Saturday, February 3, 2007

The Most Important Change...

in timberland today is clearly the shift in ownership from forest industry to TIMO's, government and NGOs. I have heard many comments suggesting that the shift to TIMOs is a bad thing but, if we believe in capitalism and free markets, then we have to think otherwise. Good or bad, though, is like beauty - its in the eye of the beholder. One person would think that all of the IP lands that went to the Nature Conservancy was a great change. A mill owner needing hardwood sawlogs might not think it was so good!

But one thing is for sure, things will be different and that is not just in the eye of the beholder. Let's throw out for thought what some of those changes might be. First, what about productivity of the land from the perspective of forest products. There is a lot that goes into this ranging from silvicultural investments to the length of ownership. The forest industry's ownership horizon used to be to own timberland "forever". Not so for TIMOs which normally have a relatively short time horizon and factor in the value of "flipping" HBU (Higher and Better Use) lands at the time of acqusition. I once bought a tract of land in Mississippi at a very favorable price because the owner felt that if he sold to a paper company he would never have to worry about having neighbors close by because the land was sold for building lots. Those days are gone. TIMOs are clearly more likely to capitalize on the HBU lands than industry did historically. This pulls forest land out of productivity (not a bad thing, just a fact).

Recently while attending a Tree Farm meeting I was listening to comments about how the TIMO sales of HBU lands to homeowners and hunters was creating a serious forest fragmentation issue which I suppose is somewhat true. What wasn't said is that these sales are also creating a wonderful opportunity to bring many more people into the Tree Farm System and to add to the political strength of those owning Family Forests. So there are pros and cons surrounding fragmentation.

Productivity is greatly impacted by silvicultural investments, particularly in young stands. I'm not sure how TIMOs compare to forest industry on that issue. I know some TIMOs that practise very intensive forestry and some that do minimal work and just hope the value increases. There is a big difference between TIMOs. But guess what - there was/is a big difference between companies in the way industrial land was/is managed. I'm not sure what or if there is a net difference.

In the area of basic research and developing and implementing technology, the TIMOs clearly fall down. The historically long term view of industrial firms is absent with the shorter time horizons of TIMOs and basic research is gone. TIMOs seem to be very good at implementing proven technology if, and only if, the gain will show up in the next annual appraisal. Forest research must come from academia and government in the future, right? Maybe not. Capital markets will come to the rescue and provide the technology needed (you do have faith in capitalism!). As industry disposes of its nurseries and research wings, a new industry will emerge to provide those products and services (we are already seeing it develop) and my guess is that the new industry will deploy its capital more efficiently that has been done in the past.

Now let's think about fire control. As industry has sold land it has also disposed of, or significantly scaled back on the fire fighting assistance that it has provided to state fire control organizations. When the largest timberland owner in the U.S. sold its lands to TIMOs and NGOs, the seller no longer needed fire control equipment and its pretty safe to say that the new owners had little interest in maintaining fire control personnel or equipment (somebody tell me if I'm wrong!). Now, what about our faith in capitalism and the thought that capital will flow to meet this need. Perhaps the faith is misplaced here and these new buyers (TIMOs, NGOs, Tree Farmers, homeowners, hunters. etc) need to step up to the plate and provide very strong support for funding of state forest fire control organizations. That means through both lobbying and increased taxes on forestland focused 100% on improved fire control. This will not happen until after a major calamity. In the meantime, state fire control budgets will shrink (in real dollars) as government finds "better" places to allocate its expenditures.

So..., what's the net change in productivity as a result of all these changes? My guess, and that is all that it is, is that productivity goes down mainly as the result of a decline in productive acreage. That's bad. Or is it. Pulpwood demand has dropped significantly in the U.S. so maybe the productivity decline will be a good thing. Or 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! and to silvicultural expenditures! and to fire control! But that's a thought for another day. --Brian

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