Maximising your return from your forest: The ABC’s of Forestry Stumpage and Forest Valuation
Part 1. Know the Value of Your Asset.
Small forests, or woodlots, make up a surprisingly large chunk of the national exotic plantation estate. Yet some of these forests can generate poor returns for the forest owner once they are harvested and the logs sold. You only have one crack at converting your forest to money after growing them for 25 odd years so it pays to get this crucial conversion step as right as you can. This series of papers is intended to give the uninitiated some insight into harvesting operations and the main drivers of profitability and economics when it comes to harvesting small forests.
Small forests, mostly pine, are scattered throughout New Zealand and have often been established by farmers and Maori landowners as a future means of income and/or to retire land that was not much suited to growing anything else. The hardest bit about growing a forest is getting it through the early establishment years – once the trees are up and growing the only real interference they need to ensure a valuable crop is a well-timed thinning operation. Some small forest owners have intensively pruned their forests; with this additional investment in the young crop it is even more critical that you get the money end right (turning the standing trees in to cash).
Forest harvesting is a specialised operation that has to be left to professionals that have the systems in place and the equipment and operators needed to fell trees, extract them, manufacture logs and load them on trucks for the log markets. Appointing the right harvest company is important but rather than fly blind it is not too difficult for most practical folk to get some assessment work carried out themselves to answer the important question of how much is the forest worth, before the harvesting or “stumpage” operator is appointed.
Looked at simply, there are two major components that determine the financial return to a forest owner: the standing value of the forest and the costs associated with getting that standing value to market. The forest owner nets the value of the forest minus the cost of converting the forest to logs, selling them and getting them to market. This paper focuses on the first component.
The standing value of a forest is estimated based on the amount of merchantable log volume within the forest, the quality of the merchantable log grades within the forest and the market price for each of the log grades. A forest is not like money in a bank where you can be exact over the value of your investment – in a forest you have to estimate the volume, estimate the grade mix and estimate the area and then calculate the value. The more precise you are with your estimates the more accurately you can assess the standing value of your forest. Also, foresters and loggers generally use costs and value on a per hectare basis: returns to the forest are based on returns/hectare multiplied by the area of your forest. Get the area of your forest wrong and your estimate of value is also wrong.
And to emphasise the point about getting the standing value estimates right (before a chainsaw has been started), I’ll take a 10 hectare woodlot as an example.
- Area: 10.0 hectares
- Merchantable volume: 600 tonnes/hectare
- Average log sales price: $100/tonne
- Estimated woodlot value: $600,000
Nowadays, with access to internet based mapping tools, it is quite possible to get accurate area estimates. Obviously, in our example, being half a hectare out in your estimate of area means that there could be $30,000 more or $30,000 less standing value – if you own the trees you have huge incentive to get this simple estimate right. Alternatively spend some money on local mapping experts – for a few hundred dollars they should be able to give certainty to within +/- 0.1 hectare.
Merchantable volume is harder to estimate than area. Foresters estimate volume by carrying out an inventory of the forest where trained field crews establish sample plots within the forest, measure a statistically required number of heights and diameters and then use models and equation to assess the merchantable volume. Obviously there is some expense involved in getting this done. A less costly alternative is to search (the internet again) for regional yield tables which will give an indication of volume for similar aged forests in your region. Clearly these do not take in to account any of the specifics of your own land or trees. When using the field assessment technique, foresters target in their inventory design to minimise error – ultimately they will produce an estimate of the “average merchantable volume/hectare” with a statistical certainty associated with the estimate. The inventory systems used in New Zealand, for pine, have been developed and tested over many years and when properly applied within the field and during modelling, provide robust information.
The hardest component to assess in generating your standing value is the log grade mix. One mature pine tree can produce up to seven logs and there is a range in log quality and therefore log markets for pine logs. The most valuable logs are those that are the straightest, the biggest, the longest and those with the lightest branching. And the range of price is significant; from $50/tonne at the low end to over $160/tonne for the best pruned material. The average value for each merchantable log is then a function of the markets of the day and the inherent log qualities of the trees. Pleasingly, NZ has developed good inventory systems for assessing the quality features of a standing forest and then using optimising systems to generate the best value yielding grade mix. Alternatives to assessing grade mix using inventory crews and optimisers are limited to an assessor’s experience and general knowledge of out-turns from crews operating in that district. An educated guess in other words.
Assessing grade mix in a standing forest also makes a presumption that the grades used to assess standing value will also be utilised operationally when the trees are actively being converted in to logs; there are however times where there is a disconnect between the presumed grades that could be cut and the grades that are actually allowed to be cut (more on this later). Notwithstanding this, the base rule for assessing standing value is that the grades applied to assessing standing value need to exist in the local market place. Valuing a standing forest is not an abstract process – think of your forests as logs standing end on end, waiting to be released and sent to market.
Ultimately the size of the cheque left for the forest owner depends on a number of factors:
- The value of your standing forest
The costs to:
- Assess value
- Manage and other bits
- The markets of the day (log price)
- The grade mix applied to your forest during log manufacture and its unit conversion.
- How effective the contractor is at converting trees to quality logs
In my experience, netting the best returns from your forest requires a thorough understanding of the factors that influence forest harvest profitability and understanding the data used to measure each factor. Not having a good estimate of the standing value of your forest limits the ability of the forest owner to gauge how successfully that value has been converted to logs and bankable cash.
Author: Andrew Dick, Registered Forestry Consultant, Interpine