Aunt Fanny reached into the side pocket of her one-piece camouflage jumpsuit. She pulled out a blue roll of Mentos. “Want one?” she asked.
“Sure,” I said, pinching off a white mint from the tin-foiled roll and popping it into my mouth. Aunt Fanny and I stared out into the woods, chewing our Mentos.
“Minty,” I said.
“You ever put one of these in a bottle of Coke?” asked Aunt Fanny. “It’s fantastic. Blows out a stream of foam like a water cannon. I saw it on YouTube.”
I nodded, wondering where this was going.
“Nephew, you mentioned ‘optimal rotation’ a while ago,” she said. “Only place I’ve heard that before was at the bowling alley. What are we talking about here?”
“It refers to our best estimate of when the forest is mature.”
Aunt Fanny laughed. “When is a forest ‘mature’?” she asked, making quotes in the air with her hands.
“Well, it depends on your goals. In forestry, we either try to maximize volume or we try to maximize value,” I said.
“Don’t they tell us the same thing?” asked Aunt Fanny.
“Surprisingly, no,” I said. “We could grow a lot more volume if we didn’t care about how much it would cost, how long it would take or what products we’d grow. But we do care about these things. So we want to estimate the forest rotation that gets us the highest, sustainable economic returns. The forest age that makes the most money forever.”
“Amen,” said Aunt Fanny. “How do we figure this out? Magic 8 ball?”
“Ouija board,” I said.
Aunt Fanny laughed. “Nice,” she said. “Quick like your mother.”
“We do some math,” I said. “Since we want to prioritize economic returns, we will think about financial maturity.”
“This is language I understand. Just like with bonds or CDs at the bank,” said Aunt Fanny.
“Yes, in a way. We care about the rate of return. A forest reaches financial maturity when its annual growth rate in value equals the target rate of return or your cost of capital.”
“Tell me more.”
“Well, think about how a forest grows. When the trees are small and young, they have little value to mills. Then, as they start growing and adding size, they start to increase in value. Quickly. Then, eventually at some point, forest growth slows down, as does the annual increase in forest value.”
“Makes sense,” said Aunt Fanny. “Let’s put some numbers to this. If I expect my forest to return 6% per year on average, I should let it grow as long as it continues to add value at a rate of 6% or more.”
“Exactly,” I said. “At some point, you have a mature forest full of sawlogs that’s pretty valuable but increasing value at only 2% or 4%. You can keep growing it, but you would be ‘losing’ value because you could harvest, replant, and grow a new forest that returns 6% or more per year.”
“And this takes time,” said Aunt Fanny, looking into the woods.
“A lot of time,” I said. “And that gets us back to estimating the optimal forest rotation. And to do this, we need to know the value of bare land. The value of dirt.”
“Sounds like we have more to talk about,” said Aunt Fanny.
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.