THE FOREST INDUSTRY OF THE FUTURE: What Will It Look Like?

The following post was originally published by Timber-Mart South 4th Quarter 2009 -- Vol. 14, No. 4, January 2010

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I was recently asked to speak at the North Carolina Forestry Association’s annual meeting in Myrtle Beach on the above captioned topic. Before agreeing to the talk, I had to think about it for a while. The quote “Its tough to make predictions, especially about the future” attributed to Yogi Berra, as most quotes are, hung in my mind for a few days. But I took a shot at it and later agreed to share some of those thoughts with TMS readers.

First, there has to be a basis for the prediction. The basis that I chose was to look at the changes occurring in the forest industry and to look at what I thought the future economic environment might look like.

The three key changes in progress are:

1.    Changing Timberland Ownership
2.    Biomass for Energy
3.    Global Industrial Revolution

Timberland Ownership: The shift in ownership (from forest industry to institutional) is well documented and well underway so there is no need to spend time on it (maybe a couple of comments!). Due to the housing/lumber market collapse, timberland owned by the sawmill industry is following in the footsteps of that formerly owned by the pulp and paper industry. This is illustrated by the timberland ownership shifts of Allegheny Wood Products and Anthony Forest Products to TIMOs. Survival can be tough. The second point is that the institutional owners have no allegiance to a mill so the wood will flow to the highest bidder.

Biomass for Energy:  This is not a new thing but its impact is changing and the magnitude of the issue is not universally well understood so it merits significant discussion. There are three drivers pushing the biomass market shift.

1. Renewable Energy: The desire to shift to energy sources that we cannot “run out” of. Many states already have legislated renewable energy targets and biomass, particularly in the Southern states, is playing a key role toward the advancement of those goals.
2. Climate Change: The desire to shift away from energy sources that add to the perceived problem of man caused global warming. Burning wood is carbon neutral when viewed from a carbon cycle perspective. This appears to be more of a political issue than a scientific one but that is irrelevant to the outcome. Pellet exports from the U.S. to Europe increased over ten fold last year fueled by carbon taxes in EU countries. If Cap and Trade is passed here, expect to see an even greater shift from coal to biomass by utilities.
3. Energy self-sufficiency: This is the most important concern from my perspective. It is significant from both national defense and economic security points-of-view.

So where will this biomass come from? The primary sources of woody biomass are manufacturing residues, harvest residues, urban waste (construction, etc.), pulpwood and short rotation crops grown specifically for biomass. I have looked at available manufacturing residues for multiple clients and there is just not a significant amount available. It is virtually ALL being used and most of it is used by the forest industry to produce products or energy. Harvest residues are there BUT, as the pulp and paper industry knows, harvesting residues is expensive, they have a negative impact on mill processing and they produce a product of inferior quality and value. These traits are equally true for pellets and pulp. I don’t know much about urban waste but there is less of it with the housing market decline. So that leaves pulpwood and that is where the bulk of the woody biomass resource will come from.

To better understand the magnitude of potential biomass demand, let’s look at some of the new facilities.

A Pellet Mill: The pellet mill in Cottondale, Florida started up in April 2008 as the largest pellet production facility in the world. One hundred percent of the plant’s production is for export to Europe where the pellets are mixed with coal to reduce carbon emissions in the production of electricity. The driver behind it is the European carbon tax applicable to coal but not the carbon neutral wood pellet. The plant produces 560,000 tons of pellets annually and consumes about 1,000,000 green tons of wood. The resource used is not “residue” - it is pulpwood. This facility is the equivalent of a new pulp mill.

Cogeneration: This is certainly not new in the forest industry as our pulp mills have been doing this for a long time. What is new is the magnitude of the projects. Industry is expanding the use of cogeneration, schools are installing the systems and one village in Pennsylvania is building a system to use the steam to heat all of the houses in the village as well as supplying the electricity to them. An industrial example is the Sonoco / Peregrine Energy Corporation plan to develop a new $135 million woody biomass-fueled cogeneration plant in South Carolina. Plans are for Peregrine to construct a new 50-megawatt capacity facility that will be capable of generating enough electricity to power approximately 14,000 homes. The new biomass-fueled cogeneration facility will replace Sonoco's existing coal-fired boilers. Peregrine intends to sell the entire electrical output and all renewable energy certificates associated with the plant to Progress Energy Carolinas, Inc., and low pressure steam from the plant to Sonoco for use in the manufacture of recycled paperboard and other converted products. “The project would benefit the regions' forestry industry by utilizing pre-commercial thinnings and waste logging residues as the woody biomass fuel for the project.”

As a rule of thumb, a 100-megawatt plant will consume about a million green tons so this facility will consume about one-half of that but that is still a lot of precommercial thinnings!

A Coal Fired Power Plant: This one really caught my attention. The power companies are struggling with the renewable energy standards. In the East, there is limited opportunity for wind, solar or geothermal so biomass is about the only alternative left (hydro is out for a multitude of reasons). FirstEnergy at Shadyside, Ohio has announced its conversion from coal to biomass. The largest proposed development to date had been Yellow Pine Energy's 110 MW project in GA, a million-plus ton/year wood consumer. FirstEnergy’s is 312 MW and will consume 3 million green tons! This is on a par with the South’s largest pulp and paper mills.

The sheer quantity and magnitude of the announced facilities similar to the examples above is staggering from a resource consumption viewpoint. Not all of them will come to pass but it is very clear that enough of them will reach production levels that will greatly impact the future supply/demand picture for forest products.

Global Industrial Revolution:  The third key change, the global industrial revolution, is well under way but it may never be realized. All of the developing nations have ambitions to reach the standard of living with which we are blessed but the commodities, the natural resources, are just not there to reach that level on a global basis. Commodity shortages, particularly oil and other transportation energy sources, will prevent the world from reaching the level that we have obtained and, more than likely, those same shortages will prevent us from maintaining that level. Escalating transportation costs will cause us to revert back to a society much more dependent on manufacturing. It is significantly less expensive to ship dried lumber than logs.

The three key changes mentioned above combine with a couple of additional economic factors to create the drivers that define my view of our economic future. The drivers are:

• Social drive for renewable energy, energy self-sufficiency and climate change
• High energy costs- The key cost escalator
• High Inflation Rate (perhaps hyperinflation) driven by:
      * Very high government spending
      * Very high oil prices
      * Commodity shortages, including timber
• Declining Value of Dollar (see Figure 1)

Source: fxstreet.com

 The Future of the Pulp Mill: Domestic paper demand will continue its downward trend but I am not as pessimistic about the industry’s future as most people are. The continuing decline in the dollar, although very bad for the consumer, will have a positive impact on the pulp and paper industry. The export market will be much brighter. A great deal of capacity has already been taken out of the market. Although bio-refinery economics are very unclear at this time, more capacity may come out as some mills are converted from pulp to production of “of ultra-clean, renewable motor fuels”. As the energy transportation costs rise, it may be cheaper to burn pulpwood for energy and to convert black liquor to transportation fuels. The key driver is the future price of oil and that may be considerably higher than the current consensus. The major downside for the pulp and paper industry will be the competitive demand for wood. Wood is both its raw material and its energy source and the power companies are going to be very tough competitors.

The Future of Sawmills: Despite the doom and gloom about future housing, domestic lumber demand driven by housing demographics still looks good after the excesses have been worked off. The Global Industrial Revolution combined with a weaker dollar will create a very positive manufacturing and exporting environment for sawmills. Global housing and lumber demand will be high and the U.S. will be one of the key suppliers. Very high energy costs make it more cost effective to ship lumber than logs to export markets, reversing the current norm.  There will be a much more competitive market (higher prices) for mill residues. Consistent and steady demand from biomass consumers will provide a steady supply of logs from producers. Things couldn’t look much better assuming there is a mill somewhere that survives the current crisis! It’s always darkest before the dawn.

The Future of Biomass Consumption:  Biomass utilization is a game changer in the forest industry because of the sheer quantity of biomass that will be utilized. Many schools in cold climates are heating with wood chip boilers today and they are saving money without any subsidies (and this is spreading to the warmer South as well). European villages have moved in that direction and some Canadian and U. S. villages are capitalizing on their experiences. The developing demand by the power companies seems so huge as to be unsustainable. Transportation cost increases will work against the large biomass programs such as the 3 million G ton Ohio facility. Power facilities with less output and shorter haul distances will be more cost effective (diseconomies of scale). If the “man-caused” global warming issue does not result in tax legislation, if consumers scream too loudly about electrical cost increases, government may back off and the power companies will be able to revert to coal to produce electricity more economically. That would take the pressure off biomass and still provide energy self-sufficiency to a degree. But even that scenario will not change the shift to biomass for energy. Oil is a finite resource and more energy must be expended to get each additional barrel. Like it or not, oil prices are on the wrong end of the power curve and that means that transportation costs are too. There WILL come a point, I don’t know when, where cellulosic ethanol (or one of the other wood-based transportation fuels) is less expensive than oil. When that happens, the forest industry is changed forever.

The Future in the Forest: Recent economic drivers supporting longer rotations are creating a “wall of wood” in the sawlog size class. Institutional investors have lengthened rotations from the pulpwood size-class to the sawtimber size-class to capitalize on the price differential. Sawtimber sales have been deferred as a result of poor markets, so harvest followed by planting has slowed (Figure 2).

The graph shows a significant decline in planting, which is troubling to some folks, but more likely reflects increased thinnings and significant reductions in clearcutting. Short rotation energy plantations close to market will happen IF wood costs go up significantly OR planners fail to anticipate increases in transportation costs. There will be more “in-woods” operations (chippers, biomass harvesting, biochar, and perhaps mobile methanol) – all driven by higher oil costs. Biomass harvests will be incorporated into conventional tree planting prescriptions. Much more competitive markets will mean higher stumpage prices for biomass and pulpwood. The current growth/drain ratios are very favorable (Figure 3) but sustainability will probably become a political issue if not a real one.

Changes in Wood Supply Chain: It is the same basic Wood Supply Chain, but…

• Harvest residues will be added, probably more mechanized
• Biomass demand brings more stable wood demand
• No monthly (weekly, daily) shifts in mill consumption
• No shifts in species needed
• Annual contracts for wood producers become practical for biomass production – good news for loggers!
• May force the same for pulpwood and sawlog buyers
•  Logging will become a more robust, stable and competitive market segment

My Synopsis of the Future Forest Industry

• Biomass/Power companies will be a key part of the industry.
• There will be more “in-woods” operations (chippers, biomass harvesting, biochar, and perhaps mobile methanol).
• A smaller pulp and paper industry will survive and exporting will play a larger role.
• Sawmills: Demographics still favor housing and lumber export market will become significant. Imports less competitive.
• Logging contractors will have a more stable operating environment. Annual production contracts.
• Stumpage market will be more competitive and more stable.
• Plantation establishment will consider energy market.
• Timberland ownership will be a good place to be!

So that’s the way I see it. A global economy responding to a failed energy policy built on unsustainable oil production. This view of the future may not be right but it is worth considering as you go forward.

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Differing views welcome, especially if rational is explained. --Brian

Visit Timberland Strategies web site.

Tree Planting in the South Continues Decline

Last week I had an opportunity to speak at the annual Southern Forest Tree Improvement Conference at Virginia Tech. The subject that I was asked to talk about was "The Relevance of Tree Improvement to Changing land Ownerships and Objectives". By the time I finished my presentation, I think that I had reversed it and actually talked about the opposite or "The Relevance of Changing land Ownerships and Objectives to Tree Improvement". At any rate, in the process of putting together the information, I created one graph that should be of interest to more than just the geneticists and biotech folks.

Each year Steve Chapman, with the Georgia Forestry Commission, conducts a survey on the prior year's tree planting in the South. He contacts each of the State Foresters for the data and then he compiles it. The project takes a great deal of time and is a very important service to everyone involved with timberland in the South. Actually, given the importance of the Southern forest to the nation, this project has importance to everyone. We should all be thankful to both Steve and the Georgia Forestry Commission for their efforts.

Last year Steve had provided me with the historical data and I looked at the trends which were not real positive. I also noticed that not all State Foresters placed a high priority on cooperating with Georgia on the project. That is very unfortunate. I graphed the data with the intention of posting it here. I decided to try to get the missing data first so I sent emails to the State Foresters that didn't provide Steve with data and asked them to add the missing data. No response.

When I was asked to speak to the Tree Improvement folks, I knew it was important to them to understand how the demand for seedlings was changing so I contacted Steve again to see how he had made out with the 2008 survey. Most of the State Foresters had responded but data from two states was still unavailable. He sent me what he had and I adjusted for missing data by using previuos years data wherever annual data was missing. Not the best numbers but the best available and that is what I used to make this graph.

The picture isn't pretty. Planting dropped off considerably after the 2001 peak and has continued through 2008. Planting levels have not been this low since the 1950's!

Let's look at the reasons behind the decline and speculate about the implications. A year or two ago I was working on a project for a pulp and paper company and we were discussing this trend and one of the Wood Procurement people made the observation that he had not been doing any clearcutting - only thinnings- for a year. So maybe the lack of planting is not so important to the long term wood supply as the graph might indicate.

There is clearly some sound logic behind this observation. During the late 1980's, national planting levels peaked at the three million acre mark and the lion's share of that was in the South. Today we are thinning those plantations and that is what is providing much of the resource for pulp production. In addition, the shift in timberland ownership from pulp and paper companies to institutional owners has probably resulted in a lengthening of pine rotations by a couple of years as the ownership objectives shifted from maximizing mean annual increment to maximizing return on investment. High planting levels of the late 80's and lengthening rotations have clearly provided a thinning opportunity. So..., we are living on the investment of previous tree planters.

The other clear driver behind the lack of planting is the sawtimber market. Low demand resulting in low sawlog prices means reduced sales and reduced final harvest cutting (clearcuts) and that results in a reduced need for planting.

It all sounds pretty logical so maybe the reduced planting is not such a bad thing. The question that is not answered is "Are there a significant number of clearcuts that are not being replanted because of poor markets?" A"Yes" answer would be a bad thing. --Brian

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The Dichotomy in Timberland Valuation

The issue in today’s post concerns why the transaction price of timberland has shown little or no decline in value but the stock price of the publicly traded companies that own timberland has declined dramatically. I will also look at what I think is happening in the timberland market today and how I see the market for timberland investment. But first, let’s set the stage.

In January, I did a post that included some graphs developed from my timberland transaction file. I was looking to see if the data supported a wide-spread belief that timberland values had dropped. The thinking was that housing starts declined, which caused a drop in lumber prices, which caused a drop in stumpage prices (all true), which caused a drop in timberland prices. You can read that post here How Much Did Timberland Values Fall in 2008? The data did not support the logic and did not show any evidence of a significant decline in timberland values. (For those that sent emails saying my opinion was wrong – that was not my opinion, it was just the data). I also wondered what the NCREIF Timberland Index would look like when it was released. The publicly accessible portion of the NCREIF website showed quarterly returns that compound to a 9.5% total return for the timberland in its index in 2008 but the components of the return are not broken out. A recent report by Brookfield Timberlands Management, distributed by Forestweb, shows the NCREIF return broken down by earnings and capital appreciation.

NCREIF TIMBERLAND INDEX

The significant decline in the blue portion of the graph reflects the decline in housing/lumber/stumpage/earnings. The green portion, Capital Appreciation, can be viewed somewhat (not perfect) as a surrogate of the change in timberland value as determined from tract sales and appraisals of tracts – all of which are a part of the index. Note the green from 2000 to 2002. This data certainly contains no indication of a 2008 decline in the price of timberland either.

Below is another graph that I found interesting. It is from the Timberland Report VOL. 10, NO. 2; by the James W. Sewall Company, a highly respected firm with a very long record in the timberland investment community.

From my perspective, the important take-a-way from this graph is that the old correlation between timberland values and housing starts fell apart. We can speculate as to why and we can speculate as to whether the correlation will return but it’s pretty clear that the conventional wisdom has not prevailed during this economic downturn. Another graph in the report reinforces the historical correlations between housing starts and stumpage prices. That correlation did hold as all timber owners know only too well. You can read the entire Sewall report here(recommended).

Now, let’s take a look at the price of common stock in some of the publicly traded companies that have timberland holdings that represent a significant share of the companies’ assets and see how share prices were impacted last year. Ownership structures of these companies include timber REITs, “C” corporations and limited partnerships but for my purposes today, I will refer to them collectively as “timberland companies”. Let’s look at this chart I made from Google.

It’s hard to see but the blue line just above Weyerhaeuser (green line) is the S&P 500. Weyerhaeuser took an early hit because it has such a major direct investment in housing. I read somewhere that it is the 17th largest home builder. The rest of the timber companies fell about the same amount as, and in synch with, the general market. My conclusion is that the timber companies stock price tracks the stock market rather than with the timberland market. Not a “pure play” in the bunch. Down about 50% when timberland prices held pretty steady.

I have long been a skeptic of the “pure play” concept of acquiring timberland companies (or an ETF) as a surrogate for timberland ownership. Even if 100% of the assets owned by the company were timberland, I would still be a skeptic and here is why.

Timberland investors use metrics based on a time horizon of 10 to 50 or more years. The key metrics are based on a discounted cash flow (DCF) analyses over that time horizon. If you would like to read more about timber valuation than you really want to know, you can do that here. The metrics used by those that analyze stock value are usually based on very short term future cash flows of a year or two (no need to discount those!). The inherent assumption is that the stock price will respond to very short term (a few quarters or few years at most) cash flows and that the stock will be bought or sold in that time frame. Some of the most referenced metrics are based on what happened last year rather than what is expected to happen in the future (current P/E for example). The Warren Buffets in the crowd that actually do take a long term view of stock investing are a clear minority today and I’m sure that DCF is an integral part of their valuation. Don’t misunderstand me. I’m not saying that one way is right and that the other way is wrong, only that they produce different results and that creates a dichotomy in value and an opportunity for long term investors. Given all this, is it any wonder that the stock of the timberland companies has fallen dramatically with the general market decline? The value of their timberland portfolio is based upon the very depressed earnings reflecting current stumpage prices rather than the DCF of future stumpage prices!

At this point, I reach two conclusions (and I know that some will not agree)

1. Timberland values have fallen little if any, and
2. The timberland value component of the timberland companies’ stock price has fallen dramatically

And therein is the opportunity.

Here is another stock chart just like the one above except Forestar Group has been added. If ever there was a pure play for timberland/HBU, this is it. Other than some OGM, that is its only asset!

The “Pure Play” Fallacy

In spite of that, the stock price of Forestar dropped over 80% - the worst of the group. So much for the “pure play” concept. If you want to invest in timberland, you need to own timberland, not stock!

Think about this. Is it possible that the assets of Forestar were worth five times as much in June as they were in November? Some folks sure didn’t think so. To name a couple, Holland Ware and Carl Icahn. Both recognize the dichotomy in valuation methodology between timberland and the valuation of the stock in timberland companies! Both made some serious money with that little bit of information and a lot of cash. Buy at $3 - $4/share, offer $15.00 (still undervalued), sell at $12 or so. Not bad. And the $15/share offer? Even that was well under the underlying value of the timberland/HBU asset.

Okay. We understand what happened in 2008. What is happening to timberland prices now and what will happen in the future? I still have seen no significant decline in transaction prices regardless of the emails I get claiming dramatic declines in prices (no transaction details attached). There is a slowing of transactions, at least one announced major transaction (St. Joe) did not close and several tracts that were put on the market were pulled off. What does this mean for the future?

It may mean that prices will fall. It may mean that buyers are holding their cash until this economic downturn, recession, depression, or crisis begins to resolve itself. I don’t know what the future holds but I do know that there is a lot of pension fund and other cash out there that will be invested somewhere. Today it is going into money market accounts and just kind of sitting there. Barron’s reported about a week ago that there was $4 trillion in money market funds which is about one-half the market cap of the entire U. S. stock market. That is a lot of money and I doubt that it will all stay in cash. At some point, some will go back into the market, some to commodities, some elsewhere and some to timberland.

Long term, I remain bullish on timberland but, in the short-term, I think that stock in the timberland companies is a better investment. The downside is less than timberland and the upside is much, much greater. If you follow Holland Ware, you won’t starve. --Brian
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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

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”!

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