Wednesday, October 29, 2008

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

Tuesday, October 28, 2008

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.

Saturday, October 18, 2008

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

Tuesday, August 19, 2008

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.

Monday, August 18, 2008

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

Tuesday, July 22, 2008

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

Friday, July 18, 2008

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”!

Sunday, June 22, 2008

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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Sunday, April 27, 2008

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

Wednesday, April 23, 2008

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

Friday, April 18, 2008

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

Thursday, April 17, 2008

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 ( and loblolly stands were simulated using LobDSS ( which uses the FASTLOB2 whole stand growth and yield model ( 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:

Thursday, April 10, 2008

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

Thursday, March 13, 2008

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

Monday, March 3, 2008

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

Saturday, March 1, 2008

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: 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.
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.
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.
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

Friday, February 29, 2008

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

Thursday, February 14, 2008

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


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

Friday, February 1, 2008

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

Wednesday, January 23, 2008

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

Wednesday, January 9, 2008

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

Tuesday, January 8, 2008

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.