This is the second in a series related to the analysis of timber markets and wood baskets.
“Nephew, do you know Abe Phroman?” asked Aunt Fanny, looking out into the woods.
“Yes, he’s the Sausage King of Chicago,” I said.
“What are you talking about?” asked Aunt Fanny. Apparently, she had not seen “Ferris Bueller’s Day Off.”
“Sorry,” I said. “Old movie reference.” I cleared my throat. “You mean your neighbor?”
“Exactly,” said Aunt Fanny. “Mr. Phroman is interested in selling some timberland.”
“You mean the 184 acres of loblolly pine adjacent to your property?” I said.
“Well, I was thinking about thinking about making an offer,” said Aunt Fanny.
I hesitated. “Did you just say what I think you said?”
“Yes,” said Aunt Fanny. “I was thinking about whether or not to entertain this idea seriously. So how should I think about this?”
“Time for me to play professor again,” I said.
“Okay,” said Aunt Fanny, opening her black-and-white marbled composition notebook. “But be gentle. I’m not taking any quizzes.”
“Overall, the recipe for assessing a potential timberland investment is straightforward,” I said. “And it starts with understanding the local market for wood. Timber markets are uniquely local.”
“What do you mean ‘uniquely local’?” asked Aunt Fanny, making quotes in the air with the hand holding her pen. The other hand kept the notebook open.
“It means the same timberland property in two different markets will have two different values,” I said. “You can have the finest timber in the world, but if you’re not close enough to mills that can buy your trees and turn them into something more valuable such as lumber or paper, your trees, from an economic standpoint, have little value.”
“Well that’s nice to hear,” said Aunt Fanny, frowning behind her aviator sunglasses.
“In this case, since Mr. Phroman’s property adjoins yours, we already know something about the local market,” I said. “It’s in your forest management plan.”
Aunt Fanny reached to a side pocket in her camouflage jumpsuit and pulled out a folded sheaf of papers. She flipped several pages and started to read, “Local timber markets within 100 road miles include seven pine sawmills, two pine plywood plants, one pole plant, four hardwood grade mills, two pulp mills and four chip mills.”
“So that gives us a starting point,” I said. “Now we’d need to confirm that those mills are open and interested in the kind of timber we’d be selling.”
“Makes sense,” said Aunt Fanny.
“Next, we would look closely at any data Mr. Phroman could share about his forest and we’d ask questions,” I said. “Forestry has a somewhat bizarre relationship with data. Everything is a sample. A forest cruise is a sample of what’s out there. Any timber price data is based on a sample of what’s going on in the market.”
“Would we do our own cruise to check the forest?” asked Aunt Fanny.
“There’s a good chance we would,” I said. “Because, in the end, we want to know what’s knowable. This helps us minimize any risks. We want to know, as best as possible, what we’re buying and, to the extent possible, the potential revenues and property taxes and management costs.”
“Whew,” said Aunt Fanny.
“In the end, we want to understand the individual property and the local timber market,” I said. “Timberland values depend on the local wood basin and the forest stocking of the properties.”
“Well, I guess we should go talk to Mr. Phroman,” said Aunt Fanny. “Life moves pretty fast. If we don’t stop talking to look around, we could miss an opportunity.”
Forisk will detail timber market due diligence during “Timber Market Analysis” on August 4th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets.
In addition, Forisk will teach “Investing in Timberland and Timber REITs” in Atlanta on October 8h.