Timberland Transaction Update

Major timberland transactions have slowed considerably but some continue to close. I wrote an article for Forest Landowners Magazine (THE TREND IN TIMBERLAND PRICES) that was supposed to be published in October but the publishing date was postponed until late November so I thought I would do a little update on transactions to date for this year. From the list below, you can see that there are quite a few transactions but relatively few large ones.

Here is an insightful comment from Plum Creek's 3rd Quarter Earnings Conference Call.  "We have not noted any significant changes to our rural land markets since the last quarter's call. In general, rural land values were off approximately 25% in higher value regions such as Florida, portions of Georgia, and Montana. Rural land sales in lower priced markets such as Mississippi and Northern Wisconsin remain fairly active. Prices in these markets have been more resilient and appear to be off 15% or less from their peaks." The comment is supported by the Rayonier sale above for $1,200 per acre which is a conglomerate of sales showing that Florida is definitely a soft area. Some of the other companies are reporting very little decline in the rural/recreational market.

In spite of these stated declines, there remains little sale activity supporting significant declines in institutional timberland values. Several of the larger timberland sales were at a solid price but there are too few to say prices have not declined. Perhaps the most interesting thing about this list is the names of the sellers. They are almost ALL public companies selling land to try to protect their dividends (or in Forestar's case, the entire company!). The one TIMO sale was at a very good price.

If I have missed any sales, and I probably have, send me an email to jbfiacco@gmail.com. As always, comments and differing opinions are appreciated (especially if supported by facts).

My last post had an error in a link. Click here if you would like to see the PDF of the presentation The Forest Industry of the Future: What will it look like. . --Brian

Valuing Timberland V – The Discount Rate

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

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

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

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

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

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

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






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

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

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

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

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

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

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

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

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

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

More on the Economics of Longleaf Pine

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

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

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

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

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

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

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




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

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

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

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

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

On the Marginal Return from Timberland Investments

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

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

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

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

ETF as Surrogate for Timberland Investment

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

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

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

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

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

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

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

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

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

• Is the primary asset of this company timberland?


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


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


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


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


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


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


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

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

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

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

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

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

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

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

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

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

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

Changes in Timberland Investments in the South

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

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

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

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

Some things you may have missed

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

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

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

Pretty impressive and kudo's to AFM!

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

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

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

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

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

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

Leisure land for investment

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

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

Potlatch Hybrid Poplar Plantations Sell to a New Green Venture.

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

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

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

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

Strategic Factors Driving Timberland Ownership Changes

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

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

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

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

Ethanol from Trees, Not Corn!

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

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

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

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

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

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

Who SHOULD own the forests?

One of the stated objectives of this Blog is to look at HOW the ownership of timberland (a term used specifically to describe commercial forestland) is shifting as industry disposes of it's landholdings. As the process continues, some timberland merely changes ownership (remaining timberland) and some shifts totally out of the commercial realm into a "protected" state where timber products are no longer produced. In most cases, though, the land does continue as timberland but perhaps with less emphasis on timber production. But who are the new owners? TIMOs, as we have discussed; "small" private landowners of family forests, as discussed earlier; NGOs, to be discussed at a future time; and, finally, the government (federal, state and local).

Should our governments own any forestland at all? Should we stop government from pulling land out of the private sector and adding more to the continuously increasing amount of public ownership? Should we sell all of the National Forests to the private sector? If you answered "Yes, yes, yes", then you are a pure capitalist! The flip side would be to continue buying by government - buy everything available through outright purchase or by exercising the governments right of eminent domain. Private land ownership should be eliminated because the government can do a better job of forest management than the private sector can. Is that a good idea? If you answered "yes", then you are a pure communist and you can point to Russia to show how forestland should be managed.

But, like most Americans, you probably feel that there is a happy medium somewhere in between. There is a role for both public and private ownership. The real question is "Where do we draw the line?", and as this shift occurs, it makes sense to have a debate on the scope of increasing government ownership. As a case study, let's look at Bowater's decision to get rid of its land in Tennessee. The first step was to donate 3,700 acres to the State of Tennessee to be added to the state park system (no longer timberland). Phase two was for the State of Tennessee to purchase 12,500 acres which will probably also be transferred from the role of timberland and into the wilderness/park designation. As for the remaining 124,000 acres of timberland, the State of Tennessee has a proposal to acquire that as well. For an overview of that proposal as well as a capitalistic view of government ownership of land, go to "How Much Land Should the Government Own" by conservative Henry Lamb. For a view of the Governor's perspective on this deal and for an insight into the interactions of TIMOs, NGOs, government and industry, click here.

There are clearly forces at play that will increase government ownership of forestland at the expense of commercial timberland as industry continues to dispose of its land. Good or bad? I guess it depends on whether you are a communist (socialist?) or a capitalist! Either way, it appears that there is public support for increased ownership of public land and debate on the scope of that would be a good thing.

From my perspective (and I'm the Blogger!), consolidation of public ownership (acquiring inholdings from willing sellers), acquiring easements for hunting/public access/recreation, and protecting truly unique areas are examples of where government ownership should be encouraged. But I have to oppose the insatiable appetite of those that feel government should acquire everything on the market. And there are clearly many in that camp. Where do you sit? Why?--Brian