Aunt Fanny put the HP calculator back in the pocket of her camouflage jumpsuit. She looked down and around at the ground covered in leaves, needles and twigs. Then, she turned to me and asked, “Nephew, what makes my forestland more valuable? What causes the land to appreciate?”
I nodded and took a deep breath. “There’s a lot going on here. I’ll do my best to share what I know.”
“I’d expect nothing less, young man,” said Aunt Fanny, pulling out her Cross pen and marbled composition notebook.
“To start, your forest doesn’t grow in a vacuum. We grow the trees with certain markets in mind. The mills we sell wood to today will probably be the same mills we sell logs to in ten years,” I said.
Aunt Fanny nodded while making a brief note in her notebook.
I continued, “But the land is subject to other economic…forces. And these forces can create value.”
“Keep it grounded, Nephew. You sound like Yoda. What forces?”
“I think about two things: people and alternative uses.”
“Continue, young Jedi.”
“Well, people put pressure on the land. Wherever you have a lot of people, you have a lot of homebuilding, stores, schools and roads. The value of the land goes up and, in a way, it becomes too ‘valuable’ for growing trees.”
“I’ve seen this happen. When I was a girl, they built the highway through our county. Forests and small farms became the four-lane and a series of towns,” said Aunt Fanny.
“Yes, Ma’am. I read an article from the US Forest Service that described this relationship between population density and land values. Once you have more than 150 people per square mile, on average, land values start climbing and putting pressure on forests.”
“Nephew, you also mentioned alternative uses. This sounds like the same thing to me,” said Aunt Fanny.
“It’s related,” I said. “Basically, I think more about how my clients think about. They’ll ask, ‘should I plant trees or row crops?’”
“We used to deal with similar questions when I worked at the bank,” said Aunt Fanny, thinking back to her days as a regional vice president. “We would talk about the best use of our capital, our funds.”
“Yes, Ma’am. Opportunity cost.”
“Exactly,” said Aunt Fanny. “We create wealth wherever we focus capital and effort. When we financed a building, some thought the money disappeared! Did it? No! We paid dozens or hundreds of people, from construction workers to surveyors to lawyers to electricians and plumbers and painters.”
“And the land appreciates,” I said.
“Exactly,” said Aunt Fanny.
“And it also increases the cost of owning the land,” I said.
“Right. Property taxes and insurance, for example,” said Aunt Fanny. “It’s a circle.”
“More people or more valuable uses of the land, from an income standpoint, put pressure on the forest. And this pushes forestland values.”
Click here to learn about “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.