Aunt Fanny and I stood on the woods road and looked through her forest of densely packed pine trees. Aunt Fanny removed her aviator sunglasses, folded them and put them in the front pocket of her camouflage jumpsuit.
She turned and looked into my eyes. “Nephew, how old am I?”
“You’re 29,” I said, without hesitating.
“Good boy. You’re mother trained you well,” said Aunt Fanny, putting her glasses back on and looking out into the woods. “Now tell me, how old are these trees?”
“Well, it’s hard to say. Most of the trees we can see standing here are about the same size and age…”
Aunt Fanny cut me off. “Nephew, keep it short.”
“These trees are 20 years old,” I said.
“Thank you,” she said. Like her Wild Turkey bourbon, Aunt Fanny likes her facts straight. “How do you know?” she asked, staring back out into the forest.
“It’s my best guess based on the size, height and number of trees,” I said.
“Nephew, what are we looking at? I see the trees, and I see the forest, but I don’t see the issues.”
“You’ve got yourself an overstocked stand of loblolly pine trees,” I said.
“What does that mean?” she asked.
“You have too many trees,” I said. “Your forest needs a thinning.”
“How can I have too many trees?” she asked. “Seems to me more trees means more money.”
“Aunt Fanny, it’s like having too many flowers or weeds in the garden. There’s only so much sunlight, water and nutrients to go around per acre,” I said. “You have a lot of smallish, crowded trees. If your goal is to maximize value…” I paused.
“Yes, Nephew? You have my attention,” said Aunt Fanny.
“If your goal is to maximize value and cash flow over the long-term, you’re better off with fewer, larger and more valuable trees,” I said. “If your forest is an investment, thinning improves cash flows and returns.”
“Talk me through that,” said Aunt Fanny, opening up her black-and-white marbled composition notebook to write.
“A thinning removes the smallest, weakest trees and leaves the straightest most promising trees. If done properly, it gives your best trees more room and nutrients. And then these trees grow through the product classes, from pulpwood to chip-n-saw to sawtimber, in less time.”
“As one of my forestry professors said in school, ‘you take the rest and leave the best.’”
“Cute, Nephew,” said Aunt Fanny with a smirk. Then she wrote it down in her notebook. “Does thinning make me more money?”
“So why wouldn’t everyone thin their forest?” asked Aunt Fanny.
“Well, a lot of folks do. And different folks have different objectives. You can thin for forest health reasons and you can thin for financial reasons. Or both. But some folks don’t have enough forest to fool with.”
“Will a thinning put cash in my pocket today?” asked Aunt Fanny. “I’m thinking of buying a new four-wheeler.”
“Yes. A thinning generates some cash now from selling some pulpwood and chip-n-saw trees. But the big payoff comes later, when we harvest the stand in six to ten years. Your forest will be full of higher value sawtimber.”
“Delayed gratification again?” asked Aunt Fanny.
“Right. And through harvesting trees periodically over time, we generate cash flows and financial returns from the forest.”
Aunt Fanny looked into the woods again. “Nephew, I keep thinking about those gaps in time between cash flows. What happens when we cut all the trees?”
“At that point, we’ll need to spend money to replant,” I said.
“How long between spending money on planting trees and generating cash again?” asked Aunt Fanny.
“At least fifteen years, or so,” I said.
“You gotta have faith in this business.”
“Yes, Ma’am, you speak the truth. The thing is, your forest is one of thousands in this local market, each with its own range of ages and products.”
“But I don’t care about everyone else, Nephew. I care about my investment here,” said Aunt Fanny in her ‘banker’ voice.
“I understand, but think of it from the other side of the table,” I said, picking up a stick from the ground and making a circle in the dirt at our feet.
“You always liked playing in the dirt, Nephew.”
I pointed the stick to the middle of the circle. “Imagine a mill here that buys your trees. That mill does not care about you 99% of the time. They care about you during those two or three weeks once every 15 years or so when you have trees to sell. So you need all of those other landowners out there, planting and growing trees, to keep those mills interested and viable for all that time in between. It’s really a relationship.”
Aunt Fanny scanned the forest and then looked up towards the sky. “Good Lord, who taught my Nephew to talk like this?”
“It’s how it works,” I said, smiling. “Time and location drive value in forestry. You can’t have a sawmill without forests, and it’s hard to justify planting trees without mills nearby if you own your forest as an investment.”
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 exercises and examples related to harvest decisions and marginal analysis.