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

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

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

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

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

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




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

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

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

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

2 comments:

  1. I have seen another analysis that used Monte Carlo simulation to model the differential risk of fusiform and beetle damage between loblolly, slash, and longleaf. With these
    factors, longleaf was often the best performer.

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  2. I enjoyed reading your comparative analysis on longleaf and loblolly financial performance.

    As with any such analysis, slightly different assumptions could tip the balance towards lob, or towards longleaf. The assumptions in this paper appear reasonable, and I agree with the conclusion, that including pine-straw should allow longleaf to produce comparable, if not superior returns to loblolly regimes.

    A few additional points, quoting this article “Furthermore, while this study assumes equal seedling survival between longleaf and loblolly pine, longleaf seedling survival may in fact be lower.”

    Most of the reports or surveys will document lower average survival rates planting longleaf (container plus bareroot) verses planting bareroot lob. However, when our (the Longleaf Alliance) typical regime is followed, (Chemical SP, burn, hand-plant container good quality container-seedlings early in the planting season), we almost always get 95% survival rates one-year post planting, equaling or bettering survival rates from bareroot loblolly plantings on surrounding properties. For the landowner or manager worried about the risk of planting longleaf, publications, tapes, and DVDs are available that help to minimize this risk.

    The analysis assumes a first pine straw raking at age twelve, which is pretty conservative. The first longleaf plantation that I planted was in December of 1995 with bareroot seedlings. During a tour at age seven, a commercial straw-producer looked at the stand and said they would clean it up at age seven, and it would be commercial by age eight.

    In the “Wiregrass” area near Dothan, Alabama, landowners are withdrawing land from the CRP after ten years, forgoing annual payments of approximately $75/acre, because they can make more selling their pine-straw.

    Quoting this analysis again “While longleaf pine forests may provide additional wildlife or aesthetic benefits, this analysis ignores such amenity values.”

    I know these values are more difficult to incorporate in a financial analysis, but they are real. There are good reasons why so many retired paper company foresters plant longleaf on their own property. And there are good reasons why hunters will pay more for leases on fire-maintained longleaf, verses a ten year old loblolly plantation.

    I also realize risk is hard to incorporate into these analyses, but there are tens-of thousands of acres of dead slash plantations in South Georgia and north Florida that burned up pre-commercially. And there are tens-of thousands of acres of beetle-killed loblolly and shortleaf in north Georgia and north Alabama. And tens of thousands of twisted, broken loblolly and slash in south Mississippi and Louisiana. Longleaf is more fire resistant, insect resistant, and wind resistant. This has real world value. Once longleaf is established, it’s more likely to make it to the end of a rotation, than are the other southern pines.

    Seventy million longleaf are being planted annually across the south. It’s encouraging to see organizations like FORSight examining the economics and encouraging TIMOs to take another look at longleaf.

    I think this is one case where private landowners are ahead of the game, and the forest industry might want pay attention.

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