At 5:10 in the morning, I pulled up to where the woods road met the county road near Murder Creek. A fading yellow metal gate blocked the entrance to the forest. I stepped out of the truck to unlock the gate and swing it open.
A red Datsun 280ZX pulled up nearby and parked on the side of the road. A middle-aged woman wearing aviator sunglasses and a single-piece camouflage jumpsuit stepped out of the car. She held a black-and-white marbled composition book and a calculator.
“Good morning, Aunt Fanny. Ready to go?”
“You bet, Nephew.”
“Let’s get into my truck.”
After two hours of driving through the forest and getting a sense for its health and condition, I pulled into a small clearing near an old hunting stand and parked the truck. From behind the seat, I pulled out my Star Wars thermos and poured two cups of coffee, handing one to Aunt Fanny.
“Nephew, talk to me. How is this forest going to make me money?” she asked.
“If you need money today, we can cut and sell trees, or we can sell the land. Do you need money now?”
“No, no. And I want to keep the land. It’s been in the family since my grandfather won it in a poker game. It’s just that now I get to manage it. And, as you know, I hate idle assets.”
Indeed. Aunt Fanny had started out as a secretary of a local community bank. She worked her way up and retired as a regional vice president, managing bank branches throughout middle Georgia. Aunt Fanny knew her numbers.
“Okay, well let’s go over a few basics. Think of your forest of trees as an army of soldiers. It’s a factory full of workers looking to produce on your behalf.”
“You’re talking my language.”
“The challenge is to put them to work on the right things, for the right length of time, with the proper nutrition while protecting them from bugs, fire and disease.”
“Over time, your trees grow in size and quality and, most importantly, value. But at some point in the future, that growth in value slows down to a point where you’d be making more money by selling the trees and putting the money in something else. So the goal here is to grow the forest to its point of maximum value in today’s dollars. Then we harvest that forest and start all over.”
“Got it. Maximize the present value of the forest, is that what you’re telling me, Nephew?”
“How exactly does the value of a forest increase? Just by growing bigger trees?”
“Setting aside the land for now, tree value changes from three things. One, volume. The trees get bigger so we have more to sell. Two, quality. The trees get more valuable as they grow from smaller, less valuable products like pulpwood into larger, more valuable logs for sawmills and plywood facilities. Three, prices.”
“How can you separate prices from quality? Sounds like you’re selling me the same story twice, Nephew.”
“Well, the thing is that prices can go up. And prices can go down. Depends on the market. So just because we’re growing better trees, it doesn’t guarantee more value for each ‘unit’ of tree. You see, together we know we can grow more trees and we can grow better trees, but we can’t control the prices. So I wanted to be clear about what we can and can’t control.”
“A cautious young man. You’d have been a good banker,” said Aunt Fanny, patting me on the shoulder.
“At the end of the day, the key question for us is ‘when should we harvest this forest?’ We have to figure out the ‘optimal rotation’ to maximize its value.”
Click here to learn about and register for “Applied Forest Finance” on February 3rd in Atlanta, Georgia. The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments. This includes examples and discussion related to determining a forest’s “optimal economic rotation.”