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