Maximising your return from your forest: The ABC’s of Forestry Stumpage and Forest Valuation

Part 2. Appointing Contractors and Method of Sale.

Small forests are scattered throughout New Zealand and in each region wherever there are forests there are competent forestry people that offer a woodlot harvest and marketing service to owners of small forests. Most large forestry management companies also offer a woodlot service as an adjunct to managing the forests of their main clients.

The woodlot merchants or stumpage operators provide a service that is almost impossible (in the face of increasingly stringent health and safety requirements) for the forest owner to duplicate. And the service they provide requires good knowledge, long hours and a significant investment (for the contractors) in heavy machinery and skilled operators. They are businessmen too: they provide a service to you and, generally, charge you a standard management fee.

Knowing the management options and the terminology used by woodlot merchants when discussing terms is important for the forest owner. The simplest option, for the forest owner, is that the merchant offers the owner a “lump sum” before harvest starts and the owner either accepts the offer or not. Mostly, payment to the owner will be progressive as the forest is harvested and logs are sold although a deposit before harvest starts is expected (which fundamentally secures ownership of the wood for the stumpage operator for a set period of time). A lump sum means that the stumpage operator is taking the risk on merchantable volume, grade mix, harvest and transport costs and market availability and price. Accordingly, lump sum offers are not common and when offered they are discounted to reduce the risk faced by the stumpage operator. Lump sum offers provide certainty to the forest owner (Table 1).

Table 1: Who bears the risk under different stumpage pricing mechanisms?

Most common nowadays are composite sales whereby the stumpage operator offers a grade specific log price schedule to the forest owner, net of all the costs of harvest, roading et cetera, and offers that price for every tonne of each specific grade produced and sold. Here, the forest owner buys in to some risks and it is at this point that having a clear understanding of the value of the forest at the outset can help the forest owner judge the level of risk they are taking: (the risk we are talking about here is not a risk of not being paid, it is the risk of not realising the value that was standing in the trees.)

Most stumpage operators will provide a spreadsheet showing their calculations of costs and returns. For small forests (less than ten hectares) the stumpage operator will normally not recommend inventory work to assess the grade mix existing within a forest – instead they will rely on their visual estimate of grade mix that they can produce and this will, logically, be conservative, as they do not want to set forest owner expectations too high and one of the hardest things to do in logging is to maximise log grade value when cutting up a stem. This is one of the main source of value leaks to the forest owner.

To some extent the forest owner is held captive by the stumpage operator when it comes to pricing and, rather than be a price taker, the forest owner should seek competitive offers before they commit to the stumpage sale of their forest. If the forest owner cannot easily decide whether they are being made a good offer or not, let the market decide or seek independent advice.

And to illustrate the importance of understanding the data steps that make up assessing the valuation, harvesting and marketing of a forest consider these recent case studies I am aware of.

Example 1. A forest owner (50 hectares) was offered a rate of $40/tonne for harvesting his immature woodlot by an experienced and capable contractor. The contractor was concerned that the tree size of the forest was small and priced accordingly (a forest of small trees is more expensive to harvest than a forest of equivalent volume of large trees). A third party stumpage expert was certain that the piece size was bigger than the contractor had estimated so a field inventory crew was sent in to the block to assess the tree size. As expected the trees size was better than thought and so the harvester dropped his price to $36/tonne. This generated an additional revenue for the forest owner of $80,000. The cost of the inventory was $1170.

Example 2. A forest owner (4.5 hectares) was offered a composite sale offer for their woodlot that had an equivalent lump sum value of $60,000. A third party stumpage expert was able to demonstrate that the area of forest was greater than estimated, export log prices had increased since the offer had been made and the cost of moving machinery was excessive. The forest owner and the stumpage operator ended up agreeing on a lump sum value (no risk to the forest owner) of $97,000. The fees for the stumpage expert, including field visits and detailed area mapping, were $2200.

Example 3. An owner of a small forest was offered a lump sum of $30,000 by a local harvesting contractor for his 4.7 hectares of scattered forest. The forest owner sought an independent inventory and valuation of his forest and assistance in negotiating the competitive sale of his forest. This led to the forest owner being offered a fixed $/tonne quote that equated to a lump sum offer of $75,000. The cost of the inventory, valuation and negotiation service was $4740.

Example 4. The owner of a small forest (4.6 hectares) received a composite bid offer from a stumpage operator that was $52/tonne of log harvested and marketed. A few months later and before the offer had been accepted the export log market slumped and a revised offer of $48/tonne was made. The forest owner sought advice from a stumpage expert and the owner and the stumpage operator settled on the original offer of $52/tonne after the stumpage operator was given a longer period to harvest the woodlot (during which time it was acknowledged that the export log price was likely to recover). The field visits, advice and negotiations cost the forest owner additional fees of $1280 while netting additional income of $11,000.

The key point in this paper is that behind every stumpage offer there is a list of assumptions that have been made which have significant impact on the size of the offer. Be very sure that the price you are being offered is based on accurate assumptions: you have tied up land for a long period of time growing your forest and you have only one opportunity to harvest it and realise its full value.

Author: Andrew Dick, Registered Forestry Consultant, Interpine