depends on the discount rate that the investor used. I don’t think that there is an acre of scraggly pine plantation on the Cape that could be bought for $1,562/acre and I doubt that you could sell an acre for over $300 million per acre either – not even the Kennedy compound. The value determined clearly depends on the discount rate used. So what discount rate would you have used? Think about that seriously. If the rate is too high (nice to get but will you get it!) you may never have the opportunity to make an investment EXCEPT one that is very risky.

When I was in forestry school (back in the 60’s) we normally used 6% in our forest economics courses. When I was an MBA student (in the late 70’s), we used the company’s marginal cost of capital with an appropriate adjustment for risk. Early in the timberland shift to TIMOs, it was pretty freely discussed that TIMOs were using real rates in the 6% to 8% which was based on the “risk free” rate of return (10 year T-bills at 4%) plus risk adjustment. At the same time, integrated forest products companies with large timberland acreages were using investment hurdle rates significantly above the average or even marginal cost of capital for the firm (a mistake – it should have been based on the marginal cost of capital and risk associated with purchasing and owning more timberland not riskier investments!). The result of this is that high-risk capital investments were subsidized by low-risk timberland ownership. As a general rule, discount rates used by the C corporations were much higher than that used by the TIMOs (rates in the range of 12% - 15% or more). Remember the decision you reached above with the Thoreau example. The C corporations also had to include taxes in the cash flow analyses (reducing cash flow and, subsequently, value) whereas most of the TIMO clients were pension funds and tax exempt. Between the tax payments and high discount rates used by the corporations, it is pretty clear why the TIMOs valued timberland higher than the forest industry.

Note two things from the above discussion. The “appraised value” of a particular tract of timberland, based on comparable sales, was the same for the TIMO buyer and the forest industry seller yet the real valuation for the buyer and seller were very different. As I pointed out in an earlier post; timberland valuation and fair market value are two different things!! The second point: the difference in discount rates used, combined with tax policy, has dramatically changed the face of timberland ownership and forestry practice in this country.

How do inflation and taxes affect the selection of the discount rate? We discussed that somewhat in the post on cash flows. Here are a couple of quotes, also from the Forest Landowners Guide to the Federal Income Tax, Ag. Handbook No. 718.

“it is imperative that the discount (interest) rate used for the analysis include a similar expectation factor for inflation. In summary, both elements of the analysis—cash flow and discount rate—must be kept in comparable terms (with or without inflation and before or after-tax) for reliable results.”

“Forestry investments are very sensitive to the discount rate used because of the long time period between planting and harvest. For after-tax analyses, the correct discount rate is the after-tax rate based on your alternative rate of return. If the next best alternative is a tax-free investment, such as a municipal bond, then the interest rate is used without adjustment, as shown in Table 2-3 for the 10-percent discount rate. If your next best alternative is an investment, such as a corporate bond, that yields 10 percent annually with taxes subtracted before compounding, the correct discount rate is 7.2 percent, after-tax [10 percent x (1 - 0.28 assumed tax rate)]. Alternatively, if the next best alternative is an investment such as an individual retirement account (IRA), certain saving bonds, or an alternative timber investment, where taxes are deferred until the end of the period rather than being subtracted before compounding, then the correct discount rate depends on the length of the investment period and when the costs are incurred and revenues received. Assuming an initial investment, 10 percent interest, and a 28-percent tax subtracted at the end of 34 years, the appropriate discount rate would be 8.94 percent.

Now, if you feel that you still need more info on how to select the right discount rate for a timberland purchase, let me give you a couple more references.

• “Timberland Investments” by Christian Zinkhan, et. al.
• “Discount Rates and Timberland Investments” by Brooks C Mendell in the Timberland Report published by James W. Sewall Company

Finally, it may be worthwhile to speculate a little bit (actually that is what the selection of the discount rate is). Timberland investors have watched as discount rates rose early in this decade followed by decreasing discount rates which resulted in a steady increase in timberland transaction prices (and corresponding values from comparable sale based appraisals). Some TIMOs have left the market so they clearly believe discount rates got too low and pushed prices too high (potential returns too low). Other TIMOs have tried to sell large blocks but pulled them off the market. Perhaps they think discount rates are too high but prices are too low to justify selling?? Or maybe there is less money chasing timberland. This concludes the Timberland Valuation series.

Oh, I almost forgot. Nobody is going to tell you what discount rate to use. That's your call. Comments welcome. --Brian

I-P to Sell 143,000 acres

The following is from IP’s website
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International Paper (NYSE: IP) announced today that it plans to divest approximately 143,000 acres of properties located in the southeastern United States in a transaction with American Timberlands Fund I, LP (the "Partnership").

The transaction value is approximately $275 million. International Paper will sell approximately 114,000 acres to the Partnership for $220 million in cash and will contribute 29,000 acres, with a value of $55 million, in exchange for a 20 percent interest in the Partnership.

The transaction value is subject to various adjustments at closing and is contingent upon the Partnership raising $220 million to finance the transaction. The transaction is expected to close in mid-June.
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A couple of observations:
1. American Timberlands Company, out of Columbia, SC, also bought 20,000 acres from I-P last year. The Registered Agent for them is Mark W. Buyck III from Florence SC. Other than that, I don't know anything about them but it looks like they could use some money.

2. It also looks like somebody thinks the value of timberland has not dropped. The reported value is $1,923/acre. --Brian

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Valuing Timberland IV

This is the forth post of a series on timberland valuation. If you missed the first post, which included an Overview plus a discussion on Disaggregation, you can read “Valuing Timberland I” here. The second post focused primarily on productivity and how that fits into today’s appraisal systems which use discounted cash flow techniques to determine the value of timberland. You can read “Valuing Timberland II” here. The third post focused on estimates of timber volumes and values, how we get them, and how to forecast them for future year’s cash flows. Read “Valuing Timberland III” here. Today, I’ll focus on how all of the previously discussed factors are tied into some form of discounted cash flow (DCF) model.

Foresters and most financial types are well versed in DCF, what it is and why it is so important. Its use can be traced back to Martin Faustmann, a German forester, in an 1849 publication on valuing immature stands. By the 1930’s, the financial community had recognized its importance and began incorporating it into investment analysis.

Here is the definition of DCF according to Investopedia: A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Forget that comment about the “weighted average cost of capital” and we will talk about that in the next post. This post will touch on the following issues.

• Cash flows: Revenue from timber sales, leases, HBU sales, etc.; silvicultural expenses, taxes, management fees and other costs.
• Inflation and taxes
• Spreadsheet models, computer programs, harvest scheduling software
• Location: Important? Can it be quantified? Final sale price: When you sell the land, how much will you get? Existing cons easements
• Discount rate: very, very important and will be discussed in next post

Cash Flows: The costs and revenues, and when they occur, constitute the cash flows used in a DCF analysis. The entire process can be visualized utilizing a timeline such as the one below from a forestry investment example illustrated in the Forest Landowners Guide to the Federal Income Tax, Ag. Handbook No. 718.



The cash flows illustrated in this timeline are shown below.


This is a very simple example but it illustrates the process very well. Note that some of the flows occur in a particular year and some recur every year. Although the costs and revenues occur at different times, they are all discounted back to the present to determine the value today. There is a very thorough explanation of the process accessible by the link above. Note that in this example, the land purchase price is included at the start of the analysis and then the land is sold in the final year. An alternate approach is to create the cash flows in perpetuity (don’t include the land cost) and discount them back to the present. The result is the value of the land BUT only if you hold it forever any your cash flow calculations never change! If you plan to sell off some HBU land in the early years or if you see real increases in land value at the end of the investment, you MUST include land cost. If a conservation easement has been sold, the revenue should show up in the appropriate place AND the final sale price must be reduced by the appropriate amount.

What about inflation and what about taxes? Should they be incorporated into the cash flows? The answer is fairly clear, with respect to taxes, if the owner, such as a pension fund, does not pay taxes! For every investor though, there is a clear answer. Include them IF they are included in the discount rate. Here are a couple of quotes, also from the Forest Landowners Guide to the Federal Income Tax.

“Most forestry costs change at the rate of inflation in the economy; however, stumpage prices may increase (or decrease) at rates exceeding (or less than) inflation when supply/demand relationships change. These differential price trends can cause miscalculations in an investment analysis. Real (exceeding inflation) price appreciation—or price depreciation as the case may be—for some products, such as Southern pine and Douglas-fir sawtimber stumpage, has received much attention. But other product prices, such as those for pine and hardwood pulpwood, and equipment costs, also have been affected. Predicting the future always is uncertain and hazardous, so the best information available for projecting real changes in cash flows should be used.”

And the second quote: “it is imperative that the discount (interest) rate used for the analysis include a similar expectation factor for inflation. In summary, both elements of the analysis—cash flow and discount rate—must be kept in comparable terms (with or without inflation and before or after-tax) for reliable results.”

The take-away here is to include inflation in the cash flow if you think it is appropriate and to include taxes in the cash flow if you think that is appropriate, but you must incorporate those elements in the discount rate if they are included in the cash flow. My solution, when building a model, is always to create the discount rate as a variable. Then model the discount rate so the analysis can instantly be modified by setting the inflation and tax rate variables (either or all) to zero. If you don’t do this, I promise that someone will ask you “What if…”

Let me also add that there are some complexities associated with timber depletion that will create some pitfalls for the model builder not experienced with forestry taxation (depletion and multiple tax rates). The taxation issues are further complicated by the “inflation tax”. Maybe someday I will do a post on that too but not today. For now, let’s look at the types of software available to do DCF analysis of timberland investments.

Spreadsheets, forestry investment software programs or Harvest Scheduling software?

Spreadsheets: This is the “roll your own” option. It has some advantages but some very powerful disadvantages as well. The biggest advantage is that you can do it your way, you already have the software (and you can distribute the model to everyone in your organization) and you understand all of the drivers used. It is a good solution for simple situations like the one above. The disadvantage is that you really have to understand forest management, DCF, forest taxation, depletion accounting, G & Y models, spreadsheet development and probably a few things that I have left out. I have constructed complex models used for evaluating large transactions so it can be done. But the results fall short in many ways.

Forestry Investment Software Applications: These applications, frequently web based, are a good alternative to the use of spreadsheets if the target tract is not to large or complex. There are usually multiple applications in each suite which allow calculations designed to feed the DCF application. Growth and yield models may be built-in or a part of a supporting application. Applications that allow projections of both real and inflated timber prices (and land prices) are available to help feed the DCF analysis (remember to use a discount rate that is consistent with the inflation/real price). They have “help files” that explain the terminology and provide guidance in usage. They are generally easy to use and they are free.

Two examples can be found on web sites at Mississippi State and the Texas Forest Service. See FORest VALuation or FORVAL Online and the Timberland Decision Support System. You can actually use both of these sites to create your cash flows and then enter them into the Texas site.

The MSU site also has G&Y models for loblolly, slash and longleaf as well as some calculators to let you look at real increases in timber values (can also be used for real increases in land values as well). The Texas site also has several supporting “calculators” including The Timberland Management Simulator which integrates a loblolly G&Y model with the financial analysis.

There is other software available that you can find with a Google search. Some of the software is web-based and some requires downloads. I prefer the web-based stuff because it is more likely to work without problems. There are some very good G&Y models that have been “left-behind” because they no longer behave well (or at all) on the current operating systems. Another advantage of the web software, particularly over spreadsheets, is that they have well thought out explanations of the terminology and give you some good advice on how to conduct your analysis.

Harvest Scheduling or Forest Planning Software: What is Harvest Scheduling? First of all, the term is a misnomer. It is a carryover from earlier linear programming models that focused on the best time to harvest stands. Today’s applications, best referred to as Forest Planning applications, are far advance from just projecting harvests. All of the activities from planting through harvest are included while measuring the impact on attributes such as habitat, wood flows and cash flows are reported. The earlier applications have morphed into spatial applications importing GIS data and producing maps that show the “where” of all activities in the plan. The spatial applications also allow the use of spatial constraints, such as “green-up” requirements. The following paragraphs are from NCASI’s HABPLAN, spatial Forest Harvest and Habitat Scheduling software, users manual. I selected them to give you a better understanding of harvest scheduling and its complexities.

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“Harvest scheduling entails the application of mathematical programming techniques to determine the allowable cut and/or the cutting budget, for a given area of forest, over multiple rotations or cutting cycles. With sustainability being a buzz word in the forestry industry, a number of harvest scheduling methods have been (and continue to be) developed that help us to manage our forests on a sustainable basis. The basic management unit is the forest stand (or a polygon comprising multiple stands). It is desirable that each management unit be managed in the most environmentally, economically and socially beneficial way. For each management unit, however, there are numerous management regime possibilities. The following are a few variables, which contribute to the wide range of potential management regimes.

• species
• site quality
• age of current stand
• length of rotation
• number of thinnings (& ages at which they occur), and intensity thereof
• regeneration or replanting
• greenup window

The potentially complex procedure of developing and solving a harvest scheduling model can be summarized in the following steps:

• Decide on decision-making variables. In Habplan, where integer programming is used, each decision-making variable represents one whole management unit (forest stand or polygon), i.e. each management unit can only be assigned one management regime. However, in linear programming, it is assumed that each management unit can conceptually split up, and managed under a number of different regimes, thus creating a number of different decision making variables for each management unit.
• Develop the objective function, according to the objectives of the given harvest scheduling problem.
• Incorporate various constraints e.g. land constraints, volume flow constraints, financial constraints and ending inventory constraints.
• Use a mathematical programming technique to solve the problem for the optimal/best solution.
• The solution to such a problem should offer information on which management units (or how much of each management unit) to devote to each of the proposed management regimes.

There is no one computer program in the world that can account for all variables in nature. Therefore, it is important to keep in mind that harvest scheduling is merely man's best effort at simplifying a very complex and dynamic natural phenomenon into a mathematical formula, and does by no means offer the perfect solution in the quest for the optimal management regime. However, it is safe to say that various harvest scheduling methods are capable of providing fairly reliable guidelines, by which land can be managed.”

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The above paragraphs illustrate the complexities and capabilities of harvest scheduling. In addition to Habplan, there are several other applications available. The hands-down favorite of forest planners is Remsoft’s Forest Planning System (Woodstock and Stanley) regarded as the best available by most users (at least managers of 500 million acres on five continents)!

It takes very well trained people to prepare a harvest schedule or plan. From personal experience, I can say that Remsoft also offers excellent training programs and support for its products. Some companies and TIMOs have trained people and do their own plans. Others use forest consultants that have experienced harvest scheduling people on their staff. One company, FORSight Resources, actually specializes in harvest scheduling and has several world-class authorities on the subject.

The take-home for the harvest scheduling discussion is that it is the best DCF methodology for a major acquisition because:

• It seeks optimization of management scenarios.
• The better versions allow spatial constraints and provide spatial output.
• It allows the addressing of very complex issues that other solutions are not capable of doing.
• Optimal solutions form the basis of the future management plan.
• There is some very good software available with tools built that reduce the complexity of the mathematical programming.
• But… it is complex, time consuming, and must be implemented by specialists

Summarizing:

• because of the timeline associated with the cash flows of all timberland investments, DCF is a requirement of all valuations (except the flip!)
• for large timberland transactions, use harvest scheduling software
• for small tracts (up to a couple of thousand acres) and infrequent purchases, use freely available forestry investment software
• for frequent purchases/valuation of smaller transactions, spreadsheets may be the better choice.

This concludes the DCF discussion. The next, and final, post in this series will focus on the choice of the discount rate and how critical that decision is to the outcome of the valuation. Comments welcomed. --Brian

Valuing Timberland III

This is the third post of a series on timberland valuation. If you missed the first post, which included an Overview plus a discussion on Disaggregation, you can read “Valuing Timberland I” here. The second post focused primarily on productivity and how that fits into today’s appraisal systems which use discounted cash flow techniques to determine the value of timberland. You can read “Valuing Timberland II” here. Today’s post will focus on estimates of timber volumes and values, how we get them, and how we forecast them for future year’s cash flows. We will also take a quick look at the confidence you should place in them.

First, let’s look at timber volumes. What does the cruise say? What does the inventory say? What is the difference? How was the acreage calculated? Are volume estimates tied to a GIS? What are the sources of errors? Can volumes be reasonably audited? If the volume estimate isn’t “right”, the value certainly won’t be!

What is a “cruise”? A survey of forestland to locate timber and estimate its quantity by species, products, size, quality, or other characteristics; the estimate in such a survey. Several different sampling techniques can be used in a cruise. (source: Forestry Terms for Mississippi Landowners, Mississippi State University Extension).

What is an “inventory”? See Cruise (same source). H’mmm. I don’t want to aggravate my Mississippi State colleagues or to argue semantics but there is a huge difference between a cruise and an inventory or, more appropriately, a timber cruise and a forest inventory. To keep it simple, the cruise (as correctly defined above) collects data to estimate the timber volume, quantity, etc. that is there right now. The forest inventory collects much more information which can be used to project volumes and harvests (and other stuff too) into the future. A cruise, as defined above, wouldn’t collect any information on an eight year old loblolly pine plantation. There is little or no volume (perhaps a few trees that meet the limits of merchantability) but there certainly is value. A forest inventory would want to know the species, age, trees/acre, site index and acreage at a minimum. That is the information that is necessary to drive the growth and yield models necessary to estimate future wood flows from the tract. The wood flows become the basis for the cash flows in the appraisal. Perhaps this is just semantics but it is very important to understand the difference and to know what you are looking at.

So the “acquisition cruise” necessary to purchase land is more appropriately referred to as a forest inventory than a cruise. A “timber cruise” is more likely used to determine the immediate value of the timber for a timber sale. Data to drive growth models or cash flow models is not necessary. This distinction is more than academic. The inventory data can be “grown” to provide volume information for appraisals, stand level info for thinning or harvest, projected harvest and regeneration sites for planning site preparation and planting, all at multiple forward points in time. A typical cruise is not designed to do this. Merchantability specs are frequently different between cruises and inventories resulting in differences in volumes reported. Merchantability specs for inventories must be consistent from tract to tract, year to year, cruiser to cruiser and they must be consistent with what the growth models require. Merchantability specs for a timber sale cruise will normally be modified to conform to current demand, market pricing and perhaps even the logger that will be doing the harvesting.

The lesson here is that the user of cruise or inventory information had better understand what he or she is looking at. The cruise/inventory designer needs a clear understanding of the objective of the cruise. Otherwise, expect disappointment.

The sampling intensity of most inventories will not provide adequate data for timber sales. Inventories must collect some information on every stand or stratum (a collection of stands with similar characteristics). The objective of an inventory or cruise is to gather the information that is necessary at an acceptable level of accuracy at the least possible cost. Contrasting the two extremes, consider the case of a 100,000 acre land acquisition compared to a 50 acre mature hardwood timber sale. The objective of the land acquisition inventory is to be accurate enough to generate a reasonably accurate cash flow analysis for the perceived life of the investment (and hence, its present value). Another objective may be to assist in management if the tract is purchased. The resulting inventory would be one with a low sampling intensity but one collecting much information at each sample plot. The inventory is “not accurate” at the stand level. Cost is a serious consideration. If the tract is not purchased, the entire cost of the inventory is wasted. The 50 acre timber sale, on the other hand, has a much higher sampling intensity (perhaps a 100% tally), does not require collecting growth modeling information and requires careful inspection of the quality of each tree relative to current market conditions. The cruise cost/acre is much higher but the payback is immediate and ensured.

Statistics 101: Reiterating an earlier point when addressing timber volume reports; you had better understand what you are looking at. Most well done cruise reports will provide some detail with respect to the statistical accuracy provided by the data. You will see something like “2,216 MBF ± 10% of hardwood sawtimber”. This means, that from a statistical standpoint, the actual volume will be within 10% of the volume estimate 95% of the time, or maybe 90% of the time, or maybe 66% of the time. Maybe you better ask which probability level applies! You will probably also see a volume by species report and perhaps that will also provide statistical error reporting too. If it doesn’t, you should understand that because the sampling intensity for any given species is well below that of all of the species combined, the accuracy of the estimate drops pretty dramatically in a mixed species stand or forest. Now, digging into the cruise report a little deeper you will see that volumes may be reported by species and diameter class. How accurate do you think that will be? If the statistics are reported, that is great. If not, beware the value that you place in the numbers. This information can be useful but you have to assign it the appropriate credibility.

You should also understand that there are other sources of error in a cruise in addition to the statistical sampling error. Examples are the use of incorrect volume tables, measurement errors, poor sample design, calculation errors and, yes, a poor cruiser.

The statistical accuracy of large inventories that have been conducted over several different years and have been brought current using growth models is a different story. I’m not going to get into how to do this because I have no earthly idea how to do it! It can be done by a fairly limited group of forest statisticians, mensurationists and biometricians but it is clearly a difficult task. As a rule of thumb, it is safe to say that the accuracy is somewhat less than what would be calculated using the “ungrown” plots and declines as the number of “grown” years increases.

That’s enough said about cruise reports, inventories and the timber volumes that they report. Now let’s talk about volumes that what will be there tomorrow and the fundamentals of creating a future wood flow.

Future harvest volumes and timing must be done on a stand by stand basis utilizing stand volumes that have been “grown” using yield tables and growth and yield models. The starting base is the stand or strata level inventory and each stand or stratum is grown into the future. Some rule or methodology is then used to select the harvest date to determine the harvest volume for each future year. The result is a wood flow model that, when combined with values, becomes a key component of the cash flow model. More detail about this will be provided in the next post.

This is probably the appropriate place to discuss the integration of a GIS (Geographic Information System) with the timber inventory system when creating the information system used for timberland management. GIS based inventory systems are very common among managers of large tracts of timberland today and sellers normally provide output from these systems to potential buyers. Inventory or cruise volumes may say what is out there but the GIS says exactly WHERE it is on the surface of the earth. A quick check of the validity of the data provided by the seller can be made by auditing selected stands to compare inventory acreage, stocking, volumes, forest types, SI, etc. to the audited values. It doesn’t take much of this type of checking to determine how serious the forest managers have been about the quality and timeliness of their inventory efforts and hence the credence that can be placed in the data provided. The GIS data can be “read” into the GIS based harvest scheduling/ cash flow models and will eventually provide the basis for future management (activity schedules, maps and annual cash flow projections). These are the tools that become the foundation for communications and expectations between the new landowner and the timberland managers. The schedules tell the owner what to expect financially and form the basis of the management plan for the manager. A final point about the GIS based inventory system is that it provides the basis for a field audit in conjunction with the traditional financial audit. In the timberland sector, a financial audit without a corresponding field audit is a serious mistake; in fact, it's not really an audit.

Now let’s discuss timber values. They are down! A lot! If you are selling timber today, that is very important but how important is it with respect to timberland valuation? Should current market conditions be used for valuation?

The comments below are by Rick Holley (from Plum Creek 2008 Q3 Earnings Conference call) answering an analyst’s question about why he thinks timberland values are holding up while other asset classes are declining in value. The quote is a little messed up but his point is clear.

“I think largely because the investor in timberlands, and there’s still a fair amount of capital on the sidelines trying to invest in timberlands, is longer term. They’re looking through this cycle. If anything they’re starting to look at this cycle and lower prices as being more upside when you look out a year or two years or whatever these markets improve. I know there was a recent [Reese] article talking about some transactions that may or may not get done. We’re in the marketplace and we talk to a lot of buyers. We know who the sellers are, and we think all those transactions will in fact get done at very, very good prices, so I think the market is holding up and there’s still a lot of capital chasing very little opportunity…”

The key words above are “looking through…” with respect to timberland prices. To me, that implies that they are also “looking through” with respect to the timber values used in the timberland valuation. I think that if stumpage prices were at all-time highs, buyers would “look through” and see lower prices in the future as well. As Andy Malmquist, my good friend, former employee, and current TIMO guy, used to remind me about so many things… “It’s regressing toward the mean”! Andy actually talks like that.

There are at least three factors to consider for determining future timber values to apply to future volumes – current values, real price increases and inflation. We will discuss how to address inflation in the next post so for now, we will confine the discussion to the first two items.

I am defining “current price” as a “look through” price that is on the trend line for the species,local area and region (huge differences between NE and NW, cherry and red maple). In other words, I am looking for the price that has “regressed to the mean”. This data can be obtained from several different pricing services such as Forest2Market, RISI and Timber-Mart South. In addition, most state forestry commissions (South Carolina Forestry Commission pricing report) or forestry university extension services also provide some level of pricing reports. Local consulting foresters usually know what is available and can also provide first hand local knowledge. Pricing from these sources will provide the baseline for projecting the value of future harvests in the cash flow model.

A real increase in future stumpage prices can and should be incorporated into the model if you think it is justified. U. S. Forest Service reports suggest that sawtimber stumpage prices have increased at a real rate of 2% a year over a very long period of time. An analysis of southern pine stumpage prices by forest economist Jack Lutz reached the following conclusion:

“Our analysis indicates that southern pine sawtimber stumpage prices are mean-reverting, with a 50-year mean of $38.29/ton (based on LDAF data). Those prices have held to that mean through 50 years of timber supply and demand shocks and significant changes in timber harvesting and processing technology. That means we should not expect a significant increase in sawtimber stumpage prices in the near future. This supports the current practice of many timberland investors who are using 0% real appreciation rates in their timberland investment models.”

The future is anybodies guess but the real value increase used should be based upon your view of the future. That’s why there is always a high bidder and a low bidder!

This concludes the discussion on timber volumes and values. The next post in the series will attempt to tie it all together by addressing the methodologies associated with the discounted cash flow models. Comments are welcomed. --Brian

How Much Did Timberland Values Fall in 2008?

My stock portfolio has certainly taken a hit to the downside. The housing market has tanked and the values of many houses and rental units have gone down with it. Stocks of the publicly traded timberland owners have gone down 20 to 60% in the last year or so. The logic is that the decline in housing has caused a drop in lumber price which has created a drop in timber (stumpage) price which has resulted in a corresponding drop in timberland prices. So logically my portfolio has taken a hit on the tree farm side too. But has it?

I do some consulting with market analysts and hedge fund managers interested in valuing timberland and the drivers behind it. The most common question that I have heard recently surrounds the declining value of timberland and just how great that decline is. How can a company like Weyerhaeuser or Plum Creek be properly valued given the logical decline in timberland values? I could give my opinion (and I always do!) but that is not enough.

I have been maintaining a database of the major timberland transactions for over a decade so I wanted to quantify the change for 2008. Below is a chart showing the $/acre sale price trend for the last decade.


















This is pretty interesting. Nationwide, it appears that prices have dropped about 21% following a year where they gained 60%! BUT… it is important to understand the data and what is happening. This database is composed of transactions that total between one and seven million acres in any given year. Also in the database is a “REGIONS” field. Price distortion occurs between years due to the variation in the percentage of sales occurring between regions ($/acre varies significantly between regions). So how does the price per acre change if we just look at a single region? Let’s look at the South.



















Within any particular region, individual transactions will impact any given years weighted average price. In spite of that, the trend is clear and it is difficult to find any argument in the data that supports a decline in timberland pricing – at least in the South. The first reported sale for 2009, Potlatch to RMK, was at $1,745/acre, right in the ballpark.

The Northeast is the only region that did show a drop last year. The acreage sold in the NE was not particularly large (meaning most of the variability was probably due to the variability between tracts) so I would be reluctant to attribute much significance to the decline. There was one significant datapoint though. The Essex Timber to Plum Creek transaction (at $267/acre) pulled the average down. It is important to note that there was a conservation easement on this tract. We should expect to see significantly lower transaction values as more sales occur on tracts with existing conservation easements. The sale of a conservation easement provides revenue in the form of an early payment for HBU land but it can also have a negative impact on future forestry based revenues as well.

So…, what does all of this mean? I can see little or no decline in timberland values. I’ll be curious to see what the NCREIF index on timberland values has to say. The index is based more on appraisals than actual sales but the appraisals SHOULD be based on comparable sales and comparable sales just do not support a decline in appraisal values. If sale prices are not declining, what is wrong with the logic expressed in the first paragraph – declining housing starts means declining timberland values?

Here is my take. First, buyers are “looking through” current timber prices. Sophisticated timberland investors use appraisal techniques that look at cash flow from timber over the planned life of the investment. Those timber values are based on their view of the future, not just today’s market.

Second, more money is chasing fewer acres. A significant amount of timberland is being pulled from the market. Example: almost all of the 161,000 acres of Finch and Pruyn timberland in the Adirondacks will ultimately be withdrawn from production and become a part of the Forest Preserve. An example from the other side of the equation: this week the United Nations announced that its pension fund would diversify its portfolio and seek to acquire timberland. More money chasing fewer acres. Institutions want to diversify their portfolios, particularly by acquiring hard assets.

Third, future wood demand will be impacted by both renewable energy and global warming concerns. We are already seeing pellet mills being built to export pellets to Europe where they are mixed with coal to reduce the amount of carbon tax the utilities must pay. Most forecasters expect to see a similar tax in the U.S. soon.

Fourth, there is evidence that declining interest rates are impacting the discount rates used by institutional timberland purchasers. A declining discount rate drives value up!

These are my thoughts, these are my numbers, and these are my opinions. Comments are welcomed. --Brian

Valuing Timberland II

This is the second post on timberland valuation. If you missed the first post, which included an Overview plus a discussion on Disaggregation, you can read “Valuing Timberland I” here. Today’s post will focus primarily on productivity and how that fits into today’s appraisal systems which use discounted cash flow techniques to determine the value of timberland.

Productivity is key to determining the value of timberland. Some of the productivity is inherent to the land itself and some is a function of the intensity and effectiveness of the silviculture practiced on the tract.

First, let’s look at the inherent productivity of the land. Foresters measure that with a metric referred to as Site Index. Site Index (SI) refers to how tall a given species of tree can grow on that particular site in a specific number of years. Examples might be Loblolly Pine, base age 25 years, SI 60. Or Red Oak, base age 50, SI 60. Or Cottonwood, base age 10, SI 60. All of these are realistic examples and I have worked in stands with these exact site indices. The sites are not similar though. Note that all of the examples are “Site 60” land meaning all of those species will grow to sixty feet in height but it takes the cottonwood only 10 years, the loblolly pine takes 25 years and the oak takes 50. The land supporting these three site indices would also look very different. So SI defines the productivity for a particular species on that site. As a matter of interest, the SI 60 examples given for Loblolly (25 years) and Red Oak (50 years) are reasonable and quite common. The SI 60 (10 years) for cottonwood is actually a very poor site. Cottonwood on a good site can attain 100 or more feet in 10 years! Neither loblolly pine nor red oak could even survive on these sites due to the prolonged flooding during the growing season. The site determines the best species to plant or to favor with natural regeneration.

Let’s look at site productivity in more detail. In the late 60’s and early 70’s I was buying timberland in North Mississippi and West Tennessee. My counterparts (in other regions) and I were tasked with developing a new appraisal system based upon minimizing the cost to the pulp mill rather than the minimizing the bare land value. A key component to valuation is the objective of the owner and I was working for a pulp and paper company that owned land for the purpose of supplying its mills. And remember this, timberland valuation and fair market value are two different things!! That’s why there is always a high bidder! Under this type of a valuation model (delivered cost), it should be very clear that the more productive the land (i.e. the higher the SI), the more wood that would be grown and the lower the delivered cost per ton would be. In addition, there was already a significant acreage of 10 to 15 year old established loblolly pine plantations on private land in the area that had been established by the U.S. Forest Service Yazoo – Little Tallahatchie flood prevention project. Cattle prices were high and the plantations were being cut, cleared and put into pasture. In general, fair market value for timberland in the area was essentially the pulpwood value of these plantations (very low because of their age) plus bare land value.

Our appraisal system team created the details for a model which estimated a future cost per ton delivered to the mill. Obviously, the tracts with the lowest cost per ton were the tracts most desirable to the company. Bare land value was still there and served as a checkpoint against “fair market value” (FMV). The new method was very different from the old in that it represented the beginnings of a cash flow model and timberland productivity became a very important driver. The “Growing Cost” of the model was actually a future value of the cash flows and was very dependent on the productivity of the tract. The impact of the increase in growth alone between SI 60 and SI 70 for loblolly pine is about 30%. Jack it up to SI 80 and the gain is almost 60%! It’s pretty easy to see the significance of productivity gains on valuations dependent on the amount of timber that will be grown in any given amount of time. The “take home” point of the last couple of paragraphs is that the greater the inherent productivity of the land, the more positive the impact will be on an appraisal system employing a discounted cash flow model. And the greater the price that informed buyers will pay for it. We’ll discuss more about the pine plantations mentioned above a bit later. But first we must talk a little more about productivity that we can impact and something called yield tables.

The second factor addressing forest productivity is silviculture. Silviculture can be briefly defined as - the art, science, and practice of controlling the establishment, composition, growth, and quality of forest stands. Silviculture is to the forester what agriculture is to the farmer. It is a broad term encompassing preparation of the site, selection of the species to be planted, selecting the seed with the best genetic capabilities, fertilization, planting, density control, weed control and harvesting. Silvicultural systems employing artificial regeneration, planting or direct seeding, are more in line with agriculture but natural stands employ similar practices to obtain the desired species composition and density control too. The decision to employ a silvicultural system with a focus on natural regeneration versus plantation management has a huge impact on cash flow and profitability (and therefore valuation). Natural forest management regimes have less cash out and less cash in. Which system, natural or plantation, is best depends on the objectives and circumstances of the owner. So…, site quality refers to the natural productivity of the site whereas silvicultural activities are things that we can do to increase the productivity of the forest. At a cost.

To a degree, the current productivity may be what nature provided us (really it is more what past “managers” left us with rather than what nature provided us with). The existing forest type (a classification of forestland based on the species forming a plurality of live tree stocking) may be a 20 year old oak-pine stand or a 10 year-old loblolly pine plantation. The two have very different productivity potentials going forward. There could easily be a five-fold increase in productivity between the two forest types on similar sites. In some cases, the forest manager has the option of changing forest types through the process of harvesting, site preparation and planting. Greater productivity, greater cost.

Inherent in the example above is greater control of stand density or stocking through planting. Control of stand density is critical to maximizing productivity. So what is stand density? I don’t want to get into a forest mensuration short course here so just think of stocking as the combination of the number and size of trees that will provide optimum growth for a particular site. Stocking charts frequently classify stands as “understocked”, “well stocked” or “overstocked”. A “yield table”, mentioned earlier, combines the stocking level with Site Index to forecast what the yield of forest products will be at some future point. This tool is critical to determining the future productivity of the forest and to the timing necessary for the discounted cash flow analysis. For the purpose of explanation and understanding, I have created the super simple yield table below.



A “real” yield table can go on for pages with many different site indices, ages, stocking levels and products but this one will illustrate the points that I am trying to make. Note how the yield (in this case cords/acre at age 25 but could be MBF at age 20) changes with both stocking (trees/acre at Age 1) and site index. Using these variables we can forecast both volumes and cash flow at the time of harvest. And what if we plant genetically improved stock that increases growth that is the equivalent of a 10 point jump in SI? Or phosphorous fertilization on a P deficient soil? Silvicultural activities have a major impact on the yield but “in the old days” we were pretty well restricted to the yield tables and they served us quite well. Today, however, they have generally been replaced with much more sophisticated growth models which are not only capable of predicting growth based on stocking and SI, but on all of the silvicultural practices that impact those metrics.

I feel that I have rambled a little too much in some places and not been clear enough in others so let me summarize the key points.

Forest productivity, both inherent (SI) and developed (silvicultural activities) is probably the most important driver in the cash flow analysis of timberland. Tools are available to measure and project the volumes into the future. Yield tables for volume projection have been replaced by growth models. You can download and learn to use a loblolly growth and yield model from Mississippi State here (CUTOVER LOBLOLLY GYM). It allows you to manipulate the SI and stand density and to see the future output. It also allows you to assign values by product which we will discuss next time.

Timberland valuation and fair market value are two different things! Remember above when I talked about buying 10 to 15 year old established pine plantations? The FMV (based on comparable sales) was about $125/acre in 1970. We began paying $150 - $175/ acre and easily acquired a significant acreage of these plantations. The value that we were assigning was the future value discounted back to the current age as opposed to FMV. Ten years later we were harvesting $1000/acre worth of chip-n-saw from these sites. We recognized that the FMV was well under the actual value of the plantations and were able to capitalize on that. Some of the early TIMOs were able to do the exact same thing with pre-merchantable plantations on a much larger scale. Some of the early TIMOs saw the value in HBU lands and disaggregation and recognized that the sum of the parts was worth more than the whole. These values are now well recognized in a competitive market and the returns, as expected, are dropping. The lesson is that there is a good return to be had if you can recognize a difference between the real value and the FMV.

Location can be very important or fairly minor. In the case of a forest products company valuing timberland, distance to the mill can be critical (as is the case with an institutional investor committed to a fiber supply agreement requiring delivery!). Some states have real estate tax structures which have a significant impact on cash flow evaluations. But frequently, location has minimum bearing on valuations for an investor.

So much for the value of productivity. The next valuation post will focus on estimates of timber volumes and values, how we get them, and how we forecast them for future year’s cash flows. We will also take a quick look at the confidence you should place in them. --Brian

AbitibiBowater to sell 190,000 Acres in Quebec

AbitibiBowater announces intention to sell approximately 76,700 hectares of select timberland assets in Quebec

Last update: 5:41 p.m. EDT Oct. 28, 2008

MONTREAL, Oct 28, 2008 /PRNewswire-FirstCall via COMTEX/ -- ABH (NYSE, TSX)

AbitibiBowater announced today that it intends to divest three forest units located in the Mauricie and Bas-Saint-Laurent regions in the Province of Quebec, Canada. These timberland assets include the Seigneuries of Perthuis, Nicolas-Riou and Lac Metis, which comprise a total area of approximately 76,724 hectares (or 189,508 acres) and have a timber inventory of over 7.7 million cubic meters. Scotia Capital Inc. has been retained as exclusive financial advisor for the sale process, and all inquiries or expressions of interest should be forwarded directly to their attention.
AbitibiBowater produces a wide range of newsprint, commercial printing papers, market pulp and wood products. It is the eighth largest publicly traded pulp and paper manufacturer in the world. AbitibiBowater owns or operates 27 pulp and paper facilities and 34 wood products facilities located in the United States, Canada, the United Kingdom and South Korea. Marketing its products in more than 90 countries, the Company is also among the world's largest recyclers of old newspapers and magazines, and has more third-party certified sustainable forest land than any other company in the world. AbitibiBowater's shares trade under the stock symbol ABH on both the New York Stock Exchange and the Toronto Stock Exchange.

Valuing Timberland I

How much is that tract of timberland worth? Is it worth the asking price? Is fair market value for the tract a good investment? People have gotten rich buying timberland but rest assured that every purchase has not been a good investment! How the land is managed during ownership is important but it pales in comparison to smart purchasing and smart selling. This is the first in a series of posts that looks at how timberland is valued.

Here is a list of the key elements that should be considered when valuing timberland.

Disaggregation: The old expression “The whole is worth more than the sum of the parts” does not appear to be true. Valuing timberland typically begins by identifying the non-timberland values.

Inherent productivity of the land: foresters normally measure this by a quantitative metric referred to as site index.

Forest types and tree species: These are commonly confused but they are not the same thing.

Silviculture and productivity: Planted vs. natural. Fertilization, genetics, etc. What is impact on future yield (value)? Are records of past silvicultural practices available? Are they tied to a GIS?

Timber volumes: What does the cruise say? What does the inventory say? What is the difference? Are they tied to a GIS?

Timber values: What are the drivers? What are the sources of information? Should current market conditions be used for valuation? Or historical, or future estimates? What roles do harvesting costs and trucking costs play in timber value?

Reproduction values: On well managed land, reproduction values may exceed timber values. How do you estimate these values?

Cash flows: Revenue from timber sales, leases; silvicultural expenses, taxes, management fees.

Location: Important? Can it be quantified?

Final sale price: When you sell the land, how much will you get?

Discount rate: or how much of a return do I need to be competitive with investments with a similar risk?

Disaggregation: This first valuation post will address the issue of disaggregation or breaking the total value of the tract down into several components. Add up the value of the components and that’s the value – more or less. Early in my career (mid 1960’s) I was appraising and buying timberland in the Ohio Valley of West Virginia and Ohio. At that time, we cruised the timber and calculated the timber value, used a “table value” to estimate reproduction value (usually minimal or “0”), and assigned a modest “fixed” dollar/acre value for OGM (oil, gas and minerals) if they had not been previously conveyed. We then subtracted those values from the purchase price to determine the residual “bare land value” per acre. The bare land value was compared to past purchases and other available tracts to determine which purchases to make. So… we disaggregated into four pieces at most – timber value, reproduction value, OGM and bare land value. With the exception of the precalculated “reproduction table values”, the time value of money was not considered. Pretty simple. The objective was to manage the entire tract as timberland “forever”, not to sell off the various components. That methodology was pretty typical of the forest industry.

During the same time period (and earlier), land speculators frequently made money by the simplest form of disaggregation with only two buckets. They would buy a tract of timberland, sell the timber and then sell the bare land separately. Many speculators made a living doing this and some got very wealthy. The sum of the parts was worth more than the whole!

The REITs, TIMOs and their institutional investors have taken disaggregation to a whole new level. The objective is to lower the investment of the timberland purchase by quickly spinning off significant assets or components of the initial purchase. In addition to the components discussed above, the investment crowd values and disaggregates Higher and Better Use (HBU) lands, Recreation lands and Conservation Easements. In addition, future HBU lands are factored into the discounted cash flow analysis. The time value of money becomes an important part of the valuation relative to the early speculators that just bought, liquidated the timber and sold the land.

The impact of the disaggregation also has an impact of the final sale price of the investment. Conservation easements can significantly lower the final sale price. Conservation easements that prohibit development are, in a sense, the early sale of HBU land that just hasn’t got there yet. Conservation easements which dictate how the forest is to be managed in the future are much more problematic and should be expected to have a more significant negative impact on the valuation of the timberland when it is sold.

The next post will focus primarily on productivity and how that fits into today’s appraisal systems which use discounted cash flow techniques to determine the value of timberland. --Brian

Rayonier wants to sell 40% of its NZ holdings

The following is a news release from Rayoniers web site. --Brian
*****************************************************************

Rayonier Announces Intent to Offer New Zealand Timberland for Sale

JACKSONVILLE, Fla.--(BUSINESS WIRE)--Aug. 19, 2008--Rayonier (NYSE:RYN) today announced that the New Zealand joint venture Matariki Forests, in which it has a 40 percent interest, has decided to offer its timberlands for sale. Matariki Forests owns the third largest forest estate in New Zealand, with approximately 343,000 acres of timberland well positioned throughout the country. In addition to its equity interest, Rayonier provides timberland management services to the joint venture.
"The decision to offer this high quality Radiata pine estate allows the joint venture to tap the private market's strong appetite for timberland as an attractive asset class," said Rayonier chairman, president and CEO, Lee M. Thomas. "We will work with the other Matariki owners to select a financial advisor and begin marketing this property within the next three months."
A sale of the joint venture's timberlands would be expected to close sometime in 2009.

90,000 Acres for Sale in Adirondacks

LandVest is selling the remaining Finch Pruyn lands for The Nature Conservancy. These properties are located at the southern edge of the High Peaks region. There is a fiber supply agreement existing and there will be, or is, a conservation easement on the land.

For more info, check their web site. --Brian

Two Ongoing Changes in Timberland

Probably the most significant change happening today in the nation's timberland is the rapidly evolving biomass for fuel market. While most of the manufacturing residue has been used - primarily by the pulp and paper industry - for several years, the accelerating change in demand is beginning to show up in the stumpage market.

One of the other changes, perhaps more temporary in nature, is the increase in foreign ownership of U. S. timberland. Reasons include both the weaker dollar, although the fall appears to have reversed, and the European desire for a carbon neutral source of energy.

There is a very good news article in the Atlanta Business Chronicle which looks at the status of these changes in Georgia. You can read it here. The article references a USDA report on foreign ownership of timberland and farms. If you would like to read it, you can download the report here.

On a totally unrelated note, American Timberland Co. has acquired 20,000 acres from International Paper in Horry County, South Carolina. --Brian

Timberland – Keep it or sell it?

I like to look forward and speculate about what is going to happen. Sometimes with a good analysis, sometimes with just a good guess. Either way, nobody can say that you’re right or wrong. Only time can do that. And it does.

But once in awhile it is good to look back. Maybe to say “I told you so” or perhaps to see just how foolish I have been with some of my prognostications. Either way, the value is in the looking.

About ten years or so ago the TIMO sector was starting to grow in earnest. It was clear (to some at least) that C Corp ownership of timberland was probably not the best ownership structure. The large timberland owners were all Integrated Forest Products Companies (IFPCs) and some had already been experimenting with different corporate structures such as LPs and REITs. Most were maintaining the status quo and capitalizing on TIMO investor driven demand by selling off their “non-strategic” holdings to generate cash or reportable earnings.

By 2000, the pulp and paper industry was about five years into some very bad times from a profitability standpoint. The investment community (and I know many of my readers are market analysts - so pay attention to this little trip back in time), had one mantra. “Sell your timberland and pay down debt”. The decade before that it was all about percent self-sufficiency. The higher the level of self-sufficiency (the more land owned), the more favorable the analysts view of the company. Mantras change abruptly.

Interesting discussions occurred in many offices during the two or three years before and after 2000. (“Let’s keep the land and sell the mills!” – Heresy!). Reactions to the analysts’ demands (or maybe to the poor profits) were varied. In some cases, corporate management bought into the analysts view, other managers explored and ultimately implemented the evolving REIT structure and one major company maintained the status quo. So who was right? Perhaps this chart will shed a little light on the issue.

Picking Weyerhaeuser as the major representative (about the only one actually) of the “status quo” decision makers, I’ve compared their stock prices to the REIT crowd (PCH, PCL and RYN) and the timberland divestures crowd (represented by IP, MWV and LPX) over the past five years. What does this tell us?

The status quo decision was right in the middle with respect to stock price performance.

An examination of the three timberland sellers (those that restructured based on the advice and pressure of the analysts) were all losers – some big time losers. Analysts pay attention. Your advice and pressure destroyed a great deal of shareholder value. But then again, it wasn’t your fault. The fault lies squarely with the senior management that took those companies down that course. The final chapter has yet to be written for these firms but it sure doesn’t look like the right decision at this point.

The shareholders of the three companies that saw the REIT opportunity and charted their own course through a complex and somewhat risky maze were very well rewarded relative to the others. All three of these companies actually acquired land over the five year period. What a difference is made by good strategic decisions on the part of senior management. History pins the Gold Medal on Rayonier’s senior management team. –Brian

Potlatch and Weyerhaeuser: Which Strategy is Best for Shareholders?

Weyerhaeuser and Potlatch are similar in that they are both major timberland owners and both have significant manufacturing facilities. Both are essentially integrated forest products companies but Potlatch is structured as a REIT and Weyerhaeuser is structured as a C Corporation. Both are publicly traded (and heavily owned by institutional investors) and both have been in the spotlight with respect to where they are going in the future. There has been pressure on Weyerhaeuser to convert to a more tax favorable REIT and criticism of Potlatch’s status as a timber REIT when so much of its assets and revenue have nothing to do with timber (not really a timberland play). The response of the two companies has been very different.

Yesterday, Potlatch’s Board approved the proposed split of the company into two separate companies - a pure timber REIT and a pulp-based manufacturing company. The REIT will be a true timber REIT with 1.7 million acres of timberland and will retain the Potlatch name. The spin-off, to be known as Clearwater Paper Corporation, will be a manufacturing company whose businesses had revenue of approximately $1.2 billion last year. Both will be publicly traded.

According to Mike Covey, "After a careful evaluation, our Board determined that separating these distinct businesses is a logical next step for Potlatch in our ongoing efforts to strengthen our businesses and build long-term value for shareholders. This strategic move will enable shareholders to have a direct stake in two unique companies - an essentially pure-play timber REIT and a solidly positioned pulp-based manufacturing company. This increased transparency will enhance the likelihood that each company will receive appropriate market recognition of its unique performance and potential. This action also recognizes the inherent diversity of our assets and the opportunities that will be available to both companies as independent businesses."

Covey continued, "This spin-off will enable the management and board of both Potlatch and Clearwater Paper to have a sharper focus on their core businesses. Additionally, as two standalone entities with sound operations and talented management teams, both companies will be better positioned to manage and grow their businesses, leverage their distinct competitive strengths, attract and retain key employees, and pursue value-creation opportunities such as acquisitions over the long-term."

Weyerhaeuser, on the other hand, has opted to maintain the status quo for at least a while longer. They have clearly been shedding manufacturing facilities in preparation for the “possible” conversion to a timber REIT but it is clear that they see no urgency. They have long had a business model that focused on growing and managing trees specifically for a particular product in a particular mill – and they have been very good at it. They have captured value. But… I think it is a dead model. The value gains from that model don’t appear, to me at least, to be as great as the tax efficiency gains from the REIT model. Many investors agree. Weyerhaeuser’s stock price has declined to about $50 per share.

One analyst estimated the timberland value alone at $60 per share. My estimate of the timberland value is significantly higher - about $80 per share. Weyerhaeuser’s management has always understood the value of owning high-site land and of the financial value of intensive management. And those two factors are keys in timberland valuation. Weyerhaeuser’s timberland is not “average”!

Weyerhaeuser Redux

By now I'm sure that you are aware that Weyerhaeuser was successful at getting a modified version of the Tree Act passed as a part of the mammoth Farm Bill this year. Shortly thereafter they announced that they would not be converting to a REIT until 2010 at the earliest. The reason given to shareholders, by Chief Financial Officer Patricia Bedient, was that "A REIT conversion for Weyerhaeuser would not be tax efficient in 2009. However, this does not preclude the REIT option for Weyerhaeuser in 2010". The underlying reason for the tax inefficiency was reportedly the housing slump. I'm a little more than suspicious.

Among other things in the modified TREE Act are:

• 
  Provides a 15% tax rate for corporations on gains from timber that has been held for at least 15 years. (This 15% rate is comparable to that paid by many of Weyerhaeuser’s competitors; C-Corporations like Weyerhaeuser current pay a 35% rate on timber gains.)


• 
  Timber REIT provisions which are much more lenient with respect to manufacturing revenue.

That certainly sounds good for Weyerhaeuser. It makes it much easier for Weyerhaeuser to convert to a REIT and allows it to keep more of it's manufacturing facilities. So why did they announce that they would not convert to a REIT in the near future?

Here are a couple of quotes from Weyerhaeuser's PAC website explaining why the Tree Act should be passed:

• 
  “For Weyerhaeuser, timberlands ownership and integration with manufacturing is a core strength of the company.”


• 
  “After the TREE Act is passed into law, we will develop a strategy focused on continuing to obtain permanent relief. There will be potential major changes in the tax code in 2009-2010, which will be an opportunity to obtain this permanent relief.”

So, it appears that Weyerhaeuser will continue to fight the change to a REIT. What impact does this have on it's shareholders? Here is a chart that compares stock performance (management performance??) of Weyerhaeuser to Plum Creek.

That kind of says it all! Weyerhaeuser is over 80% owned by institutional investors. I wonder how long they will be willing to wait? --Brian

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Biofuels Update

A year ago last February I made my first post on this Blog. Among other things, I expressed my dissatisfaction with President Bush for his corn-based ethanol thrust and for ignoring the potential of wood. At that time I wrote “maybe we will come to understand that people would rather eat than have gasoline made from corn ethanol. Or see timberland and wildlife habitat cleared for corn fields. Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen. Then forest productivity will once again be a major issue and timberland investors will be smiling. And capital will flow to forest research!”

To President Bush's credit, he woke up quite quickly and began a very real push for cellulosic ethanol research as well. Perhaps less well known is his core strategy of “next-generation-biofuels production from nonfood feedstocks”. At any rate, now would be a good time to assess what has happened since that original post.

First, the nation (world) now clearly understands that corn ethanol is not the solution or even a part of the solution. Corn ethanol's high energy inputs, very limited carbon reduction (if any), clearing of forest land, and hard pressure on food prices are all serious consequences that have now become well recognized. A recent, widely read Time Magazine article, “The Clean Energy Scam” by Michael Grunwald, had this to say:

“But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it's dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.”

“Meanwhile, by diverting grain and oilseed crops from dinner plates to fuel tanks, biofuels are jacking up world food prices and endangering the hungry. The grain it takes to fill an SUV tank with ethanol could feed a person for a year. Harvests are being plucked to fuel our cars instead of ourselves. The U.N.'s World Food Program says it needs $500 million in additional funding and supplies, calling the rising costs for food nothing less than a global emergency. Soaring corn prices have sparked tortilla riots in Mexico City, and skyrocketing flour prices have destabilized Pakistan, which wasn't exactly tranquil when flour was affordable.”

“Biofuels do slightly reduce dependence on imported oil, and the ethanol boom has created rural jobs while enriching some farmers and agribusinesses. But the basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.”

Grunwald concludes with “But the world is still going to be fighting an uphill battle until it realizes that right now, biofuels aren't part of the solution at all. They're part of the problem.” And so is Grunwald.

The article, widely criticized by the ethanol community, paints a pretty accurate picture of corn ethanol and the agri-fuels but it paints all biofuels with the same brush. (Grunwald is an advocate: he ignored science and balance to make his point). Not once did he look at wood as a source of biofuel. Click to read the article. The danger stemming from Grumwald's article is that people will believe that all biofuels are “bad” and that “They are part of the problem” as he says.

The second point of this assessment is to look at what is actually happening on the wood front. Biomass co-generation plants have been successful for years and their use is expanding rapidly. Most of the fuel for these plants has typically been waste. There are over a dozen wood pellet mills operating in North America already. The largest one, in Cottondale, Florida, has an annual capacity of 550,000 tons. Another, perhaps even larger, is going in at Selma, Alabama with the intent of exporting to Europe. In Europe, wood pellets (carbon neutral) are mixed with coal to produce a cleaning burning product to reduce carbon emissions.

“Europe already consumes nearly 8 million tons of wood pellets a year, to run factories and power plants , and to heat entire neighborhoods (combined heat-and-power biomass systems with district heating). In 2005, the EU witnessed a 16% growth of electricity produced from biomass.” For more on this, here is a link to a Biopact article. This site also has a link to “A Biofuels Manifesto: Why biofuels industry creation should be ‘Priority Number One’ for the World Bank and for developing countries” by John Mathews. I would encourage Mr. Grunwald to read it!

Initially, the wood pellet plants have been sourced with wood waste but that will likely change. As consumption increases, it should be expected that fiber for pellets will begin competing with lower grade wood products like pulpwood. That makes timberland investors happy and research capital flows in that direction.

A DOE letter commenting on the Grunwald article stated that government “agencies invested more than $1 billion in research, development and demonstration of next-generation-biofuels production from nonfood feedstocks, which remains the core U.S. Strategy” (my italics). That's pretty significant. Both money-wise and strategy wise. Some of that grant and research money, along with private investment capital is also flowing into cellulosic ethanol. There are at least nine, perhaps more, cellulosic ethanol projects in some level of funding now.

“Despite all of this, Range Fuels Inc., which broke ground on its 20 MMgy wood-to-ethanol thermochemical plant in Soperton, Ga., is finding success quite unlike the rest of the biorefinery projects. On April 1, the company announced that it had raised more than $100 million in series B equity financing. This is in addition to the $76 million DOE grant Range Fuels received along with a $6 million grant from the state of Georgia. The company says the $100-plus million will go toward the completion of construction on the 20 MMgy biorefinery. Russo confirms that Range Fuels is the only commercial-scale cellulosic ethanol plant under construction by the end of the first quarter of 2008. Three more projects that were part of the original $385-million award have completed what’s called a Phase One award. (source: Biomass Magazine). For a more detailed look go to Commercial Biorefinery Update.

The third point that needs discussion is the use of wood as a feedstock for biomass to liquid, BTL, for a clean burning diesel fuel. We convert natural gas to a liquid form, LP, and use it as a fuel. Coal (which is wood under pressure for a few years) is being liquefied and being burned in the new diesel engines. This new biodiesel burns much cleaner and with increased mileage as well. A reader sent me a link to a very informative German newspaper article, BIOFUELS -- THE SECOND GENERATION, New Technology Foresees Trees, not Grain, in the Tank, by Christian Wüst from which I will extract a few quotes.

“The facility is fairly small. And even if all goes smoothly, its production will also be fairly modest -- just 13,500 metric tons of diesel fuel a year as compared with Germany's annual consumption of 30 million tons. Still, this tiny refinery in the eastern German town of Freiberg has managed to attract a number of highly prominent visitors, including ... Mercedes and Volkswagen..., Shell will be there, as will German Chancellor Angela Merkel. After all, the small cluster of concrete silos, combustion chambers and catalyzers owned by Choren Industries is worth paying tribute to. The only facility of its kind in the world, it is designed to turn wood into fuel for cars -- and thus represents a decisive step toward so-called "second generation" biofuels.”

“Now Choren wants to mark the dawn of a new age. The plant in Freiberg uses non-food biomass instead of traditional crops and is the first of its kind to cross the threshold from theoretical research into industrial production. This advanced refinery was designed to furnish proof that the new fuels are feasible -- and can be produced on a much larger scale.”

“Instead of sugar beets and rapeseed, the new plant processes wood as its raw material. In a pinch, it can also use straw. Using these materials significantly increases the yields from cultivated areas. According to estimates provided by the German Agency for Renewable Resources (FNR), the annual energy yields using the Choren process, based on a Central European climate, are 4,000 liters of fuel per hectare (1,057 US gallons), which is up to three times as much as previous biofuel production methods. What’s more, in contrast to production methods using rapeseed oil and ethanol, this technique does not produce fuel of inferior quality. Choren manufactures extremely pure diesel with virtually no sulfur. Moreover, these second generation biofuels do not harm particle filters or engines and meet top emissions standards.”

“ 'BTL is a dream fuel,' says Wolfgang Warnecke, CEO of Shell Global Solutions in Hamburg, 'the best of all the biofuels.'”

“The German technology is ready for production. And this has prompted traditionally gasoline-fixated Americans to take an interest in BTL diesel. In a competition held last year between 146 entrants, Choren emerged as the only foreign company in a group of winners to offer new energy technologies. Washington wants to promote these new technologies quickly and effectively -- and without red tape. Choren CEO Blades says a US government agency reviewed his company for just nine months. Soon thereafter came the offer for a loan guarantee amounting to 90 percent of the investment costs of a BTL facility on American soil.”

Here is my takeaway. Government policy has changed and is now pointed in the right direction (will Bush be known as the “Energy President”?). Capital is flowing in the right direction. Research is generally where it should be. The politics of all three Presidential candidates are inconsistent with the reality and the news media changes it's stance as food and gasoline prices waiver. And as the little company in Germany is showing us, at the heart of the solution is capitalism! Wood is good. --Brian

The Vertically Integrated TIMO?

One of my readers pointed out an interesting development to me recently. As has become so obvious, the vertically integrated forest product companies (VIFPC) are almost a thing of the past due to the elimination of favorable capital gains tax rates and the high tax rates on C corporations. The pass-through tax structure for TIMOs (pension funds) and REITs has pretty well destroyed the VIFPC as a viable tax structure. So the new landowners and managers become true timberland companies unburdened by the tax structure brought by those pesky mills.

The interesting observation is that The Forestland Group has recently completed the first part of the purchase of Roy O Martin's LeMoyen, Louisiana, hardwood sawmill, 10,000 acres of hardwood timberland, and 20-year harvesting rights on an additional 138,000 acres of hardwood timberland in south Louisiana. Read more.

Now back up about two years to when Anderson-Tully "merged" with one of The Forestland Group's funds. ATCO had a huge hardwood sawmill in Vicksburg billed as the largest hardwood sawmill in North America. You can read about that transaction here.

So now we have a new acronym (we need a new acronym), the VITIMO! It will be interesting to watch this trend develop, if it is a trend. When The Forestland Group buys its first pulp mill, I'll know its for real! --Brian

Weyerhaeuser Continues March to REIT

Weyerhaeuser, the last major public integrated forest products company still standing, continues its march to a REIT structure. For some background on the Weyerhaeuser REIT issue, you can visit my posts of May 4, 2007, Weyerhaeuser Takes First Step Toward REIT; May 8, 2007, TIMOs and REITs and Oct 30, 2007 which includes some REIT speculation and an estimate of the value of Weyerhaeuser's timberland. The May 8th post includes an excellent background article on REITS by Cliff Hickman with the U.S. Forest Service.

Yesterday's announcement that Daniel Fulton, head of Weyerhaeuser Real Estate just last December, and promoted to President of Weyerhaeuser just four months ago, has been promoted to CEO of Weyerhaeuser. That's a fast track! And a significant step toward the REIT.

One of the issues preventing Weyerhaeuser from converting to a REIT is all of its manufacturing facilities. It is clear that WY has been moving rapidly to divest itself, by sale or mill shut downs, of facilities. Check out this list of news releases since the first of the year. The number of mills shuttered or sold already this year is staggering. Although individually they may appear to be small steps, collectively, it appears to me to be a giant step toward the REIT.

I think Weyerhaeuser was originally optimistic that they could save the company by means of the Timber Revitalization and Economic Enhancement Act (the so-called TREE Act) which would have lowered the capital gains tax rate on timber sales to 14%. I think that the possibility of any tax reduction for large corporations is pretty much dead for the foreseeable future and I'm sure the folks at Weyerhaeuser would not argue that. Another step toward the REIT and the march goes on.

It would appear that the only remaining question now is "When?". "If" is history. --Brian

More on the Economics of Longleaf Pine

What follows is an invited Blog on the economics of longleaf from a commercial perspective. It was written by the folks at FORSight Resources. I think one of the key components of the comparative economic analysis that still needs to be addressed is the difference in stumpage value at harvest between loblolly and longleaf when poles are factored in. Perhaps some readers have a few comments that will address the subject. Thanks to Bruce and his crew at FORSight for taking the time to provide additional insight into the economics of longleaf. --Brian
________________________________________

The past decade has seen significant shifts in timberland ownership, particularly in the southern U.S. Integrated forest product companies have sold many of their land assets, which have subsequently been acquired by institutional investors. Timberland investments are often made by Timberland Investment Management Organizations (TIMOs), who both acquire and manage property on the behalf of institutional investors. Many TIMOs function as closed-end funds, meaning a key aspect of TIMO management is a short time horizon relative to integrated forest products companies. While forest product companies have traditionally held land ‘forever’, these closed-end funded TIMOs often plan to hold land for no more than 10-15 years.

Along with shifts in forest ownership, the past decade has also seen increased interest in longleaf pine management. In recent years, various organizations have begun encouraging longleaf plantation establishment with much of their effort directed at private landowners whose objectives include factors such as wildlife habitat and aesthetics in addition to economics. Little work has been done examining the economic viability of longleaf pine management on investment properties. This can be attributed to the commonly-held belief that returns from longleaf management cannot compare to those from loblolly pine plantations. TIMOs may be able to justify investments in longleaf pine plantations if they can show returns comparable to those from intensive loblolly pine management. This is particularly true given the higher amenity values attributed to longleaf pine.

To address this issue, the financial performance of loblolly and longleaf pine plantations were compared for four cases, each with low and high site productivity levels and each evaluated using 5% and 7% real discount rates (Table 1). Management regimes were selected for comparison from a reduced set of acceptable alternatives, which were constrained by management intensity and treatment timing. The regimes that maximized Land Expectation Value (LEV) for each site/discount rate combination were chosen for analysis. LEV is the present value per acre of the projected costs and revenues from an infinite series of identical rotations starting from bare ground.

Longleaf pine stands were simulated using FORSim Longleaf Pine Growth Simulator (www.FORSightResources.com) and loblolly stands were simulated using LobDSS (www.forestnutrition.org) which uses the FASTLOB2 whole stand growth and yield model (www.fw.vt.edu/g&y_coop/). Product prices and management costs and application rates were typical of the Southern US. Land expectation value (LEV) and present net worth (PNW) for the first rotation were calculated for each selected regime using both 5% and 7% real discount rates. Because loblolly and longleaf rotation lengths differ, LEV provides the only means for directly comparing results. Present net worth provides a means for analyzing cash flows over the short term.

Financial analysis results are shown in the last two columns of Table 1. The addition of pine-straw raking to longleaf pine management regimes resulted in greatly improved financial results (13-70% higher) that compared favorably with the loblolly pine management regimes. The loblolly regimes produced LEV values 3-16% higher than longleaf with pine straw raking in all cases except case 4, which exceeded the corresponding loblolly LEV by 2.6%. An examination of the cash flows reveals that the cumulative PNW ($/acre) from loblolly pine plantations remained negative until the final harvest in all cases. Interestingly, the economic rotation for longleaf without straw raking in case 1 (lower site, 5% rate) was shorter (32) than loblolly (35); in all other cases, loblolly economic rotations were shorter than longleaf, regardless of pine straw. Pine straw raking resulted in economic rotations for longleaf that were more than 10 years longer in all cases except case 4 (higher site, 7% rate) where the economic rotations for longleaf were the same (27). Pine straw harvests yield positive cash flows earlier in the rotation, especially for longleaf pine plantations on lower sites and evaluated using lower discount rates.

Table 1. Cases examined and financial results of each. Highest financial results in boldface.




Results indicate that longleaf pine regimes that do not incorporate pine straw raking yield financial results that are inferior to those from intensive loblolly management. However, with the addition of pine straw revenues, longleaf management can yield returns that are comparable to typical loblolly regimes. Longleaf pine plantations with pine straw harvests produced greater LEV than loblolly plantations on lands with higher site index (80 and 110 feet for loblolly pine and longleaf pine, respectively) when using the higher discount rate (7%). Other longleaf pine management regimes produced lower but comparable financial performance.

At lower discount rates longleaf pine regimes with pine straw raking provided positive cash flows sooner than loblolly pine. In all cases, however, positive cash flows were not achieved with any regime until after age 23. This result is noteworthy because this is longer than the expected land tenure of many closed-end funded TIMOs. Because there is likely to be little to no direct return on reforestation investments under such short land tenures, a logical consequence may be the minimization of reforestation expenses. Thus, longleaf pine may be a more attractive alternative, given a 25% lower initial silvicultural investment and the favorable LEV comparison. This analysis suggests that timberland owners managing strictly from the economic perspective should re-evaluate longleaf pine as a viable alternative to loblolly plantations. The tradeoffs for managing a species often considered to have higher amenity values than loblolly pine is not nearly as substantial as often believed.

This posting is a summary of a detailed paper prepared by the staff of FORSight Resources. Please visit FORSight Resources to download a copy of the complete white paper.

FORSight Resources is a leading provider of decision support services for natural resource management. The company’s main business lines are forest planning and harvest scheduling, timberland acquisition due diligence, forest inventory and biometrics and forestry GIS. For more information on FORSight Resources, LLC contact Bruce Carroll at 843.552.0717 or Karl Walters at 360.882.9030 or email: info@forsightresources.com.

On the Ownership Structure of Family Forests

I received an email this week that I think might have interest to several of my subscribers so I thought I would post the response. The email follows:

"Please tell me where I can review pros and cons of forming a LLC. I desire the best long term arrangement, tax advantages, etc. for timberland held for a longtime in the family. Need Pros and Cons compared to two siblings holding timberland separately. You might convince me that some, currently owned separately ,should remain that, and other acreage held in common should be split up, or continue to hold in common via a LLC. Thanks for any input you might offer."

Well, for openers, I'm not going to convince you of anything except that the issue is very important and can be complex. On the positive side, I can point you to sources to "review pros and cons of forming a LLC" and other ownership structures.

Breaking down your question a little bit, it looks like both current issues (taxes and management) and estate planning are both concerns (as they should be). So your speculation on an LLC might be right on target (taxes pass through to individuals, limited liability, more than one member but not too many members, etc). But there are caveats.

The best single source for this type of information, that I am aware of, is the National Timber Tax Website. I am going to quote a few things from the site for a general understanding and provide some links for you to pursue the issues in more detail.

First, what is ownership structure?
"Structure" refers to how you set up your timber investment for legal and tax purposes. How should the property be titled? Should you treat it on your tax return as an investment or a business? If you file as a business should it be a sole proprietorship, or should you form a corporation? Whether you are a new timberland owner or someone who has owned the property for a long time, these are just a few of the questions that should be considered when structuring your timber investment...

Timber owners also face a variety of risks that do not affect more conventional investments. Furthermore timber resources are generally exposed to risks for a much longer time period than other forms of investment. Another important consideration is the intergenerational nature of a timber investment. Is the property being held only for speculative purposes, or do you plan to pass the property on? When is it best to start dispersing your wealth? Creating an estate for future generations can be a very complicated process. Read more.

There are a half dozen or so types of ownership structure of which the LLC is one. With the exception of the "C Corporation", all tax related issues flow through to the individuals tax returns meaning no double taxation. That's a good thing. But taxes are not the only issue involved when selecting an ownership structure. Other factors are liability, number of investors, ability to manage, laws of the particular state, cost of organizing, etc. Read a more thorough discussion here.

The National Timber Tax Website also has two publications that deal specifically with estate planning for family owners of timberland. These can be read online or downloaded as PDFs.

Estate Planning Opportunities and Strategies for Private Forest Landowners (by Michael G. Jacobson and John Becker, Penn State)

Estate Planning for Forest Landowners - What Will Become of Your Timberland? (by Haney and Siegel). This also covers the form of timberland ownership and business organization, including LLCs, although it is a little old.

Another site with taxation and estate planning information worth mentioning is the Forest Landowners Guide to Internet Resources. Although it was developed specifically for the Northeast, most of the links apply to any geography. The content is very broad and useful to most any landowner. --Brian

Funding Fire Control

I live in a 20 year loblolly pine plantation in the Lowcountry of South Carolina. Fire has long been a part of life here. From the fire ecosystem implemented by Indians centuries ago to the cooperative (S.C. Forestry Commission, U.S. Forest Service, International Paper and Westvaco Corp.) fire control efforts of a decade ago, fire has been an important part of life and forest management here. As industry disposed of it's timberland, the burden shifted to the Forestry Commission and, to a lesser degree, the U. S. Forest Service (Francis Marion National Forest). As smoke related lawsuits from prescribed burning increased, prescribed burning declined and fuel loads have increased. This all has happened in the face of declining budgets for both fire control organizations. What has happened in the Lowcountry is a microcosim of the situation in the entire South and, to a lesser degree, the entire nation.

In recommendations to the Subcommittee on Interior, Environment, and Related Agencies regarding the FY2009 Budget for the U.S. Forest Service, George M. Leonard - Chairman, Board of Directors, National Association of Forest Service Retirees had this to say:

"The most critical issue that needs to be addressed in the Forest Service budget is the funding of fire suppression. The current procedure of including the ten-year average cost of fire suppression within the agency’s discretionary budget is destroying the capability of the Forest Service to carryout the remainder of its statutory missions. From 25 percent in FY2000, fire funding is now approaching 50 percent of the budget. The suppression cost trend means the ten-year average is going to continue to grow, further cannibalizing funding for other programs. While the overall Forest Service budget has increased nine percent over the last six years, the diversion of funds to fire suppression has had a major impact on the workforce available to carry out the multiple-use mission of the agency. The number of foresters, biologists, and other resource specialists, along with supporting technicians, is a good measure of the capability of a resource management agency to carry out its mission. As illustrated in the following table, the capability of the Forest Service has been seriously compromised."

You get the point, but if you want to read more, go here.

The SC Forestry Commission's situation is equally as bad, perhaps worse. Here are a few facts.

When adjusted for inflation, the current budget is 30% less than it was in 2001.
• Aging firefighting equipment is not being replaced on a timely schedule.
• Fuel costs are soaring.
• Hiring and retaining qualified firefighters is difficult due to a more urban economy and changing demographics.
• Forest industry changes have led to a loss of cooperator capacity, both personnel and equipment.
• Recent housing development has expanded into wooded areas, creating communities with very high fire risk.
• Forestry has a tremendous impact on SC’s economy: #1 employer, #2 payroll, #1 harvested crop, $1 billion in exports, $17 billion total economic impact.
• The Commission’s $18 million baseline budget investment is supporting a $17 billion industry economic impact, a multiplier of almost 1000.

If you have a home in SC, or own/manage timberland here, now would be a good time to contact your Senators in support of this years budget request, in particular, the members of the Senate Finance sub-committee responsible for reviewing the request. Those are Senators Yancy McGill from Williamsburg county, Larry Grooms from Berkeley county, Phil Leventis from Sumter county, and John Drummond from Greenwood county. By the way, these senators have been very supportive of forestry and fire control. Something to keep in mind the next time you go to the polls!

This post may appear to be somewhat local in nature but be assured that the words that you have read apply right outside your door, to your timberland and to your National Forest as well. What are you going to do about it? --Brian

Longleaf Pine

If you read my Blog through email subscription rather than visiting the Blog site, you probably have forgotten the byline. So..., The Timberland Blog: Examining the changes in timberland ownership and what those changes might mean. The pulp and paper industry was very focused on maximizing growth as opposed to the financial return focused on by the institutional investors. Management objectives are a primary key to what the future forest will look like. That's fact.

Way back in '67 while working on a major cruise/appraisal for the West Virginia Pulp and Paper Company, I remember vividly a sign near Washington, Georgia that said “Wilkes County, Gone to Grass”. I was with friend and mentor Kenney P. Funderburke, who said wryly “the sign should say, Gone to Loblolly Pine!”. Times change, economics change, landowners change, management objectives change, the forest changes. Like Wilkes County, the South went from natural forest, to cotton, to pasture, to loblolly pine for fiber production to whatever is next. What is next? For some of the Southern forest, maybe a return to the longleaf pine that once dominated this landscape. Management objective of optimizing financial return permitting.
If you are familiar with the longleaf and loblolly, the comparisons jump into your head very quickly. Longleaf is straight. Loblolly is crooked. Loblolly grows faster (at least initially). Loblolly occupies a broader range of sites. Longleaf is straight.

The lower pulpwood prices, combined with a focus on financial return of the new owners, provides an opportunity for longleaf to reassert itself. Back in the days when the land was managed by Native Americans, the objective of management was to burn the forest to prepare it for agriculture, provide nitrogen fertilization, reduce ticks and chiggers, improve hunting, grow broomstraw for housing, and to be able to see enemies lurking in the forest. That's some pretty powerful reasons to burn. At that time, the EPA was less concerned with smoke, environmentalists were less concerned with pine monoculture, and there were fewer lurking lawyers in the forests. The point here, is that the longleaf forest was not “natural”, it was created by its managers based on the objectives of management. These managers created a pine forest of an estimated 60 – 90 million acres that was reduced to less than three million acres in 1996 by a series of landowners whose objectives were cotton, rice, beef, soybeans, and wood fiber production. If longleaf is to expand replacing some of the loblolly acreage, that expansion must fit with the objectives of the new management – that being financial performance as opposed to the fiber productivity objective of the pulp and paper industry. I think it can do it. So do the sawmilling families that have owned and managed the longleaf remnants for the past 75 years.

The fact that longleaf is so straight can go a long way in a comparative economic analysis. The Longleaf Alliance has some financial analysis on its web site which illustrates the gains from increased pole production and the increased value of the poles over sawtimber. I didn't notice the increase in proportion of sawtimber to pulpwood characterized by longleaf stands although it may have been there. The growth and yield models do show that loblolly's growth advantage diminishes or disappears as the rotation age increases. In addition, nursery and silvicultural improvements have reduced the amount of time it takes to get the seedlings up and out of the grass stage thereby reducing the rotation age and improving the financial performance of longleaf. At any rate, it looks to me like the economics are there, at least on some sites.

I don't want to forget us Family Forest owners. Collectively, we own a lot more of the former longleaf forest than the institutional investors by a long shot. And our “management objectives” are generally broader than those of the investment community. The Feds are working to help us understand and to put money in our pockets if we will convert to longleaf and do it their way. So far, it seems to be working with a couple of hundred thousand acres being planted each year. That's enough to turn the tide and longleaf acreage is actually increasing now. It may not be increasing much but at least the decline has been arrested.

So..., what does all this mean? We are in the early stages of a change in the South's forest which will in fact see more of the landscape revert to the beauty of the historic longleaf pine forest that defined the “pineywoods” of the Old South. There is something about longleaf that stirs the soul, loblolly doesn't. --Brian

Meetings, Global Reports and More Pricing Services

There are three upcoming meetings that readers may be interested in attending. The first, scheduled for March 19 & 20 in Waukesha, WI, is an SAF program entitled The Effects of Change in Forest Ownership. The registration fee is $100 and the list of topics and speakers (see below) is outstanding. For more information, call Julie Peltier at 262-670-3404, John Eschle at 262-264-5705 or Hank Kleppek at 414-463-1991. There is no web site that I am aware of. This looks like an excellent program at an excellent price.

Here is the list of presentations

• 
  What Happened to Industrial Land Ownership – Sam Radcliffe
• 
  Forest Fragmentation – Susan Stewart
• 
  The Role and Tools for Conserving Lands – Tom Duffus
• 
  The Impact of Forest Certification –Bill Rockwell
• 
  Banquet Guest Speaker – Miles Benson “A Historical Perspective”
• 
  The Next Generation of Family Forest Owners – Catherine Mater
• 
  Future Wisconsin Forest Land Markets – Ed Steigerwaldt
• 
  The Role of Bioenergy – Lew McCreery
• 
  Carbon Credits – David Miller
• 
  Changes in Traditional Forest Products Markets – Peter Ince

The second meeting is the 4th Timberland Investing World Summit taking place June 9th-11th in San Francisco, CA. The registration fee for the conference is $1599 until March 7th. Call 646.253.5526 for details (no web link provided). The list of speakers will include:

• 
  Liane Luke-Managing Director of Four Winds Capital Management
• 
  David Bischel-President for The California Forestry Association
• 
  Corey Brinkema-President for The Forest Stewardship Council
• 
  Klas Sander-Natural Resource Economist for The World Bank
• 
  Jacques Beadry-Loisque-Program Manager for the U.S. Department of Energy BioMass Program
• 
  Jose Rente Nascimento-Senior Natural Resource Specialist for Inter-American Development Bank
• 
  Burl Carraway-Program Manager for The Texas Forest Service

The third program is in September and is hosted by the World Forest Institute which focuses on the shift in forestlands and its implications. They are holding their fourth such event this September (last year's sister event focused mainly on international investing). You can check out last year's agenda at: http://wfi.worldforestrycenter.org/invest/agenda.html. This year's theme is "What Next?"

The World Forest Institute also has many “Country Reports” available in addition to past conference proceedings and special reports. Here is a link to their publications. Another source of global data is RISI. Here is a link to some of their publications.

Some time ago, I provided info on some of the available pricing services that are available to timberland owners. Following that Blog, RISI sent me the following note and links to some of their stumpage pricing services which may be of value to you.

“I wanted to let you know that RISI also provides a stumpage pricing service called Timber Transaction Pricing Service (TTPS). We currently offer comprehensive online stumpage pricing for the entire US South and are actively working to expand our footprint into the northeast as well as a few other areas of the country.”

“Here are several links that you might find interesting.
The first is the link to our TTPS description. http://www.risiinfo.com/risi-store/do/product/detail?id=10035&pcId=23&parentId=&rootId=12
But, I also wanted to send you an example of a stumpage pricing report we have developed for northern Pennsylvania, where we have begun to look at providing hardwood stumpage pricing. http://www.risiinfo.com/pareport
Finally, here is a link to another service we provide that while not a stumpage pricing service, does include stumpage prices and does help landowners, or prospective landowners determine the investment attractiveness of specific timberland tracts. http://www.risiinfo.com/risi-store/do/product/detail?id=10732&pcId=23&parentId=&rootId=12 “
There seems to be several good stumpage pricing services available. The key is to match the cost with the value that you will receive. --Brian

On the Marginal Return from Timberland Investments

I own stock, I own timberland. Each provides an economic return that is somewhat comparable to the other. Sophisticated analysts compare the two asset classes to determine which is actually best. In the end, I think timberland usually wins the contest by a small amount.

When I get up in the morning, I have my coffee and then head out the door with Sophie. About four steps from the door I am walking in the woods and enjoying the marginal return that comes from a direct investment in timberland. Sophie has me by the cuff dragging me down the slope to see if we will see ducks, geese, a Great Blue Heron or maybe even an otter if we're lucky.
She runs as fast as she can go, stops abruptly, and then freezes into that handsome pose of a pointer.

The individual investor is sometimes at a disadvantage to the institutional investor when it comes to buying and owning timberland. Economies of scale make it more economical to both purchase and manage large tracts. Yet when the pension fund manager is working diligently balancing the portfolio for the funds clients, the owners of the Family Forest can be balancing on a log crossing the creek.

Sophie breaks her point, flushes three wild turkeys, my heart races and the marginal return jumps a point! It all evens out. --Brian

ETF as Surrogate for Timberland Investment

In the Feb. 18th issue of Business Week, there is an article entitled "Wood Paneling for Your Portfolio". I'll start with a couple of quotes from the article and then I'll disect them.

"Buying timberland is one of the ways big guys running pension plans and endowment funds have diversified their holdings away from financial market trends and earned fairly stable double-digit returns to boot. But timberland has been mostly off-limits to individual investors, because it requires millions of dollars to buy in."

"Enter the Claymore/Clear Global Timber Index ETF. It's a new exchange-traded fund that invests in stocks of companies with the world's greatest exposure to timberland. It amps up the exposure by weighting the 27 stocks in the portfolio not by market capitalization but by actual acres companies own."

"This sort of everyman version of a timberland play..."

Okay, that's enough. I've been reading about this ETF as a surrogate for timberland ownership since its inception and I would like to say very LOUDLY and clearly that this is NOT a timberland play.

First, let's consider the above quote "timberland has been mostly off-limits to individual investors, because it requires millions of dollars to buy in." No it does not. Small tracts of timberland with all of the advantages of larger tracts are available for purchase. The use of a LLC allows investors to combine financial resources to acquire larger tracts. You can even purchase timberland within an IRA. Consulting foresters in all regions of the country are available to assist with appraisals and management. Many of these consultants are the same people assisting the institutional investors with timberland acquisition and management. If you want a timberland pure play, you will have to buy timberland and it is within the reach of most investors. If you want to get an idea of what is available for sale and pricing, just do a Google search on timberland for sale or consulting foresters in your geographic area of interest. If you want to learn more about buying small tracts of timberland, you might want to buy and read Curtis Seltzer's "How To Be a DIRT-SMART Buyer of Country Property". There is a lot of info in it that can put you on the right road. Before you buy, you will still need a consulting forester or someone else very familiar with timber values, land productivity and the local market. If you want to delve into the concept of timberland as an investment, I'd recommend "Timberland Investments" by Chris Sinkhan, et. al. which is pretty much the classic in that field.

So, no, you don't need "millions of dollars" to buy timberland!

Now let's look at the Claymore/Clear Global Timber Index ETF and see why it is not an "everyman version of a timberland play". To be fair to Business Week, they are not the only ones promoting this ETF as a surrogate for owning timberland. I have seen at least a dozen articles with similar comments.

Below is a list of the holdings in the Clear Global Timber Index along with the percentage weighting of each. As you scroll down through the list, ask yourself the following questions.

• Is the primary asset of this company timberland?


• Does this company own any land or has it sold its timberland?


• Is the stock weighting in the portfolio "by actual acres companies own" as claimed in the article?


• Is this company forced to acquire its timber on the open market (or at market price if there is a fiber supply/lease agreement)?


• What level of fiber self-sufficiency does this company have?


• Does this company grow and sell more timber than it uses?


• Is this company the exact opposite of a timberland play?


• Is this index/ETF more reflective of the global pulp and paper industry index than timber or timberland?
  

Clear Global Timber Index
Top Fund Holdings as of 2/13/08

Name/Weight
INTERNATIONAL PAPER CO/5.48%
VOTORANTIM CELULOSE E PAPEL SA/5.46%
ARACRUZ CELULOSE S.A. ADR/5.17%
POTLATCH CORP/4.86%
SINO-FOREST CORP/4.83%
RAYONIER INC/4.78%
SVENSKA CELLULOSA AB-B SHARES/4.77%
SAPPI LTD/4.74%
TIMBERWEST FOREST CORP/4.61%
PLUM CREEK TIMBER CO INC/4.60%
WEYERHAEUSER CO/4.60%
SUMITOMO FORESTRY CO LTD/4.56%
HOLMEN AB SER B/4.55%
MEADWESTVACO CORP/4.49%
GUNNS LTD/4.45%
OJI PAPER CO. LTD./4.33%
SMURFIT KAPPA GROUP PLC/4.28%
GRUPO EMPRESARIAL/3.76%
CHINA GRAND FORESTRY RESOURCES/3.22%
DELTIC TIMBER CORP/2.71%
WEST FRASER TIMBER CO LTD/2.67%
HOKUETSU PAPER MILLS LTD/2.48%
GREAT SOUTHERN PLANTATION/2.13%
CANFOR CORP/1.25%
TIMBERCORP LTD/1.21%

If you answered the questions, it should be very clear that this index is NOT a timberland play but in many cases, it is just the opposite. For example, as timber and timberland prices increase, you would expect the value of the index to increase as well. Here is a quote from MeadWestvaco's news release following its last quarter.

"Higher input costs for wood ...negatively impacted profitability."

The corporate structure of many of the key holdings above is very similar to that of MWV. This ETF may be a good investment, I can't say, but it is certainly NOT a surragate for timberland ownership. It reflects a global pulp and paper play.

So..., is it possible to invest in stock as a timberland play? Maybe, kind of, in a way. At a minimum, we can do a heck of a lot better than this ETF. We'll do it by creating a basket of stocks from the above list that really are backed up by timberland and that have little or no exposure to pulp and paper. Let's also eliminate the bulk of the foreign stocks which, to a degree, have currency exchange risk associated with them (You may think that the dollar will continue to decline so they will be a good investment but that is not timberland investing, that's currency investing - then again, you might think that the dollar is about to turn around...).

Let's start by putting check marks by Plum Creek, Potlatch and Rayonier. All have significant timberland acreage, little or no exposure to pulp and paper, and a tax efficient corporate structure (REIT). The timberland in these three stocks provides plenty of geographic, species and market diversity. That diversity substantially reduces many of the risks associated with both timberland and stock investing. I believe that this basket will come as close to owning timberland as you can get. If you want to add a few more, consider Deltic Timber (timberland and lumber mills), Pope Resources (a MLP), and Weyerhaeuser (six million acres but pulp and paper, lumber mills, currency risk, and inefficient tax structure). Weyerhaeuser is a particularly interesting addition because its current market cap is less than estimates of the timberland value. In addition, a probable change in the tax structure will likely result in a significant increase is share price. So let's create a basket with three to six of these stocks and forget the ETF. It will be more reflective of a timberland investment.

But remember, too, that it is NOT timberland. It is stock - be that good or bad. On the positive side, the stock basket is much more liquid than a timberland investment. The stable, continuously rising value of timberland will be absent. Daily values will change with the stock market. Value will rise and fall with major market influences like housing. Quarterly profit will impact the stock price (no matter how foolish). Last week an analyst reported that Potlatch was a better buy than Plum Creek. I checked the stock prices for the two of them and Potlatch was up about 3.5% and Plum Creek was down by 3.5%!!! The value of the timberland at neither company had changed one penny but the difference in value of the two companies was 7%! These types of moves may be foolish but they are also reality.

So..., this may raise a couple of questions in your mind. First question: How can we do a better job at selecting stocks to "kind of" mirror timberland investments than a professional investment firm like Claymore? Answer: Due to laws and regulations that apply to mutual funds and ETF's, they are restricted from taking a position that exceeds 5% of the fund. That means that they must take a bare bones number of 20 different companies in the ETF and there are not 20 companies out there that even approach being true timberland plays. We win not because we are better but because we are blessed with more flexiblity.

Second question: How could Business Week's assesment be so far off? Answer: ?? --Brian

Employee Buyout of FIA

Charley Tarver will sell Forestry Investment Associates (which I think was the first TIMO, one of the first for sure) to its employees. The employee buyout will be funded with capital provided by Asset Management Finance Corporation which will assume a financial interest in FIA. The management team, consisting of L. Michael Kelly, V. Scott Bond, Samuel R. Grice, Charles L. VanOver and Marc A. Walley will maintain a controlling ownership interest in the firm.

"Launched in 1986, Forest Investment Associates manages approximately $2.8 billion in assets, overseeing broadly diversified portfolios of timberland on behalf of state and municipal retirement systems, corporate pension plans, endowments, foundations, family offices and private commingled funds. Timberland has become an increasingly popular asset class among institutional investors. It provides portfolio diversification, having low correlation with traditional equities and real estate, and acts as a hedge against inflation."

If you are an employee in another firm looking for a way to do a buyout, you might want to talk to AMF. According to David Chalfin, Vice President at AMF, “We feel fortunate to partner with the team at FIA and to assist them in achieving this milestone transaction. We look forward to facilitating management buyouts with other successful management teams in the investment management industry.” Read all about it. --Brian

Global Timber Prices Rising?

Wood Resources International is reporting that global wood prices are up everywhere but in the US South and West. The reporting is in U.S. dollars and they acknowledge in their promotional piece that some of this is due to the declining dollar but they don't say how much. I suspect that the dollar is in fact the primary driver and that real increases are pretty minimal. You can read the promotional piece here or subscribe to their service and get the full details. I used to subscribe when I was charged with monitoring global fiber supplies but the service is quite expensive and (in my opinion) hard to justify unless you have a very specific need in the global marketplace. If so, go to their website. I have also used some of their studies/reports in the past which I found very useful on various wood supply studies.

A few months ago I did a post on a very good paper by Tom Harris and others that included a comparison of delivered pine pulpwood in Brazil and the U S South. There is a chart that shows very dramatically the impact of the changing U S dollar. Look at the chart if you missed it. Its important.

While I'm on Harris and bunch, the Timber Mart-South also publishes a stumpage pricing service and very informative newsletter. You can subscribe to the service on their web site. General pricing data and older newsletters are available at no charge but you do have to pay for the current stuff. I have subscribed to this in the past too and found it very useful when I was actively involved in timber sales. It is reasonably priced.

Probably the most extensive and most heavily used pricing service today is Forest2Market. It is a relative newcomer that is providing very localized data on stumpage and delivered costs. They are extensively used by both landowners and the forest industry. Visit their website for a list of products and services.

There are also some free services out there provided by state forestry organizations and local universities. Google them if you are an infrequent user. If I have missed any of the key pricing services or if you would like to comment on any of them, please add a comment. --Brian

The Forestland Group to Buy 100,000 acres in Wisconsin

TFG reportedly has purchased (or will purchase?) 100,000 acres of timberland from Plum Creek in Wisconsin.

"the timber on the lands sold to TFG includes a variety of species and age classes. Besides the 16,300 acres in Sawyer County, the sale includes 12,000 acres in Rusk County, 69,700 acres in Oneida County, and lesser acreages in Price, Forest and Langlade counties."

"When asked by the Record what Plum Creek’s objective is in selling these lands, Wilson said that Plum Creek “regularly evaluates its holdings to determine the best economic use for every acre, and this was a market opportunity for the company."

"As the largest private owner of hardwood timberlands in the United States, TFG currently manages approximately 2.1 million acres in 17 states in the eastern U.S."

Read the entire article in the Sawyer County Record. --Brian

Timberland Investing: Latin America Summit

If you would like to head way south this winter, there is a timberland investment program scheduled for March 3-5 in Sao Paulo, Brazil (that is late summer in Brazil!).

According to the promotional literature:
"Discussions will focus on:
• Local investments opportunities in South America
• Biological, political and financial risk of investing in Brazil
• The importance of creating a diversified global timber portfolio
• Investments in carbon credits as additional revenue"

Actually, it looks like a pretty good conference for anyone with a timberland investment in Latin America or for anyone considering an investment. You can check out the speakers and all topics on the conference web site. If you have never been to Sao Paulo, it will be a memorable experience! Brazil is a wonderful place with some equally wonderful people. --Brian

Molpus Acquires 195,000 Acres

"The Molpus Woodlands Group, LLC (MWG), a timberland investment management organization, headquartered in Jackson, Mississippi has announced the successful purchase of 195,000 acres of timberland. The acreage is located in five states as follows: New York, Pennsylvania, Kentucky, Tennessee and Alabama. This acquisition increases the company's total acreage under management to 665,675. "

" These purchases mark the first acquisitions outside the southern United States for MWG. This acreage will be managed as a long-term timber investment on behalf of an institutional investor."

Read entire article.

Longleaf Pine Growth Model and Stand Simulator Available

A new longleaf pine growth model and stand simulator is now available from FORSight Resources. The following information is from their news release. For additional details, you can email: info@FORSightResources.com. --Brian
___________________________________________________

FORSight Resources releases FORSim – Longleaf Pine Growth Simulator (LPGS)

North Charleston, S.C., USA – November 16, 2007 – FORSight Resources, a leading provider of decision support services for natural resource management, announced today the release of FORSim – Longleaf Pine Growth Simulator (LPGS). LPGS is a versatile tool that provides biometricians and inventory foresters with the functionality of a longleaf pine growth engine in an easy-to-use, excel-based interface. The growth engine provides for alternative thinning treatments. LPGS provides a means for quickly analyzing and comparing stand-level treatments through graphical and tabular outputs. LPGS also calculates scores for assessing foraging habitat for the endangered red-cockaded woodpecker (RCW), providing foresters and wildlife managers a powerful tool for developing and assessing treatment regimes in support of RCW recovery. Overall, users will find this to be a valuable addition to FORSim product
suite.

Investing in African Plantations

A new firm, Arfwood Timberland Partners LLC, has been launched with the stated purpose of investing "in African timberlands specifically investments in: African Plantation forests companies, African Farm forests companies, African eco-tourism companies, African certified forest products retail companies, and African carbon sinks establishments. "

It is unclear to me if the proposed investments are just in African companies or if they will actually be investing in plantation and natural timberland as well. The following is an extract from their promotional literature. --Brian

__________________________________________

say YES to investments in:
 African Plantation Forests
 African Farm forests
 Africa Eco-tourism
 African certified forest products retail
 African Carbon sink establishments

AFRWOOD TIMBERLAND PARTNERS LLC is a for profit perpetual timberland investment firm registered in the State of Delaware USA, specializing in Africa with power to secure the market by investing in local retail outlets. The company will invest in African plantation forests, African farm forests, African eco-tourism, African certified forest product retail outlets and African carbon sink establishments. The firm is managed by African wood Inc, and may take on any number of additional managers depending on need. The partners, who must be qualified investors in their jurisdiction, should be able to commit a minimum of five million United States dollars in patient long term investment funds since the managers cannot guarantee an exit route in the medium term.

For Commitments and inquiries contact: David F Amakobe, President, African Wood Inc, Suite 902, One commerce Center, 1201 north Orange street, Wilmington, Delaware 19801,

T. 302-884-6737, F. 302-884-6738, Skype: afrwoodusa, www.linkedin.com/in/fundingafrica , www.afrwood.com

Bowater Continues Selling; 17,600 Acres Remain for Sale.

Bowater announced earnings today. The following paragraph is from their earnings statement. Looks like they are pretty well "wound down". --Brian

"During the third quarter of 2007, Bowater sold approximately 11,400 acres of timberlands primarily located in Tennessee, and during the first three quarters of 2007, Bowater sold approximately 119,200 acres of timberlands primarily located in Tennessee and Canada. One of Bowater's consolidated subsidiaries, which is owned 49% by a minority interest, sold approximately 25,000 acres of the 119,200 acres and recorded a pre-tax gain on the sale of land of $22.8 million during the first three quarters of 2007. During the third quarter of 2006, Bowater sold approximately 23,000 acres of timberlands, and during the first three quarters of 2006, Bowater sold approximately 519,000 acres of timberlands, its Degelis sawmill and its Baker Brook sawmill. As of September 30, 2007, Bowater has approximately 17,600 acres of timberlands classified as held for sale."

Changes in Timberland Investments in the South

There is an outstanding paper by Tom Harris, Jacek Siry and Sara Baldwin (the TimberMart-South crew) that can be downloaded at no charge from Forestweb's site. The paper looks at the major changes and trends impacting forestry investments in the U. S. South. An outline of what is covered follows:

• "Major Changes in the U. S. South: New items worthy of note
  »» A decade of timber price declines
  »» Retirement of the vertically integrated model for forest products
  »» Improved competitive position
  »» Maturing forestry investment industry
  Southern Timber Trends: Key, Overarching Issues
  »» Globalization
  • Increased Global Trade in Forest Products
  • Shift in Manufacturing
  • Role of Paper in Communications
  • Energy and Bioenergy
  »» Abundant Timber Supplies
  • Planting Rates down
  • New emphasis on thinnings
  »» Consolidation and Dis-integration
  • More concentrated products markets.
  • Dis-integration essentially complete
  »» Forestland Ownership Shifts
  • New owner objectives and investment horizons unclear.
  • HBU based values assuming new importance.
  A long-term history shows nominal increases in stumpage prices"

The paper is well illustrated with charts and graphs illustrating the authors' observations. It covers "all the usual suspects" (price trends, ownership changes, transactions, etc.) but I think the most interesting observation is the impact of the declining U. S. dollar. The charts compare delivered prices of conifer pulpwood in the major wood producing regions as well as a more detailed comparison (see graph) between the U. S. South and Brazil. Guess what? The South is now very competitive!! So while we hear all of the wailing and gnashing of teeth due to the falling dollar on the nightly business shows, there is a very positive impact in our manufacturing sector (more jobs, higher wages, higher stumpage prices from increased demand? etc.).

I would recommend reading FORESTRY INVESTMENTS: Major Changes in the U.S. South made available from Forestweb. Harris and bunch did a good job. --Brian

Land Deals: WEYCO, GFP, Sierra Pacific, TCG, Rosboro

The following is from a WEYCO news release on WEYCO's website:

Weyerhaeuser, Global Forest Partners Complete Sale of New Zealand Assets:
"FEDERAL WAY, Wash., Oct. 31 /PRNewswire-FirstCall/ -- Weyerhaeuser Company (NYSE: WY) and Global Forest Partners today announced the completion of the sale and transfer of assets from their former joint venture to GFP sole ownership after receiving the necessary government approvals."

"Under the agreement, GFP investment funds will acquire Weyerhaeuser New Zealand, Inc., and Weyerhaeuser's interest in the Nelson JV assets. These assets include approximately 67,000 productive hectares of plantation forests in the Nelson/Marlborough region and the Kaituna sawmill at Renwick, which has a log input capacity on a single shift of 80,000 cubic meters annually."

"Terms of the agreement were not disclosed."
------------------------------------------------------

The following copyrighted news article is supplied with permission and the courtesy of Forestweb. You can visit their site at www.forestweb.com.

Sierra Pacific acquires 140,000 acres of Washington timberland from The Campbell Group; simultaneously buys/sells off 43,000 Oregon acres to Rosboro

Oct 26, 2007 — Forestweb
By Audrey Dixon

SAN DIEGO, Calif., October 26, 2007 (Forestweb) — Sierra Pacific Industries (SPI) has acquired 140,000 acres of Washington timberlands from The Campbell Group (TCG), plus another 43,000 acres in Oregon that it simultaneously sold off to Rosboro.

Mark Pawlicki, Director of Governmental Affairs for Redding, Calif., based SPI, confirmed earlier this week the company had acquired the Washington land very recently but declined to divulge any more details.

Industry sources told Forestweb it had been a two-part transaction with TCG, and that about 40,000 acres of Oregon timberland had been sold to Springfield, Ore., based Rosboro.

Rosboro's CFO Scott Nelson confirmed Friday afternoon that his company had acquired 43,000 acres in western Oregon from SPI at the same time it completed its transaction with TCG, on September 27.

All news reports are copyrighted by the respective papers.

Gone Hunting!

Okay, I've been "out-of-pocket" off hunting for caribou and moose in Newfoundland (beautiful country!) for the last week and a half. Let's see what has happened since I've been gone.

Hancock sold 10,000 acres:
of Coosa River timberland for Alabama's Forever Wild Land Trust program. "The Forever Wild Program was established in 1992 by constitutional amendment to provide for the purchase of public recreational lands. Since its inception, the program has purchased 133,000 acres of land for general recreation, nature preserves and additions to Wildlife Management Areas and state parks. To learn more about the Forever Wild Program, please visit http://www.alabamaforeverwild.com/."

"The Hancock Timber Resource Group has a long history of working with communities, states and conservation groups to protect environmentally sensitive land. To date, our Sensitive Lands Program has protected approximately 320,000 acres across the United States," said Mike Wolf,director of North American Forest Operations, Hancock Timber Resource Group. Read more about it.

Speculation on Weyerhaeuser's Conversion to a REIT:
I guess this speculation is a long way from new news but there is a very informative article in Barrons. Following are a few quotes from the article (as I write, WEYCO stock is trading at about $74/share).

"BASED ON RECENT PRIVATE-MARKET transactions, Zaret, a former forester, values Weyerhaeuser's timber assets at $13 billion, or $59 a share -- just a bit under the company's stock-market value of $14.6 billion. At current prices, that means investors are getting Weyerhaeuser's other assets for a relative pittance. The timber business generated just 5% of last year's sales of $22 billion, but accounted for 64%, or $762 million, of total operating income."

"Wood products, which chipped in almost $8 billion of revenue, is Weyerhaeuser's second-most-valuable business, according to Zaret, who estimates it's worth $3.2 billion, or $15 a share. The real-estate business, whose income Zaret expects to slump 58% in '07, comes in at around $10 a share. In all, the analyst values Weyerhaeuser's parts at $103 a share, some 51% above its current price."

"This tax disadvantage prompts the market to value timber held by publicly traded C corporations at a discount to land held by REITs or private owners. Plum Creek, the largest REIT with more than eight million acres of timberland, trades for 18 times Ebitda, well above the multiple of 10 or 11 for the average paper company. Weyerhaeuser fetches eight times Ebitda."

"Timber companies could get some relief this year from Congress, which is mulling passage of the Timber Revitalization and Economic Enhancement Act. Aimed at enhancing the industry's global competitiveness, it would cut the timber-harvest tax for C corporations by 60%, to 14%."
Read "A Tribute to Timber" in Barrons.

It is a very interesting article that shows the pickle that WEYCO is in. Its tax structure has to change. Either Congress makes changes or WEYCO becomes a REIT.

Pope and Talbot Seeks Financial Protection:
"Pope and Talbot, Inc (Pink Sheets:PTBT) today announced that, in order to address its financial challenges and to support efforts to be a more efficient organization, the company and its U.S. and Canadian subsidiaries have applied for protection under the Companies' Creditors Arrangement Act (CCAA) of Canada. Pope & Talbot's Board of Directors, in a unanimous decision, directed the company to take this action as the best alternative for the long-term interests of the company, its employees, customers, creditors, business partners and other stakeholders." Read release.

Timberland Investment Returns

Here is a link to economist Jack Lutz' quarterly newsletter "That Was Then, This is Now". It is a very well done and interesting article on how the returns from timberland have changed over the past two decades.

In addition to timberland returns, and the "shocks" that impact them, he compares and correlates the returns to other major investment alternatives. It is well worth reading. --Brian

Phaunos Timber invests 2 mln eur in sustainable forestry in Indonesia

Phaunos Timber Fund Ltd, the UK closed-end investment company that bought Potlatch's poplar tree farm, "said it has committed a minimum initial investment of 2 mln eur and up to 4 mln eur in sustainable forestry in Indonesia, with the opportunity to scale-up the investment over time."
"These funds will be used by the scientific team working with the foundation to assist in the development and expansion of a novel closed-system of tropical forestry".

Read release.

43,000 Acres of Timberland for Sale

A private investor has 43,000+ acres of hardwood timberland for sale in eastern Kentucky. Partial mineral rights also available. If you are interested and would like an information packet, please email ky.timberlands@gmail.com.

Some things you may have missed

There have been a few interesting things in the news about timberland since my last post. Its possible you may have missed one of them.

on American Forest Management
I think the most interesting, is the acquisition of I-P's Sustainable Forest Technologies subsidiary by American Forest Management which is to occur later this month. The IP subsidiary managed the 1+ million acre former IP land, among other lands, in Maine for GMO, a TIMO.

"Headquartered in Charlotte, N.C., and Sumter, S.C., American Forest Management manages more than 1.5 million acres and has 15 district offices and eight field offices. With the acquisition of Sustainable Forest Technologies, the company will now manage more than 4 million acres and operate 41 offices in 15 states." Read the article.

Pretty impressive and kudo's to AFM!

on Potlatch acquisition
"SPOKANE, Wash.--(BUSINESS WIRE)--Sept. 12, 2007--Potlatch Corporation (NYSE:PCH) today announced an agreement to acquire approximately 179,000 acres of timberland in Idaho for approximately $215 million from Western Pacific Timber, LLC, representing $1200 per acre. The transaction will occur in two phases, with the majority of timberlands to be acquired in the first phase, which is expected to close in September 2007, and the remaining timberlands to be acquired in the second phase, which is expected to close in January of 2008."

This is the former Boise Cascade lands in the McCall, New Meadows and Donnelly area. I spent some time there on a USFS timber inventory crew. It's a pretty area, grows good timber and certainly has significant recreation potential. For most of the time, we stayed in a trailer up above New Meadows. Later we went to Burgdorf (summer population was 2, winter population was zero). Nice hot springs in a pool built of logs. We worked 10 days on, 4 days off. Our off days were spent at the smokejumpers barracks in McCall. It is (was?) a beautiful place. So much for the reminiscing, this brings the total acreage for Potlatch to 1.7 million about half of which is in Idaho. Read the news release.

On CalPERS
It seems like it wasn't too long ago when CalPERS was getting out of timberland investments...

"The California Public Employees' Retirement System sees big investment opportunities in the construction of roads, bridges, airports, utilities, water systems and similar projects.
The nation's largest public pension fund plans to allocate up to $2.5 billion into an inflation-linked new asset class that will include the pilot infrastructure program as well as investments in commodities, inflation-linked bonds and timber." Read article.

on MeadWestvaco timberland ownership structure
"As we continue to execute our land management strategy and build this business, we will explore alternate ownership structures that best support our business objectives and provide the greatest value to our shareholders," said John A. Luke, Jr., chairman and chief executive officer. "Our Board of Directors strongly supports our strategy, and believes that any alternative structure must recognize that successful implementation of the business plan will require continuity of vision and leadership, as well as community engagement and support." Read the news article.

Time to sell Canada's forests?
Read "Treasure in the Trees" for some thoughts by Clark Binkley and others.

USDA AWARDS $6 MILLION TO ADVANCE TREE GENOMICS AND BREEDING

From USDA News Release:
"WASHINGTON, Aug. 30, 2007 - Agriculture Secretary Mike Johanns today announced that $6 million has been awarded to the University of California - Davis to improve breeding technologies for conifer trees. Application of genomic-based breeding technologies will significantly reduce the breeding cycle time and the cost of extensive field evaluations at large, long-term test plantations."

"The Conifer Coordinated Agricultural Project (CAP) brings genomic-based breeding to major industry cooperative breeding programs within five years to develop a comprehensive undergraduate and graduate curriculum in modern plant breeding technologies to train the next generation of tree breeders. The program also will develop a comprehensive extension program to train existing tree breeders in the use of genomic-based approaches to tree breeding."

Read the entire news release.

RMK Timberlands acquires 115,000 acres in Texas

According to the Daily Report, Regions Financial Corp.’s RMK Timberland Group has purchased 115,000 acres in Texas from Corrigan Timberlands. Although no other information was given, I assume that this is a part of the former International Paper land (managed by Molpus, I beleive) in East Texas. --Brian

Forest Nurseries and ArborGen

One of the stated concerns as timberland moves from industrial ownership to investor ownership is "Where will the seedlings come from?" Investors want the timberland but not the nurseries.

International Paper, in particular, had a large forest seedling production capability. MeadWestvaco, although with less production capacity, also has outstanding seedling capability. Loss of these quality nurseries would be significant from a forest production standpoint and probably from a seedling cost standpoint.

Several years ago, a forest biotechnology company, called ArborGen, was created by I-P, MWV and Fletcher Challenge. Fletcher Challenge was later broken up and the Rubicon piece became the partner in ArborGen. The thinking behind ArborGen was that it might make more sense to combine existing technology and future research dollars than for everybody to do their own thing. The idea took, not quickly, and ArborGen was born.

ArborGen's product is improved tree performance through biotechnology. The product's package is the seedling. The founders have now provided ArborGen with all the packaging they need! All United States nurseries belonging to International Paper and MeadWestvaco are now owned by ArborGen. Rubicon's New Zealand and Australian nurseries are now owned by ArborGen. Along with the nursery operations come the seed orchards, germplasm, researchers, more technology and more intellectual property. ArborGen is entering a new era. Read the news release here. Visit ArborGen here. --Brian

MWV Sells Elkins, WV Timberland for $1,500/Ac.

The following is from the MWV news release.
_________________________________________________

"RICHMOND, VA – August 24, 2007 – In continuation of its land management strategy, MeadWestvaco Corporation (NYSE: MWV) today announced a definitive agreement with Penn Virginia Operating Co., L.L.C., a wholly owned subsidiary of Penn Virginia Resource Partners, L.P.(NYSE: PVR), for the sale of approximately 62,000 fee acres of forestland in West Virginia for $93.1 million. MeadWestvaco expects to complete the transaction in the third quarter of this year."
_________________________________________________

This completes the announced planned sales of MWV and leaves the company with about 800,000 acres. Read the entire news release here.

MeadWestvaco appears to have a very well thought through program for the remainder of it's timberland holdings. All lands have been (or will be) classified into one of four categories: Development, Emerging Development, Recreation and Timberland. The resulting implementation plan has three prongs.

1. East Edisto: Development already well reported.
2. Small Tract Sales: Appears to be the guts of the program. - 117,000 acres along Georgia/Alabama line (Mahrt mill), 95,000 acres in Virginia and West Virginia. SC not yet determined. The SC lands will be determined and a marketing plan for the entire program completed within a year.
3. Continuation of Forest Management with select Sales over time. Rough acreages in this program are 150,000 acres in the Rupert WV area, 70,000 acres in the Appomattox, VA area and 320,000 acres currently in SC. The SC number will be reduced by the number of acres selected for the Small Tract Sales program.

Some people in the Charleston area are trying to pressure MWV into selling the East Edisto lands for "conservation" purposes. They continue to propose a price of $4,000 per acre which is way below the market value for that land.

On another note, Carl Icahn has taken a position of almost 3.8 million shares of MWV. It will be interesting to see why, and what he wants to see happen. He's not usually too passive! --Brian

Leisure land for investment

From theJackson, MS Clarion Ledger.
____________________________________

While financial markets seesaw, a growing number of investors are sinking their money into another commodity: recreational land. Investors are paying anywhere from $1,000 to $20,000 an acre for land, mostly in Texas, the South and the western mountain states, that doubles as a private recreational escape and a diversifier for a long-term portfolio, Kiplinger.com reports. And the land values appear to be accelerating. Plum Creek Timber, an investment company that is the U.S.' largest private owner of timberland, says land it has sold for recreational development has gone from $2,300 an acre in 2004 to more than $4,000 now.
- Gannett News Service
___________________________________
You can read the more in depth article from Kiplinger here.

You can also read about one persons investment in a small tree farm in the latest issue of "Timberlines" magazine. I particularly enjoyed this one. Click on "A Labor of Love". --Brian

MWV Sells Timberland and Leasehold to Wells Timberland REIT

A very busy day in the timberland sales arena! This news release from the MWV web site. --Brian
________________________________________


RICHMOND, VA – August 6, 2007 – MeadWestvaco Corporation (NYSE: MWV) today announced a definitive agreement with Wells Timberland REIT under which it will sell approximately 228,000 acres of owned forestland and approximately 95,000 acres under longterm timber contracts for $400 million. The sale is part of MeadWestvaco’s previously announced strategy to segment and manage its domestic land holdings for the highest value opportunities. MeadWestvaco expects to complete the transaction in the fourth quarter of this
year, and intends to return the value obtained to shareholders.

The agreement with Wells Timberland REIT includes a long-term fiber supply agreement for MeadWestvaco’s Mahrt Mill, which produces over one million tons of Coated Unbleached Kraft paperboard marketed under the CNK® brand. Under the terms of the agreement, fiber will be sold at market price and the forestlands will continue to be managed and third-party certified under the requirements of the Sustainable Forestry Initiative® Standard.

“Our ongoing land management strategy is delivering solid results for our shareholders,” said John A. Luke, Jr., chairman and CEO of MeadWestvaco. “The sale of these forestlands is part of our broader strategy to segment our land holdings for the best possible use, whether that is fiber supply, conservation, recreation or responsible development.”

Nearly 228,000 acres are owned by MeadWestvaco in Stewart, Marion, Quitman and Randolph counties in Georgia, and Russell, Barbour and Chambers counties in Alabama. The sale also includes the conveyance of long-term timber harvesting rights on approximately 95,000 acres owned by third parties.

MeadWestvaco is continuing the auction process for approximately 63,000 acres of forestland located in West Virginia. The company anticipates entering a definitive agreement for the sale of these lands in the third quarter. Upon completion of these forestland sales, MeadWestvaco’s U.S. land holdings will include approximately 800,000 acres throughout South Carolina, Georgia, Alabama, Virginia and West Virginia.

Temple-Inland to Sell 1.55 Million Acres of Timberland for $2.38 Billion

Sorry for the long absence folks but here is something to start the week off with. The news release below is from Temple-Inland's web site. On another note, Cambium bought 6,100 acres in Hawaii from Hancock. Read about that. --Brian
________________________________________
AUSTIN, Texas--(BUSINESS WIRE)--Aug. 6, 2007--Temple-Inland Inc. (NYSE: TIN) today announced that it entered into a definitive agreement with an investment entity affiliated with The Campbell Group, Inc. to sell 1.55 million acres of timberland for $2.38 billion. The acreage included in the sale consists of 1.38 million acres of land owned in fee and leases covering 175,000 acres.
The transaction is expected to close in fourth quarter 2007. The total consideration is expected to consist almost entirely of installment notes. Roughly 30 days after the sale is closed, the Company expects to pledge the installment notes as collateral for a non-recourse loan. The net cash proceeds from these transactions, after current taxes and transaction costs, are anticipated to be approximately $1.8 billion. Following the pledge of installment notes, the Company expects to use the majority of these proceeds to pay a special dividend, which is currently estimated to be approximately $1.1 billion, or $10.25 per share, to its common stockholders. The remaining approximately $700 million of the cash proceeds will be used to reduce debt.
The transaction includes a 20-year fiber supply agreement for pulpwood and a 12-year fiber supply agreement for sawtimber, the terms of which are both subject to extension. Fiber will be purchased at market prices. The agreements further require that the timberlands will continue to be managed and third-party certified under the requirements of the Sustainable Forestry Initiative(R) Standard. In addition, The Campbell Group and its investors have agreed to continue Temple-Inland's high conservation standards and focus on environmental stewardship.
"The sale of our timberland is a milestone in the execution of our previously announced transformation plan," said Kenneth M. Jastrow, II, chairman and chief executive officer. "The fiber supply agreements will enable us to capture a significant portion of the fiber grown on these lands. The quality of our forest is a tribute to our forest team's superb management of these timberlands for many years. We are pleased that many of our current forest employees will have the opportunity to continue managing these lands under new ownership."
John Gilleland, president of The Campbell Group, said, "The Temple-Inland forests represent some of the best managed, highest quality industrial timberlands in the world. Acquiring these forests enables our firm to further its strong commitment to timberland as a long-term asset class, and to continuing our history of sound environmental stewardship. We are looking forward to managing these lands responsibly and to producing the best product for our customers and quality results for our clients."
Transformation Update
As previously announced, Temple-Inland's transformation plan includes: -- Retaining its manufacturing operations - Corrugated Packaging
and Building Products - as Temple-Inland Inc.;
-- Spinning off its financial services operation, Guaranty
Financial Group, in a tax-free distribution to shareholders;
-- Spinning off its real estate operation, Forestar Real Estate
Group, in a tax-free distribution to shareholders; and
-- Selling the Company's strategic timberland.
Temple-Inland reiterated that it is on track to complete its transformation plan by the end of 2007.
Goldman, Sachs & Co., and Citigroup Global Markets Inc. served as financial advisers and Sutherland, Asbill & Brennan LLP served as legal advisor to Temple-Inland in connection with the transaction. Morrison & Foerster LLP and Schwabe, Williamson & Wyatt served as legal advisors to The Campbell Group in connection with the transaction.
Temple-Inland Inc. operates four business segments: corrugated packaging, forest products, real estate and financial services. Temple-Inland's common stock (TIN) is traded on the New York Stock Exchange. Temple-Inland's address on the World Wide Web is www.templeinland.com.
The Campbell Group, LLC (www.campbellgroup.com) is a full-service timberland investment management company headquartered in Portland, Oregon. The company is focused exclusively on acquiring and managing high quality, investment grade forestland on behalf of institutional investors to produce superior risk-adjusted returns.
This release contains "forward-looking statements" within the meaning of the federal securities laws. These statements reflect management's current views with respect to future events and are subject to risk and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to: general economic, market, or business conditions; the opportunities (or lack thereof) that may be presented to us and that we may pursue; fluctuations in costs and expenses including the costs of raw materials, purchased energy, and freight; demand for new housing; accuracy of accounting assumptions related to pension and postretirement costs, impaired assets, and the allowance for credit losses; competitive actions by other companies; changes in laws or regulations and actions or restrictions of regulatory agencies; our ability to execute certain strategic and business improvement initiatives, including the Transformation Plan; closing the transactions described in this report; and other factors, many of which are beyond our control.
CONTACT: Temple-Inland Inc., AustinChris L. Nines, 512-434-5587SOURCE: Temple-Inland Inc.

Cellulostic Ethanol Action Alert

The Forest Landowners Association has issued the following Action Alert. If you support wood, (instead of corn) as a base for ethanol production, now would be a good time to let your Senators know. --Brian
______________________________________________________

Special Issue June 7, 2007
Forest Landowners Association Action Alert
Contact Your U.S. Senator Today
The Forest Landowners Association is excited about the federal movement to promote cellulostic ethanol as a renewable energy source for our country, which will benefit the almost 11 million non-industrial forest landowners across the United States. Cellulostic ethanol is produced from natural feedstocks such as woody biomass, trees, and a variety of other plant materials.
We need your help!
Congress is developing energy legislation that will be voted on soon. We are pleased to report that due in part to recent FLA efforts, the Senate Energy Bill now has language that includes cellulostic ethanol as a means to help solve our nation's energy crisis and spur the development of bioenergy markets for forest landowners.
A few manufacturers fear this new market for forest products will create increased competition which could translate into them paying higher prices to landowners for their wood. They are working very hard to change this bill, and others, in order to limit the forestland eligible for these new markets. We need your help to make sure they don't succeed in excluding your forestland.
Why is this so important?
In an effort to reduce America's dependence on foreign oil, power our nation, reduce greenhouse gas emissions, and diversify the nation's fuel supply, forest landowners can provide an alternative to fossil fuels by promoting, enabling, and utilizing all cellulostic biomasses.
New markets for woody biomass and other cellulostic feedstocks will improve forest health by reducing hazardous fuels, encouraging responsible forest management, and enhancing wildlife habitat. The use of wood for energy can sustain forestlands as desirable investments and stop forestland conversions to other uses. We value current markets, but forest landowners must have some assurance that there will be future markets for their investments in forestland. An unrestricted market in cellulostic biofuels is the best policy for forest landowners and renewable energy producers.

What to say to your Senator

• 
  Family forests can be part of the solution to America's energy needs and independence.
• 
  Trees are an abundant, renewable, and reliable energy source.
• 
  New markets for forest products will help landowners sustain the family forest.
• 
  A few manufacturers are proposing restrictive definitions of woody biomass in the energy bill and they want to limit competition for their raw products: trees.
• 
  Unrestricted markets are the best policy for forest landowners and renewable energy producers.

Call Today!
To contact a Senator's office, please call (202) 224-3121, ask for his/her office and then ask for the energy legislation assistant. Leave a voicemail message if you cannot speak directly to that person. Please be sure to contact your Senator by phone or fax as sending a letter takes too long and timing is important on this issue.

Glatfelter and IP Info

Glatfelter is selling at least 60,000 acres of the remaining 80,000 acres of timberland. LandVest appears to be marketing the tracts. The Conservation Fund has reportedly committed to purchase some of the land and is looking at more. According to Glatfelter CEO Jacunski, "These are generally properties that have appreciated well beyond the value of the timber," Read the news article.


There is an interesting article documenting the change in International Paper's divestitures (timberland, wood products division, four North American mills shut down, 25,000 fewer employees) and new marketing areas of emphasis (products, that is) in Forbes. It provides a little insight into the CEO and the new strategy. It provides a lot of insight into IP's new geography. Read article. --Brian

Potlatch Hybrid Poplar Plantations Sell to a New Green Venture.

GreenWood Resources Announces Acquisition of Boardman, Oregon, Poplar Tree Farm from Potlatch Corp and Construction of a New Sawmill

"PORTLAND, Ore.--(BUSINESS WIRE)--GreenWood Tree Farm Fund L.P. (GTFF) today completed the acquisition from Potlatch Co. (NYSE: PCH) of a 17,000 acre hybrid poplar tree farm near Boardman, Ore. for $65 million. GTFF is a private equity fund organized to acquire, develop and intensively manage fast-growing tree farms in North America, and to manufacture and market Forest Stewardship Council (FSC) certified products from these tree farms. GTFF is managed by GreenWood Resources of Portland, Ore., International Forestry Investment Advisors, LLC of Cambridge, Mass., and Malkin & Co. of New York City, N.Y. The Collins Companies of Portland, Ore. will construct and manage on behalf of GTFF a $35 million lumber mill in the Boardman area, and will market a line of fast-growing tree farm products under the trademark “Pacific Albus”. Construction on the mill is expected to begin in the third quarter, and operations are expected to commence in second quarter of 2008. Once fully operating, the tree farms, harvesting, and mill operations are expected to employ more than 150 people."

“This acquisition is the beginning of a new venture to capitalize on a unique combination of leading-edge sustainable tree farm technologies, advanced manufacturing techniques and world-class environmental certification here in Oregon,” said Jeff Nuss, President/CEO and founder of GreenWood Resources."

Go to news release; GreenWood's website; International Forestry Investment Advisors website; the Collins Companies website. Lots of familiar names! --Brian

TIMOs and REITs

Normally I don't copy an entire publication but I am making an exception in this case. The following paper was prepared by Cliff Hickman with the U.S. Forest Service. It is an excellent work which spells out very clearly how the tax laws and GAAP (Generally Accepted Accounting Principles) have destroyed the vertically integrated forest products companies and created the shift in timberland ownership to REITs and institutional ownership. I highly recommend reading it in its entirety.

You will also see why it is so difficult for a company to convert to a REIT. Essentially, the company must first be destroyed. Temple-Inland is in this process now and this is what Weyerhaeuser is currently struggling with.

Hickman has also clearly outlined the scope of the ownership changes and made a good effort to determine what those changes might mean to forestry.

I was unable to maintain the exact format (it was in Word) in this web version but the content is unchanged. Thanks to Cliff Hickman for a task well researched. --Brian

************************************************************

March 19, 2007
TIMOs and REITs1

Situation in Brief:
Since the mid 1980’s, many vertically integrated forest products companies (VIFPCs) in the US, for reasons discussed below, chose to either: 1) sell-off all, or a large part, of their forestland holdings, or 2) restructure themselves so as to legally separate ownership and control of their forestland and timber from ownership and control of their manufacturing facilities. Where sales occurred, much of the land is now held by “Timber Investment Management Organizations” (TIMOs).2 TIMOs buy, manage, and sell forestland and timber on behalf of various institutional investors – e.g., insurance companies, pension funds, endowments, and foundations. (01) Where restructuring occurred, the land and timber is now held by “Real Estate Investment Trusts” (REITs). REITs are entities that buy, manage, and sell real estate or real estate related assets – e.g., mortgages – on behalf of various private investors.3 (18) The magnitude of the ownership shift has been substantial. As shown in figure (1), as recently as 1985 the total investment in forestland and timber by TIMOs and REITs was less than $1 billion, but by 2005 it had grown to exceed $25 billion – with approximately $15.0 billion having been invested by TIMOs, and $10.2 billion by publicly traded REITs. (03, 10) As shown in figure (2), in acreage terms, while the VIFPCs held 58 million acres of forestland in the US in 1980, by 2005 their holdings had dropped to 21 million acres – a roughly 60% reduction.4 (03) In contrast, over this same period of time the holdings of the TIMOs and REITs grew from nothing to over 25 million acres – with the proportion of land being held by each being roughly equivalent to their relative investment levels.5 (03, 10) The holdings of the TIMOs and REITs are spread across all commercial forest regions of the US, but the biggest concentrations occur as pine plantations in the Southeast, conifer plantations in the Pacific Northwest (west of the Cascades), and mixed softwood and hardwood stands in the Northeast. (01)
Figure (1):


















Figure (2):

• 
  
  

• For various reasons these ownership shifts have been of concern to many within the forestry, conservation, and environmental communities. Questions being asked include the following: (04, 14).

• How will the new owners manage their forestlands, and what will be the implications for the flow of goods and services that can be expected in the future?
• 
  Will the new owners hold forestland and timber for a long time, or will they contribute to increased fragmentation and development across forested landscapes?
• 
  What roles will the new owners play in the broad community of interests concerned with forestry issues – e.g., will they actively support forestry research and public policies conducive to the forestry sector?

Objectives of Paper:

The objectives of this paper are to look briefly at: 1) the primary reasons for the shift in forestland ownership patterns – including the impact of tax and other public policies; 2) how the management objectives, practices, and behaviors of the new owners compare to those of the prior owners; 3) the outlook for further ownership changes; and 4) the actions the Forest Service should take in response to this situation.

Reasons for Changing Ownership Pattern:

The reasons for the changes in private forestland ownership that have occurred in the US may be viewed from at least three different perspectives: 1) that of the former VIFPCs that elected to sell-off all or part of their forestland holdings,6 2) that of the TIMOs and the institutional investors they represent, and 3) that of the former VIFPCs that elected to restructure and create timber REITs.

Key motives and factors influencing the VIFPCs that elected to sell-off some or all of their forestlands included the following:7

• 
  Relatively weak financial performance and the need to improve returns to stockholders. – Stockholder returns over the 10-year period 1995 to 2005 averaged +6.2% for the “Forestry and Paper Group” as compared to +12.1% for the S&P 500, and +13.1% for the Dow Jones Industrial. (04) To ensure continued flow of investment capital into the industry, it was essential that stockholder returns be increased – and the sale of timber holdings was seen as a way to achieve this end.
• 
  Generally Accepted Accounting Principles (GAAP): – Related to the preceding factor, GAAP for “Sub-Chapter C Corporations” precludes such entities, when it comes to computing their return on investment, from recognizing any appreciation in the value of the timberland assets they hold – only profit realized from the harvesting and processing of trees may be considered. This treatment contrasts with the conventions that apply to “Sub-Chapter S” and “Limited Liability” corporations, to TIMOs, and to REITs. (01, 12)
• 
  Rising Forestland Values: - Related to both of the preceding factors, throughout much of the US forestland values have been rising in response to what has been characterized as “the grand tidal wave of sprawl now sweeping over the nation.” (09) As forestland values rose, so did the value of what was arguably the primary asset held by the VIFPCs. Although GAAP prevented these companies from recognizing this appreciation in value in their formal accounting, it didn’t stop them from “cashing in” through the sale of some of their lands – especially tracts with good access, proximity to urban areas, water frontage, scenic value, or outdoor recreation potential.
• Consolidations made to enhance international competitiveness also increased debt burdens. – Over the last 10 to 15 years, the VIFPCs in the US have faced increasing competitive pressure from low cost timber suppliers and forest products manufacturers in other parts of the world. In response, the domestic industry went through a period of substantial consolidation. Oftentimes significant debt was incurred to finance these consolidations. The sale of timber holdings was seen as a way to get this debt off corporate balance sheets. (01)
• 
  Rethinking of the long held belief that ownership of timberlands was essential to ensure future availability of an essential raw material at reasonable cost. – Historically, as previously noted, a major rationale for the acquisition of timberlands by the VIFPCs was to gain some degree of control over the conditions of availability of an essential raw material. During the last 10 to 15 years, however, many firms came to believe they could confidently rely on open market sources of timber – both domestic and international.8 (01, 04)
• 
  Federal income tax policies. – While no doubt unintentional, federal income tax policies also appear to have encouraged many US forest products companies to divest themselves of their timber holdings. Of greatest importance is the fact that the traditional VIFPCs are classified as “Sub-Chapter C Corporations” for income tax purposes. For this type of entity, any profits obtained from the sale of timber are taxed twice – once at the corporate level (35%), and once at the stockholder level when dividends are disbursed (15%). The practical effect of this tax policy is that investors who own both manufacturing plants and forestland often recoup as little as 50 cents out of every dollar of profit made from cutting trees whereas investors who own just forestland can normally pocket at least 85 cents out of every dollar.9 (01, 04, 07, 14)

Key motives and factors influencing the TIMOs and their institutional supporters to increase their forestland investments included the following:10

• 
  Passage of the Employee Retirement Income Security Act (ERISA) of 1974. – This federal law, and similar pieces of state legislation, encouraged institutional investors – e.g., pension fund managers – to seek increased returns by diversifying their investment portfolios to include more than just fixed-income securities like government and corporate bonds. Collectively these statutes opened-the-door for institutional investment in timberlands. (01)
• 
  Increased recognition within the financial community of the advantages of timberland investments. – Experience suggests that investments in timberland offer the following advantages for the patient investor – i.e., for the investor not interested in quick returns:
  Favorable returns – Overtime, investments in timberland – considering both income generated and appreciation in value – have compared favorably to other investment options. To illustrate, over the period 1987 to 1999 when much of the shift in timberland ownership was occurring, total returns to timberland investments averaged +20.1% per year - +7.8% of this total was due to income generated, and +12.3% was due to appreciation in value. (01, 12)
  Lower risks – While foresters tend to think of timberland investments as being fairly risky because of hazards like wildfire, insects, and disease – to financial managers, who view them as one part of a diversified investment portfolio, they are generally seen as a way to reduce risk because experience suggests that returns to timberland investments tend to run counter to the returns provided by many other types of investments. (01, 12)
  Inflation protection – Experience indicates that timberland investment returns are highly correlated with the rate of inflation, which makes such investments a good hedge against inflation. (12)

Key motives and factors influencing those forest products firms that restructured to form timber REITs included the following:

• 
  Passage of the Real Estate Investment Trust Simplification Act (REITSA) of 1997: - This legislation removed a provision of prior law known as the “Thirty Percent Gross Income Test” that had effectively precluded the VIFPCs from forming timber REITs. Basically this test would have required the VIFPCs that desired to be recognized as a REIT to forgo any timber harvesting for 4 years. Another favorable provision in the REITSA was that it allowed large institutional investors such as pension funds to hold shares in a REIT. This statutory change had the effect of increasing the liquidity of timberland investments for those REITs that are open to public trading.11 (11)
• 
  More favorable tax treatment and enhanced after-tax investment returns. – This factor was discussed above when looking at the reasons why many VIFPCs have chosen to restructure themselves to separate ownership and control of their timber holdings from ownership and control of their mills. REITs are single tax entities – i.e., the REITs themselves pay no income tax, only the shareholders – and this tax is normally computed at a rate of not more than 15% as compared to the 35% rate applicable to any income realized by Sub-Chapter C Corporations.12 (13, 20, 21)
• 
  Desire to ensure timberlands were fairly valued in financial markets – i.e., to “monetize” timberlands. – When a VIFPC restructures to form a timber REIT, two changes occur that help to ensure its timberlands will henceforth be fairly valued in financial markets. First, GAAP no longer precludes recognizing appreciation in value as part of return on investment. Secondly, as noted above, if public trading is allowed liquidity is enhanced because a wide array of investors can now participate directly in “pure” timberland investments. (11, 12)

Management Objectives of Different Ownership Groups:

While the specific organizational entities that make up the three ownership groups of interest in this paper – i.e., VIFPCs, TIMOs, and timber REITs – are all different and have somewhat unique management objectives and reasons for holding forestland and timber – different authorities have nonetheless offered some generalizations that seem relevant to this discussion. These include the following:

• 
  VIFPCs own both forestland and related manufacturing facilities, and as a result have certain strategic supply objectives that influence their decisions about when to cut timber and how long to hold on to forestland. TIMOs, and to a lesser degree timber REITs, have no such strategic objectives – when market conditions are favorable timber is generally cut and sold to the highest bidder in open-market auctions. When market conditions are unfavorable, timber need not be harvested but can be left to appreciate in value.13 (01)
• 
  TIMOs and timber REITs apply modern portfolio theory to their decisions about when and where to buy, hold, and sell forestland. They are interested in diversifying their holdings among regions, timber types, and age classes. In contrast, the VIFPCs frequently make such decisions based on the locations of their existing manufacturing facilities and forestland holdings. (01)
• 
  Capital availability oftentimes constrains the management options open to the VIFPCs but is typically not a limiting factor for the TIMOs because the funding sources that they can potentially tap into are extremely large. 14 Capital availability can be more of a problem for the timber REITs, especially if they are not publicly traded.
• 
  TIMOs invest funds on behalf of their clients (e.g., pension funds, endowments, and foundations) for a specified period of time – quite commonly 10 to 15 years. Unless the specific investment vehicle provides an option to extend, the assets will be sold at the end of this time period. Additionally TIMOs, especially when they are engaged in investing pension funds, have an implicit fiduciary responsibility to manage the investment so as to yield the best possible return – i.e., to maximize profits. (01)
• 
  Taxes are a major decision-making factor for the VIFPCs. TIMOs and timber REITs are less concerned about taxes because they are only taxed once, they are taxed at a lower rate, or they are tax exempt. (01)

Management Practices and Behaviors of Different Ownership Groups:

As noted earlier, as TIMOs and REITs have gained control over more forestland in the US – many within the forestry, conservation, and environmental communities have grown concerned about the implications of the ownership shifts. These groups wonder what the changes will mean in terms of such things as: how forestlands will be managed, the flow of goods and services that forestlands will provide, the pace of forestland fragmentation and development, and levels of support for forestry research as well as other important forestry-related activities. After years of working with the VIFPCs these groups had learned what to expect from this class of forest owners – but the shift in historic ownership patterns has created much less predictability as concerns the future of US forests.

Because the changes in forestland ownership are for the most part relatively recent, very little empirical evidence exists that can be used to answer the questions being posed by the forestry community. Even in the few cases where relevant studies have been conducted, the results must be interpreted with caution. Some studies have elicited information on planned management activities, but plans aren’t always carried-out. Other studies have looked at the management practices actually being applied, but either the interval of years represented has been very narrow or the geographic coverage has been spotty. For the most part analysts have been forced to draw inferences based on the presumed management objectives of the various ownership classes. Recognizing these realities, the following impressions are offered:

• 
  Type of forest management practiced. – At present there is little evidence to suggest that the management practices employed by a TIMO or REIT on a given piece of land should be expected to differ markedly from those that would have been applied by a VIFPC. The new owners, like the old, generally have an incentive to leave their land in as good or better shape than it was when they acquired it – and as noted earlier, they typically don’t suffer from the same limitations on capital availability as often plagued the VIFPCs. There is some evidence to indicate that TIMOs show a preference for silvicultural treatments that will produce a benefit in 10 to 15 years, and that they tend to concentrate their investments early in a given investment period; but when longer-term investments are needed to maintain or enhance property values – e.g., investments in site preparation and planting – it appears these investments will be made as long as they can be economically justified. As previously noted, some authorities have argued that because they don’t have mills to support, TIMOs and REITs are under less pressure to cut – especially when markets are weak; however, as has been pointed out elsewhere, the validity of this argument is questionable – especially as it applies to the timber REITs. In a somewhat different vein, it should be noted that the TIMOs and REITs are subject to the same forest practice regulations and mandatory environmental restrictions as apply to other forest owners. Whether or not the new owners will be as willing to comply with voluntary BMPs as were the VIFPCs is unclear, however, especially when the BMPs will result in cost increases that are not inconsequential. The VIFPCs were often willing to accept such cost increases in order to enhance their corporate image and maintain their “social license” to practice forestry. Finally, yet another point worth noting is that some TIMOs and REITs have elected to participate in independent programs designed to “certify” the sustainability of their forestry practices. 15 On this score, however, it should be pointed out that in most of these cases the lands were previously enrolled in a certification program and thus the decision was to continue, not initiate, certification. (01, 02, 04, 13)
• 
  Type of goods and services (including environmental amenities) produced. – It seems clear that at present the forest product of greatest interest to TIMOs and REITs, as it was for the VIFPCs, is timber – and that other non-market goods and services that can be provided without significantly compromising the flow of timber products will continue to be “jointly produced” in the future as they were in the past – e.g., wildlife habitat and watershed protection. Where the different types of owners may take different stances is when it comes to producing those forest-related goods and services that potentially have a market value – e.g., different types of recreational pursuits such as hunting. While the VIFPCs sometimes sold hunting leases when this was an accepted practice in a given area, oftentimes they provided free public access to their lands for this pursuit as well as others – but it is presently unclear whether TIMOs and REITs will continue to honor this tradition.16 Additionally, it’s interesting to speculate about what would happen if a national cap were to be imposed on carbon emissions and an active market for carbon sequestration credits were to emerge. Given less of an obligation to supply dependent mills, TIMOs and REITs would be comparatively free to adjust their management strategies to take full advantage of the relative values of timber versus a unit of carbon sequestered. (01, 07, 12)
• 
  Ownership tenure and fragmentation: – This has been raised as an issue mainly as concerns ownership by TIMOs, which as previously noted – typically operate within a 10 to 15 year timeframe. This situation contrasts sharply with the VIFPCs, many of whom – at least until recently – held forestland for periods of 50 years or more. The main concern is that more frequent ownership turnovers will lead to increased fragmentation. The limited evidence that is available to date suggests these fears may have merit. In instances where TIMOs have sold timberlands, it appears they have frequently disposed of their holdings in smaller sizes than when they were acquired – and some observers suggest this is being deliberately done in order to capture the higher prices obtainable in the “retail” as opposed to “wholesale” land markets. While TIMOs occasionally sell to other TIMOs, sometimes sales are made to smaller regional buyers such as sawmills. This has led to a secondary concern that many of these purchases are being financed with borrowed capital – and that the purchasers may subsequently be required to cut their lands heavily to payoff the debt they’ve incurred. Overall it appears that although TIMOs may be long-term holders of forestland in the aggregate, they can be expected to periodically turnover specific areas – and this will likely contribute to increased fragmentation. (12, 18)
  Willingness to convert forestland to other uses. – There is some evidence to suggest that TIMOs and REITs, because they don’t have the same level of responsibility to supply dependent mills as did the VIFPCs, are more willing to convert forestlands to other uses. Indeed, it’s not uncommon for TIMOs and REITs to have a staff, or subsidiary, that is specifically tasked with handling the sale of lands that have been determined to have some “higher and better use” than continued timber production. That said, there is also some evidence which suggests that TIMOs and REITs, in selecting what forestlands to invest in, make a conscious effort to avoid lands that have development potential or are environmentally sensitive because purchasing such lands is inconsistent with their basic goal of realizing the returns obtainable from timberland investments.17 Additionally, some observers have noted that TIMOs, and to some degree REITs, seem relatively willing to enter into conservation easements with environmental organizations, land trusts, and/or governmental agencies. 18 The easements that have been negotiated typically ensure that sensitive forestlands will be remain in their current use but also permit continued timber harvesting under stipulated conditions. (06, 07, 09, 18) For the TIMOs and REITs, the rationale for entering into such easements is multifaceted; they can be a way to: 1) reduce up-front land acquisition costs and maximize overall investment returns, 19 and 2) side-step the potential controversy associated with trying to practice forestry on lands deemed “sensitive.” 20 While the acreage of land protected by conservation easements has been increasing over time, a persistent problem for the conservation and environmental communities has been finding adequate funding to consummate desired easements.21
• 
  Support for forestry research. – There is some evidence to suggest that TIMOs and REITs are less supportive of forestry research than were the VIFPCs – many of which had their own forestry research organizations. One indicator is that as timberland ownership by the VIFPCs has declined, so has participation in various university-affiliated forestry research cooperatives. In the case of the TIMOs, this phenomenon has been attributed to the fact that they operate under relatively short investment horizons (10 to 15 years) whereas the payoffs from most forestry research activities are realized over long periods of time; however, this logic only holds-up if you assume the TIMOs don’t expect to be in existence beyond the duration of their initial investment offerings – and this doesn’t seem rational. In the case of the REITs, the phenomenon has been attributed to the fact that they are required to annually distribute 90% of their income to their shareholders – and that consequently their capacity to support forestry research is diminished. Some observers have suggested that the problem may not be that TIMOs and REITs are unwilling to support forestry research, but that they simply haven’t been in existence long enough to find a suitable mechanism for allocating these costs to their investors. (01, 04)
• 
  Support for forestry in general. – There is some evidence to suggest that TIMOs and REITs will be somewhat less active within the broad forestry community than were the VIFPCs – i.e., that they will not participate as extensively in different forestry organizations at the national and state levels, and not be as aggressive in supporting federal and state legislative initiatives of concern to the forestry sector. Indicative is the fact that membership in the American Forest & Paper Association (AF&PA) as well as many state forestry associations has been declining. In a somewhat different vein, in the South there is some evidence to suggest that the TIMOs are not as supportive of cooperative fire fighting efforts as were the VIFPCs. During the last 15 years private fire fighting capability in the South has been declining, at least in part because the TIMOs seem more willing to defer the responsibility for providing fire protection to the states. Again, it may be somewhat premature to form any final conclusions – perhaps the new owners simply need more time to assess the benefits of participating in such cooperative ventures. (01, 04)

Conclusions and Possible Responses:

Only one conclusion will be offered based on the results of this analysis, and this is that the movement of forestland ownership within the US from the VIFPCs to TIMOs and REITs is likely to continue in the future – although the pace of change may very well slow.22 The main reason why this shift in ownership classes is likely to continue is that the pressure to move ownership of forestlands to a more tax-efficient structure is very strong – i.e., those VIFPCs that do not embrace more tax efficient structures will find themselves in a constant struggle to remain competitive.23 Reasons why the trend may slow include the following: a lot of industry land has already moved into other ownership classes, suitable timberland investment opportunities are becoming more difficult to find, and rates of return on US timberland investments have moderated somewhat – perhaps due to increased international competition and the fact that domestic markets have now adjusted to the decline in national forest timber sales in the Pacific Northwest.24

The lack of hard data showing, beyond a reasonable doubt, that serious economic, environmental, or social problems are occurring as a result of the shift of substantial acreages of forestland from ownership by the VIFPCs to ownership by TIMOs and REITs suggests that the Forest Service should be cautious and prudent as regards the actions it takes, or advocates that others take, in response to this matter. At the same time, the evidence now at hand very definitely suggests that a number of potentially undesirable trends may be emerging – and that existing federal tax policy may well have contributed to the situation. Under these circumstances the Agency would be remiss to do nothing, and so the following possible responses are suggested:

That the Agency commit to monitoring and periodically making available, perhaps through the FIA program, data on: 1) changes in forestland ownership, including ownership by TIMOs and REITs; 2) shifts in land use by ownership class; 3) the types of management practices being applied by different types of forest owners; and 4) changing resource conditions on the forestlands held by different types of forest owners.

That the Agency, to the extent allowed by other priorities, commit to conducting or supporting additional research that will provide better information about the true economic, environmental, and social consequences of the shifts in forestland ownership that have occurred in the US.

That the Agency, consistent with the spirit of its “Cooperating Across Boundaries” initiative, expand its outreach efforts to the TIMOs, REITs, land-trusts, and other key partners in order to find collaborative solutions that will help keep America’s forests and grasslands “healthy across the landscape” – perhaps through the more effective use of working forest conservation easements. (08)

That Agency leaders, on appropriate occasions, use their “bully pulpit” to describe how federal income tax policy appears to have influenced the ownership of private forestlands in the US – and to discuss the apparent conservation implications of these changes. 25

Literature Cited

Publications:
01) Block, Nadine E. and Sample, V. Alaric. 2001. Industrial Timberland Divestitures and Investments: Opportunities and Challenges in Forestland Conservation. Pinchot Institute for Conservation. Washington, DC. 50p.
02) Binkley, Clark S.; Raper, Charles F.; and Washburn, Cortland L. 1996. “Institutional Ownership of US Timberland.” Journal of Forestry. 94(9). pp. 21-28.
03) Boyd, Gary P. 2006. “Corporate Forest land Divestiture: Issues & Opportunities for Companies and Communities.” Powerpoint presentation developed on behalf of International Paper. Contact: gary.boyd@ipaper.com .
04) Clutter, Mike; Mendell, Brooks; Newman, David; Wear, David, and Greis, John. Strategic Factors Driving Timberland Ownership Changes in the US South.
05) Ellefson, Paul V. 1992. Forest Resources Policy: Process, Participants, and Programs. McGraw-Hill, Inc.; New York, NY; 504p.
06) Fernholz, Kathryn; Howe, Jeff; and Bowyer, Jim L. 2006. “Conservation Easements to Protect Working Forests.” Dovetail Partners, Inc. 11p.
07) Hagan, John M.; Irland, Lloyd C.; and Whitman, Andrew A. 2005. Changing Timberland Ownership in the Northern Forest and Implications for Biodiversity. Forest Conservation Program, Manomet Center for Conservation Studies. Report No. MCCS-FCP-2005-1. Brunswick, ME. 25p.
08) Harper, Clair and Crow, Tom. 2006. Cooperating Across Boundaries: Partnerships to Conserve Open Space in Rural America. USDA Forest Service. Publ. No. FS-861. 49p.
09) Irland, Lloyd C. 2005. “US Forest Ownership: Historic and Global Perspective.” Maine Policy Review. Winter Issue. pp. 16-22.
10) Mendell, Brooks. 2006. “US Timberland Investment Markets.” Powerpoint presentation made at the 2006 SAF National Convention. Contact: bmendell@forisk.com .
11) Mooney, Scott. 1998. “Understanding Timber MLPs and REITs.” Timber Mart South Newsletter, 2nd Quarter. 2p.
12) Ravenel, Ramsey; Tyrrell, Mary; and Mendelsohn, Robert (eds.). 2002. Institutional Timberland Investment. A Yale Forest Forum Publication. Vol. 5. No. 3. New Haven, CT. 52p.
13) Rogers, W. Rhett and Munn, Ian A. “Annual Management Activities of TIMOs and Industrial Landowners in Mississippi During 1998-1999.” Forest and Wildlife Research Center, Mississippi State University. Publ. No. FO176. pp. 140-145.
14) Siegel, William C. 2004. “Tax Considerations Associated With Different Types of Forest Ownership.” National Woodlands. April Issue. pp. 22-24.
15) Smith, W.B.; Miles, P.D.; Vissage, J.S.; Pugh, S.A. 2004. Forest Resources of the US, 2002. USDA Forest Service, GTR NC-241. 137p.
16) Wallinger, R. Scott. 2006. “Timberland Investing and the Public Good: Issues that Matter to Investors.” Proceedings of the World Forestry Center’s 3rd Symposium on Who Will Own the Forest. Portland, OR. pp. 118-126.
17) Stern, J. David. 2004. “Investing in Timber,” Fund Evaluation Group, LLC. Cincinnati, OH. 13p.
18) Zinkhan, F. Christian. 1993. “Timber Investment Management Organizations and Other Participants in Forest Asset Markets: A Survey.” Southern Journal of Applied Forestry. 17(1): 32-38.

Websites:
19) http://www.sec.gov/answers/reits.htm
20) http://en.wikipedia.org/wiki/real_estate_investment_trusts
21) http://www.endgame.org/timo.html
22) http://www.forestinvest.com/
23) http://forestsystems.com/
1 Paper prepared by Cliff Hickman, Forester, R&D, Policy Analysis Staff.
2 Other buyers have included government agencies, privately held (i.e., family owned) forest products companies, and various conservation organizations like the Nature Conservancy and the Conservation Fund. Of the roughly 27 million acres of forestland that was sold-off in the US by the VIFPCs; an estimated 15 million acres was acquired by TIMOs, 2 million acres by privately held forest products companies, and the remaining 10 million acres by different conservation groups, other private owners, and government agencies. (03)
3 Various distinctions between TIMOs and REITs will be brought to light during the course of this paper, but one difference worth noting at the outset is that TIMOs don’t actually own forestland whereas REITs do. In the case of TIMOs, the forestland is actually owned by the individual investors the TIMOs represent.
4 It is perhaps worth noting that despite the recent shifts in forestland ownership that have occurred within the US, in the overall scheme of things the TIMOs and REITs are still not all that significant. The most recent national statistics published by the Forest Service’s FIA program show that in 2002 the US had 504 million acres of “timberland” – i.e., land capable of growing over 20 ft.3/acre/year and not legally withdrawn from timber harvesting. (15) Figures compiled from different sources used to prepare this report suggest that in 2006 the TIMOs and REITs jointly held about 27.3 million acres of timberland, which would represent about 5% of the total. This figure generally agrees with similar figures reported within the financial community that show timberland ownership in value as opposed to acreage terms. To illustrate, one website set the value of all timberland in the US at $450 billion, and indicated that “institutional investors” held 4%. (22) Another website put the value of privately held timberlands in the US at $230 billion, and indicated that “institutional investors” owned 5%. The main point is that at present TIMOs and REITs hold only a fairly small fraction of all the timberland in the US. (23)
5 In 2006 both Potlatch and Longview Fibre, with combined forestland holdings of just over 2.0 million acres, converted to the REIT structure.
6 Before looking at the reasons why some VIFPCs elected to sell forestland, it may be worthwhile to briefly reflect on why they originally acquired such land. Unquestionably the key rationale was their desire to gain control over the conditions of availability – e.g., timing, delivered cost, species, volumes, and log sizes – of an input required by their manufacturing facilities. Other rationales included: 1) the investment returns realizable through timber management and appreciation in land values, and 2) the ability to enhance their corporate images by demonstrating that they were responsible land stewards. (05)
7 While the factors listed here are felt to have been the most important, other factors no doubt also played a role. One additional factor was the increased availability of relatively attractive forestland investment opportunities overseas where biological productivity rates were often higher and environmental restrictions less stringent. (01) Another factor was the apparent decline in the domestic demand for stumpage needed to produce some forest products such as paper and paperboard, where the use of recycled fiber has grown over time and is expected to exceed 40% in a few years. (01) Finally, yet another factor was the emergence of tax strategies – e.g., installment sales – that made it possible to better manage the capital gains tax implications of making timberland divestitures.
8 It is perhaps worth noting that where forestlands that were previously owned by a VIFPC are now under the control of a TIMO, it’s not uncommon for the TIMO to be operating under a “supply agreement” that obligates it to provide a certain amount of timber to the company that previously owned the land. Similarly, where a VIFPC has restructured to form a timber REIT – typically some of the firm’s manufacturing facilities have been retained and placed into a fully taxable REIT subsidiary that the timber REIT is obligated to supply.
9 Prior to the Tax Reform Act of 1986 the effect of the double tax on Sub-Chapter C Corporations was greatly moderated by the fact that such entities paid a significantly lower tax rate on “capital gains” income – which ordinarily included any income received from the harvesting of timber. The elimination of this rate differential in combination with the double tax applicable to their income has created a heavy burden for the Sub-Chapter C Corporations to bear. To date, efforts to get a rate differential for capital gains income restored have proven unsuccessful.
10 Ownership of timberland by institutional investors can take many forms. It is usually not direct fee simple ownership, but rather an interest or share in a fund, limited liability partnership, master limited partnership, limited liability corporation, or insurance company group annuity contract.
11 There are presently four publicly traded timber REITS: Plum Creek Timber Company, Inc.; Rayonier Inc.; Longview Fibre Company; and Potlatch Corporation.
12 REITs didn’t always enjoy single tax status; this benefit was authorized with passage of the Real Estate Investment Trust Act of 1960. The goal was to encourage creation of special purpose companies that would make it possible for average Americans to invest in real estate, an option that had previously only been open to wealthy individuals and corporations. To qualify as a “pass-through” tax entity, REITs must satisfy a number of requirements. Some of the more important of these are:
They must be jointly owned by 100 or more persons/entities for at least 335 days each year.
They must derive at least 75% of their gross income from real property sources – e.g., rents, mortgage interest, and proceeds from the sale of real property including timber.
They must pay annual dividends of at least 90% of their income.
They must have no more than 50% of their shares held by 5 or fewer people during the last half of each taxable year.
They must have no more than 20% of their assets consist of stocks in taxable REIT subsidiaries. (20)
13 The reality is almost certainly more complex than this observation suggests. It’s not uncommon for TIMOs to have “supply agreements” with manufacturing facilities located in the vicinity of their timberland holdings, and these agreements can limit their flexibility to postpone harvest. Similarly, where VIFPCs have restructured to form timber REITs, in most cases at least some of the parent company’s manufacturing facilities were retained and placed in a “taxable” REIT subsidiary – and the need to keep these subsidiaries supplied can constrain their flexibility to delay harvest. Additionally, timber REITs are obligated to annually pay an agreed upon distribution per share which may be either a dollar amount or a percentage – and this requirement may also create pressure to harvest annually. (01)
14 To illustrate, even as long ago as March of 2000 – US pension fund assets were estimated to be on the order of $10 trillion. (01)
15 An example would be the Anderson-Tully Company, a timber REIT whose hardwood management activities are certified by the Forest Stewardship Council (FSC).
16 Illustrative is the fact that on February 23, 2007 Potlatch Corporation – a publicly traded timber REIT – announced that starting April 1, 2007 it would be requiring users to purchase a permit to recreate on its forestlands in Idaho. Additional information can be obtained by going to http://www.potlatchcorp.com/ .
17 Lands with recognizable development potential would be more expensive to acquire, and sensitive lands would be more costly to manage; in either case the returns realizable from practicing forestry would be compromised.
18 Conservation easements may be donated or sold, but when a TIMO or REIT is involved typically an easement will be sold. This situation is consistent with their emphasis on maximizing investment returns and the fact that taxes are generally less important to these owners.
19 A case can be made that the existence of an easement will influence a property’s eventual resale value. For some landowners this possibility may not be important, but for a TIMO or REIT it likely will be – and thus it seems reasonable to assume this possibility will be taken into account when negotiating a sales price.
20 There can also be important income, estate, and property tax benefits associated with entering into conservation easements – but typically these advantages are not as important to TIMOs and REITs as they are to other types of private landowners.
21 Within the US, the area of land protected by conservation easements grew from 1.4 to over 5.0 million acres between 1998 and 2003. (06) This figure includes all types of undeveloped rural land, not just forestland.
22 A case can be made that to the extent there is further growth in the amount of US timberland held by TIMOs and REITs, this growth will occur mainly within the REIT sector. There are still a few VIFPCs that hold significant amounts of timberland – e.g., Weyerhaeuser, Mead-Westvaco, and Temple-Inland. For these firms restructuring as a timber REIT would produce significant tax benefits while not requiring a complete severing of any connection to their manufacturing facilities since the latter could, within limits, be placed in a taxable REIT subsidiary. It may also be worth noting that timber REITs enjoy certain advantages over many other types of REITs, a key one being that most of their income will qualify to be recognized as a capital gain. Once timber REITs are better known within the financial community, these advantages could lead to an increase in the amount of investment capital available to such entities.
23 Relevant to this point, at the time this paper was being written, the press and various industry newsletters were reporting that: 1) Weyerhaeuser had recently appointed a REIT expert to its corporate board, and 2) Temple-Inland had announced plans to sell-off its forestland holdings. If these companies divest themselves of their timberland holdings, while there will still be some family-owned forest products corporations that own significant acreages of forestland – Mead-Westvaco would become the last VIFPC to still own forestland.
24 It is perhaps worth noting that two institutional investors – i.e., the California Public Employees Retirement System (CalPers) and Harvard University – have recently terminated their North American timberland investments, purportedly because of declining returns.
25 Considerable care should be exercised in acting on this suggestion. The Agency must avoid putting itself in the position where it could be perceived as advocating a “tax break” for wealthy corporations – especially given current levels of public concern over the national debt and growing annual budget deficits. Agency leaders should strive to be factual and stress that their dominant concern is to encourage adoption of tax policies that are conducive to responsible forest management and conservation.

Weyerhaeuser Takes First Step toward REIT

In a news release today, Weyerhaeuser's actions confirms that it will evaluate the possibility of converting to a REIT.
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Weyerhaeuser Considers Strategic Alternatives for Containerboard, Packaging and Recycling Business
FEDERAL WAY, Wash., May 4 /PRNewswire-FirstCall/ -- Weyerhaeuser Company (NYSE: WY) today announced that its board of directors has authorized a process to consider a broad range of strategic alternatives for its Containerboard, Packaging and Recycling business. Alternatives range from continuing to hold and operate the assets to a possible sale or combination. Read the entire news release.
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Analysts have been pushing WEYCO to convert to a REIT in order to gain a more favorable tax rate for its timberland operations. WEYCO has resisted because of laws prohibiting such a move for companies with large manufacturing bases such as Weyerhaeuser. Removing the above mentioned business units from the timberlands operation will pave the way for conversion to a REIT. If this should happen, it will clearly be in the best short term interest of shareholders. It also means the end of the most successfully integrated "from forest to end profuct" company in history - MAYBE not a good thing for long-term WEYCO investors. But change happens and my feeling is that nobody, not even Weyerhaeuser, can stop the tide.

Weyerhaeuser has great people, great forest management, great timberland and will make a great REIT!

Strategic Factors Driving Timberland Ownership Changes

This post references another paper examining the changes resulting from the shift in timberland ownership from vertically integrated industrial companies to TIMOs and TREITs. The paper was written by Mike Clutter (University of Georgia) and Brooks Mendell, David Newman, David Wear and John Greits (all with the USFS). The study was funded by the Forest Service. Following are a few extracts, kind of at random, that I found important or just interesting:

• "more efficient tax structures for owning timberland have evolved - such as single-taxed real estate investment trusts (REITs) and S-corporations - replacing the traditional double-taxed C-corporations..."
• "Client preferences and investment horizons impact the choice of silviculture treatments, leading TIMOs to tend to invest in silviculture early in the life of the investment funds, but not later."
• On TIMOs: "We make money on growth."
• On TIMOs: "Appraisals drive our business." Note that this comment and the one before it both get to the difference in accounting (GAPP) that allows such things as timber growth and appreciation in land prices to be treated as an annual return for the TIMOs but not for the C-corporations. Note too, that if a silvicultural activity, like mid-rotation release, doesn't increase the appraisal at least as much as it cost, it won't be done. Question - how good are the appraisers? Do appraisals reflect what is not seen?
• "TIMOs, without exception, focused on the financial metrics of concern to their clients. ...this measure was some variation of cash return plus asset appreciation, as established through appraisals."
• "These metrics reflected a general attitude toward silviculture treatments. ..., it’s ‘what will the market pay for this treatment if applied?’"
• "TIMOs view silviculture information as a "commodity" and, in general, appear reluctant to invest in long-term research or forestry coops. ..." In other words, if the impact does not show up in the growth and yield models or appraisals, it does not pay to make the investment."
• On community presence or public affairs: "TIMOs ... relied on their forestry contractors to establish and maintain sufficient working relationships within the communities." Some exceptions to this.
• "...fragmentation was not viewed as a major concern or priority by any interviewee."
• On fire control: "TIMOs and forestry consultants rely almost entirely on state resources. ...To assess the southern States fire suppression assets available for use we talked with all of the Fire Fighting Coordinators for each state... As expected, ... Most southern states have experienced significant reductions in private fire suppression capability during the past 15 years, the time frame during which industry ownership has been declining.
• "The thirteen responding states report reductions in the availability of 700 private cooperator-owned and available tractor/plow units. Of the thirteen states, only Kentucky has not reported a reduction; others ranged from 12 to 142 (Georgia). Notably, Kentucky has the smallest share of forest industry ownership in the South. Limited reductions in air tanker availability (4), 20 person hand crews (1), and helicopters (1) were also reported."
• "shareholders, analysts, and executives of the traditional vertically integrated forest products firms believe that returns on industry-owned timberlands lagged alternative investments, a fact complicated by the lack of recognition of asset appreciation and growth on forest products firms’ income statement."
• "In the preponderance of transactions ownership changes did not lead to substantial land use changes."
• "we expect these timberland ownership trends to continue. Within the next three years we expect that there will exist only one traditional forest products company that owns more than a million acres in the southern United States."
• "The other trend that will continue to impact timberland ownership is the continued growth of rural real estate markets at the urban / rural fringe. Continued emphasis will be placed on identifying those acres and monetizing the assets as they become more valuable for other uses."

Read the entire report: Strategic Factors Driving Timberland Ownership Changes in the U.S. South. See the quick version in The PowerPoint Presentation

There are no surprises in this research but it has helped to document those things that we have seen. --Brian

MWV Timberland Strategy

MeadWestvaco announced Q1 earnings and layed out its strategy for managing/selling its timberlands today. Here is the short version.

• Complete sale of 300,000 acres this year.
• Actively manage remaining 800,000 acres for long-term value (25 year timeframe). 600,000 acres of that is classified as "high-value" land. 200,000 acres will be traditionally managed forestland.
• A 72,000 acre block, designated as East Edisto, will be developed using joint ventures with tight control by MWV. This project is in an ecologically sensitive area, known as the ACE Basin, and MWV's plan is to actually have a plan with a great deal of public input. Read what the Charleston Post and Courier has to say about the project and the public input.
• A new reporting segment, the Land Management Group, will be in place to implement this strategy by the second half of this year.

Look at the PowerPoint presentation MWV gave at the analyst's meeting.

Glatfelter's Timberland Monetization Update

Glatfelter owns 86,000 acres in Pennsylvania, Virginia and Delaware.

The following is from their Q1 Earnings Report:

"The Company continues to move forward with its timberland monetization program. During the first quarter, approximately 1,520 acres were sold for $3.8 million in cash. The Company has contracts or agreements in principle for the sale of an additional $25 million of timberlands that are expected to close in 2007. "

"The Company’s Timberland Strategy, which was initiated at the beginning of 2006, is expected to generate proceeds in excess of $150 million over the next two- to four-years assuming, among other factors, acceptable market conditions and a carefully executed plan of disposition in order to maximize the value realized. To date, the Company has realized $20.9 million of these proceeds and continues to target $50 million of timberland sales proceeds for the full year 2007. "

TimberVest and GMO TIMOs Share $60 million

The San Bernardino County Employees Retirement Association is recognising Timberland as an asset class separate from Real Estate and, with that recognition, is doubling the amount of money to be invested in timberland to 4% of its portfolio.

According to IPE Real Estate:
"The outcome of a recent fund board meeting was that the pension fund made two commitments to two timber commingled funds. One was a $30m ($22m euros) to the Timber Vest Partners II fund, which will be a commingled fund with a total equity raise of $600m. The investment strategy is to invest in timber in the US."

"San Bernardino County also allocated $30m to invest in GMO Long Horizons Forestry Fund. This commingled fund will have a total equity raise in the neighborhood of $300m to $350m. This investment fund will be looking for assets in the US and internationally. "

The pension fund is expecting a real rate of return of 6% over the next 10 to 20 years. Reportedly, the fund will be ready to invest another $40 to $60 million in Q1 and Q2 of next year. Read the entire article here. --Brian

MWV to Announce Plans for SC Timberland

According to Columbia's "TheState.com", MeadWestvaco will be announcing it's long awaited plans for 400,000 acres of timberland in the Lowcountry of South Carolina. This article, and another in the Charleston Post and Courier, reported on a Friday briefing by John Luke, MWV's CEO, in North Charleston which included key people from SC's state government, agencies, conservation groups and community leaders. Details of the plan were not announced at the meeting.

"Spokeswoman Donna Cox said she could not answer questions about the property’s future. 'We are going to announce the details of this plan with our earnings call mid-week next week,' Cox said Friday." That conference call is scheduled for Wednesday morning.

The following is an extract from the Post and Courier:
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But the fate of the rest of its holdings has sparked anxiety about growth and development in the Lowcountry. MeadWestvaco owns about 145,000 acres on the outskirts of the greater metro area, land that for decades has acted as a passive growth boundary west of Charleston and to the north of Goose Creek.

The uncertainty escalated last fall when a top MeadWestvaco executive suggested that the company was considering selling some or all of its remaining acreage in the United States, telling a group of investors: "We believe there is significant value to be unlocked in this asset."
Conservation advocates have been fretting ever since that some or all of the company's local property will be put up for grabs, opening it up to home builders or large-scale commercial real estate developers.

That was not the message Luke gave at Friday's meeting.

The person who attended said the fact that the CEO traveled to Charleston to deliver it in person, however vague, gave some weight to the matter, considering the audience.
"You don't go calling in people who sit on boards and staffers from Columbia to Charleston and pledge to put conservation as your highest priority and then go back on your word," the attendee said.

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Read the articles from "The State" and the "Post and Courier"

According to MeadWestvaco: "The live conference call and presentation slides may be accessed on MeadWestvaco’s website at www.meadwestvaco.com. After connecting to the home page, look for the link to Investor Information, then Financial Calendar, to access the webcast. Go to the website at least one hour prior to the call to register, download and install any necessary audio software."

Kudos to Weyco!

While politicians promote corn, sugar beets and other annual crops, Weyerhaeuser and Chevron have announced an alliance to "assess the feasibility of commercializing the production of biofuels from cellulose-based sources". Kudos to Weyerhaeuser, Chevron and capitalism!

"The two companies said the partnership reflects their shared view that cellulosic biofuels will fill an important role in diversifying the nation's energy sources by providing a source of low-carbon transportation fuel. The venture leverages the strengths of both companies, combining Chevron's technology capabilities in molecular conversion, product engineering, advanced fuel manufacturing and fuels distribution with Weyerhaeuser's expertise in collection and transformation of cellulosics into engineered materials, innovative land stewardship, crop management, biomass conversion and capacity to deliver sustainable cellulose-based fiber at scale." The entire news release is well worth reading.

On April 4th, Roger Sedjo with Resources for the Future, moderated a session on Biomass Energy: Biorefineries. All of the presentations are available at the previous link but I found the presentation by Theodore H. Wegner, Assistant Director, Forest Products Laboratory to be particularly informative. It is an outstanding look at the current situation while clearly laying out the hurdles that must be overcome to begin using wood to replace oil. --Brian

What to Teach?

A former colleague of mine and professor at Virginia Tech, Dr. Stephen Prisley, dropped by over the weekend to say Hello and catch up on what has been happening over the last few years. As it always does, the subject eventually shifted to the changes that have occurred along with the nation's shifting timberland ownership. Steve's statements centered on the question "Are we at VPI teaching the right things to the new crop of foresters?"

For many years, Steve and I worked together as "industrial foresters". That term is almost an anachronism today! There are a few left at MWV, Weyerhaeuser is a holdout (for now at least) and some of the timber REITs do have minimal industrial holdings but, by and large, it appears that the day of teaching a crop of students for the industrial forestry market is over. In the area of industrial forest research, of the big three (International Paper, MeadWestvaco and Weyerhaeuser), only Weyerhaeuser remains. Most of my MWV forest research colleagues have returned to universities, gone somewhere in government, or in the case of one biometrician, went to work for HP where his skills were better rewarded financially.

But timberland must still be managed by someone so the questions are "Who" and "How does that affect how the new forestry students should be educated". The "who" part of the question is easily answered. TIMOs and the consulting foresters that serve them. Some of the TIMOs and TREITs mange the land themselves and some employ consultants to do the job for them. Either way, the basics of silviculture have not changed and they must still be taught. What has changed is the objectives of the landowner. The primary objective of growing a crop to supply mill furnish is generally not an objective of the new owner (even with fiber supply agreements). The new primary objective of TIMOs and TREITs is one of financial return which suggests that universities must strengthen efforts on teaching the tools that accomplish that objective. This includes not only a new emphasis on the traditional financial tools but on those, such as harvest scheduling, which are specific to timberland management. --Brian

160,000 Acres in Adirondacks Changing Hands?

The following info was taken from two different news releases on Finch, Pruyn's web site.
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GLENS FALLS, N.Y. — Richard J. Carota, Chairman of the Board of Directors of paper manufacturer Finch, Pruyn Co., Inc., has announced that the Board of Directors has voted to recommend that the company’s shareholders accept an offer from Atlas Paper Resources LLC to purchase all of the company’s assets, including its manufacturing facilities in Glens Falls, N.Y., and its Adirondack forestland. The shareholders will vote on the transaction at a meeting on Tuesday, April 24, 2007.
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Finch, Pruyn has owned and cared for the vast majority of its 161,000 acres of forestland in New York State’s famed Adirondack Region since the early 1900s. In 1910, the company increased its contributions to modern forestry with the hiring of one of the nation’s first professionally trained foresters, Howard Churchill. Today, the company employs 11 professional foresters who oversee company lands and the purchase of wood from outside sources.
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Get more details from Finch, Pruyn's web site.

Atlas Holdings is a diversified private investment firm whose ownership includes Forest Resources LLC which reportedly owns four paper mills and nine packaging plants. Based on their web site, it looks like Atlas has been a very aggressive buyer in the past year. --Brian

Potlatch to Sell it's Hybrid Poplar Plantations

The following was extracted from Potlatch's news release. --Brian
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"Potlatch Corporation (NYSE:PCH), a real estate investment trust (REIT), has announced the sale of the company's 17,000-acre hybrid poplar tree farm in Boardman, Oregon, to a private-equity tree-farm investment fund for $65 million. A definitive purchase agreement was signed today and closing is expected during the second quarter of 2007. ...
This 17,000-acre property is certified under the stringent forest practices guidelines of the Forest Stewardship Council (FSC), along with the remaining 1.5 million acres under Potlatch ownership. Development of the unique Boardman plantation was started in 1992 to supplement Potlatch's fiber needs...
"After spending the past year evaluating the best path forward, and meeting with a number of interested poplar-focused operators, we are pleased to have reached an agreement with a global leader in the hybrid poplar industry who we believe is better positioned to deliver greater value from the operation," said Chairman, President and CEO Michael J. Covey." Read the entire news release.

Ethanol from Trees, Not Corn!

Before I start on the corn rant again, there are a couple of recent articles that I found interesting. The first is kind of a summary, from an investor/financial perspective, of the shifting ownership from industry to investors that was done by Laura Mandaro with MarketWatch. See "For-sale signs pop up on U.S. timberlands". Some interesting facts.

For an update on what is happening in the State of Washington, click here. The focus is on the loss of timberland to development. There are references to Hancock, Weyerhaeuser, Port Blakely, UW and the Forest Service.

On Feb.3, disappointed with President Bush's push for corn ethanol, I wrote "Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen". I doubt that Dubya spends much time reading blogs but I am certainly glad that he woke up and is now making research commitments to "cellulosic" ethanol!

The obvious outcomes of the corn ethanol push are already well under way. Corn prices have jumped. Today's newspaper reported farmer's intent to increase the acreage in corn by 15% (farmers are no dummies, they have already sold a portion of that harvest at these increased prices). Most of the new acreage in corn will be at the expense of other crops, like soybeans and milo, meaning we will see price increases in many other foods plus the many non food products manufactured from soybeans. If the corn thing isn't halted quickly, there will be a new rash of conversion from timberland to farm land. When the shift to cellulosic ethanol occurs, some folks will be holding the bag as corn prices drop substantially. The only thing that will hold corn prices up will be farm subsidies funded by us good old taxpayers. And in a double whammy, we will have higher food prices as well. There is a certain odor about this. To put it bluntly, it stinks of farm belt politics!

But things are at least moving in the right direction (slowly). The following appeared in a recent issue of the Forest Landowners Fast Facts newsletter.
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New Wood Biomass Coalition Formed

Recently, FLA lobbyist Frank Stewart participated with other representatives from like-minded groups to help effectively organize to "provide advocacy, education, information, and outreach to public and private entities that promote research, development, and funding for sustainable woody biomass utilization and markets."
As a result of that organizational meeting, the coalition adopted the name, "Woody Biomass Committee," and set goals, including: · Reduce America's dependence on foreign oil and improve the nation's national security position · Improve forest health · Create new markets for renewable fuels, including woody cellulosic ethanol in rural America, which will promote economic opportunities and growth while supplying a sustainable supply of woody biomass for all biomass/bioenergy products
These are certainly aspirations in keeping with FLA ideals for the 110th Congress, which are: · Statutory and regulatory definitions of "wood biomass" should be defined as "wood" and not simply as wood residues, wastes, and/or byproducts. · Wood biomass must be a full partner with other cellulosic feedstocks in all bills, laws, regulations, and other federal initiatives. · Markets for wood biomass must be developed to maintain forestland investments as vital, so forestland investors continue to hold their land as forestland. Without suitable markets, forestland divestitures may increase.
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There was also an article in the last NC State alumni magazine with a focus on research aimed at reducing lignin in cottonwood specifically for ethanol production (although originally the research was done for pulp production). So, overall, research is beginning to shift from pulping to energy production in support of the new role that timberland will soon play. --Brian

Timberland for Retirement

Things have been a little slow on the transaction front lately but a couple of articles caught my attention with respect to investing retirement funds in timberland. The first is another example of Europeans moving more aggressively with pension fund investments (which is not really news) and the second relates to an individual buying timberland in his/her self-directed IRA. The latter one was certainly news to me and I found the methodology very interesting.

In the case of the Europeans, a Dutch company, Stichting Pensioenfonds ABP, (reportedly the third largest pension fund in the world), had a contest among employees to select some innovative investments to supplement the standard stocks and fixed income investments. APB is committing $5 billion to this particular investment. They had several ideas (art, wine, etc.) but the winner at this point is timber and ABP plans to make an investment by the end of the year. The article makes reference to the NCREIF Timberland Property Index which shows the value of timber assets increasing at an annual rate of 15 percent over the last 20 years compared to a 12 percent annual return for the Standard & Poor's 500 Index. Those kind of numbers certainly do draw investment interest.

The article also states "California Public Employees' Retirement System, the largest public U.S. pension fund, said in January it planned to start a new asset class that would include some timber investments". That's an interesting development when just two years (three years?) ago the concern was that timberland prices would fall because CALPERS was selling its timberland investments and getting out of that market! If interested, you can