Pine Plantation Investment Returns

4 State Forestry on the Grow Conference Idabel, OK

2012

Barry Shiver bshiver@forestech.us www.forestech.us CHFORES E

Where do investment returns come from?

Land Price Appreciation Stumpage Price Changes

Biological Growth

Product Transfer

A sure bet to increase investment returns

Follow the advice of the old adage…

“Buy low, sell high. Aren’t there any other eternal truths?”

…but not always possible

Controllable ways to increase investment returns

Spend less (positive) and get more (positive)

Spend more (negative) and get more (positive) This is what we typically get with silvicultural

spending

Spend more (negative) and get the same or more sooner (positive) Sometimes the added expense requires an earlier

payback to optimize returns Time value of money

Ways to Increase Investment Returns (without the need for a clairvoyant)

Improved tree genetics

Regeneration treatments Chemical site preparation, herbaceous weed control,

tillage, fertilization

Intermediate Treatments Woody release, fertilization, timely and properly

conducted thinnings in some markets

Tree genetics

We haven’t quite found this gene yet!

Tree genetics

Until the early 1980’s most seedlings planted in the South were unimproved

Genetics cooperatives focused on increasing growth and disease resistance (particularly fusiform rust)

By the late 1980’s most organizations planted 1st generation improved seedlings.

Now, at least 2nd Gen and some 3rd Gen are widely available along with CMP and varietal seedlings

Genetics as an investment enhancer

Advanced genetics seedlings = $5-$10

more/thousand

1st gen = 9%-17% green

weight gain

Example: Planting 600 per acre with advanced genetics =

only $3-5/acre more cost

Produces an additional 10 to 25 tons/ac! Some of it more valuable solid wood

Genetics- further benefits

First Generation Gains Incidence of disease is lower by about ½ Incidence of sweep, fork, etc. lower by about 25%

Additional gains for 2nd Gen based on progeny tests were 10-15% more again with only small increases in price

CMP seedlings are more expensive, but gains from having both parents known are large, particularly for good form traits

Have you figured out the math yet?

While a rigorous analysis of ROI could be made, this one is so obviously good that it is not needed.

Clones a.k.a. Varietals

When perfected, clonal seedlings have the ability to: significantly increase volume, decrease stand variability, and produce a stand of trees that virtually all qualify for solid

wood The stem quality and pruning characteristics of

selected clones are outstanding

Major obstacle right now for most landowners is the upfront price.

Varietal L3514 O3621 O3621 Q3802 L3514 Q3802 Q7766 Q7766 Q7766 Avg

Location-Age GA-6 GA-6 FL-8 FL-8 FL-8 LA-6 NC-5 NC-5 NC-5 Gain

Survival 7.0 8.0 7.7 11.4 11.4 10.0 9.3 10.4 4.7 8.9

Height 4.0 0.0 7.4 9.6 -2.6 25.0 26.0 22.2 24.7 12.9

Dbh 6.0 7.0 4.5 1.7 -1.3 -6.0 20.5 6.6 15.1 6.0

D2H (ft3/ac) 1.0 1.0 29.8 23.8 12.4 31.0 79.0 74.3 27.8 31.1

STP 28.0 28.0 48.3 46.5 39.2 24.0 13.9 9.8 7.5 27.2

Percent change for varietals vs. 2nd Gen open pollinated for different tests.

Stem Quality is a Big Factor

2nd Gen Varietal

Yes, but are they a good investment?

The biological growth and form improvement of varietals are obtainable with pines and have been obtained in S. America and other places with different species

Especially where solid wood prices are high and can be counted on to be high in 15-25 years even the high prices of varietals may be justified

For organizations that will own a stand for only a portion of even a short rotation the investment is not necessarily bad, but more uncertain

Answer? Maybe.

Ways to Increase Investment Returns (without the need for a clairvoyant)

Improved tree genetics

Regeneration treatments Chemical site preparation, herbaceous weed control,

tillage, fertilization

Intermediate Treatments woody release, fertilization, timely and properly

conducted thinnings in some markets

Site Preparation

Prior to the 1980’s site preparation in the South was typically minimal mechanical such as Chopping or more intensive involving tillage such as bedding or disking

Tillage helped survival, but neither did NOT control hardwood competition – set it back a few years

Research in the 1980’s showed the negative impacts of even a few hardwoods in pine stands

Chemical site preparation did a better job of controlling hardwoods at a lower price

Fayette Study

Mechanical vs. Chemical – a closer look

Site: • Avg site quality (S.I. = 62) Stumpage prices: • PW=$8, CNS=$15, SAW=$27 Seedling genetics: • 2nd gen OP Treatments: • Avg. level of hardwood for

mechanical • Low level of hardwood for chemical • 2 thins

• Mechanical @ 15 & 22 • Chemical @ 13 & 20

ROI • For timber investment alone

– no land

• Real, no inflation of prices or costs

Mechanical 8.8%

Chemical 9.8%

Comparison of Yields

Total Tons Site Index 62

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

5 7 9 11 13 15 17 19 21 23 25 27 29 31

Age

Grn

Wt (

ton

Chop,BurnChemSP

Herbaceous Weed Control (HWC)

An optional treatment that we did not have chemicals to perform prior to mid 1980’s

Herbaceous weed control

Is not a great investment on most mechanical siteprep stands without tillage since hardwoods are released

A great combination with chemical site preparation since site preparation removes hardwood competition and HWC removes herbaceous competition Often mixed with fall chemical site preparation now to

avoid an extra application charge

• Chemical Site Prep • Bedding • HWC • May 1st Growing

Season

• Mechanical Site Prep • Bedded • No HWC • November after 1st

GS

No HWC; Didn’t Make it; July 1st Growing Season

COMP Study Results – Age 15 from Miller et al. (2003)

Conversion: 100ft3 is about 3 tons so a gain of 1000 ft3=30 additional tons

Modeling Effects of HWC

Research finding: A 51% volume gain 9 years after 1 year of banded HWC treatment! Fact: Many (most) growth and yield models do not address HWC response (!!)AND/OR users simply increase the site index to attempt to take HWC into account

Bad voodoo from simply ‘adjusting S.I.’!

The response to HWC is not a uniform change in height over time, therefore increasing site index

results in very poor estimates, especially at merchantable age years.

COMP Study HWC Effect on Height

Returns with HWC (estimated the right way)

Add a $35/ac HWC treatment to each 2 thin management regime from previous example

Now, Chem + HWC ROI = 9.8% Thin @11*,18 Now, Mech + HWC ROI = 8.7% Thin @ 14,21 Note: Though the ROI values did not change much at all, the Chem+HWC provides greater absolute returns since

more money was invested and ROI was same.

*Thinning at 11 on an average site was not possible without HWC

Ways to Increase Investment Returns (without the need for a clairvoyant)

Improved tree genetics

Regeneration treatments Chemical site preparation, herbaceous weed control,

tillage, fertilization

Intermediate Treatments woody release, fertilization, timely and properly

conducted thinnings in some markets

Intermediate Treatments as Investments

Thinning Timing affected by competition, density, and site quality

Woody Release

If there are more than 2-3 hardwoods per pine, response will typically be large and concentrated on larger dbh trees

Fertilization

Virtually all sites in SE need fertilization at some age to grow to their potential – price has become key

Thinning is an investment

Especially for first thinnings that is the correct way to think of it even though cash flow is positive because it increases the growth of the remaining trees, leading to more solid wood potential

Caveat: Not true in every market, but in most markets

in South where solid wood is worth multiples of pulpwood

Ensure proper thinning timing

If thinning is not early it increases rotation age

If thinning is too late, crown ratio is lost and,

biologically, stand will grow mostly pulpwood When can we get a first thin done?

Dbh 6.5-7.0 inches and good stocking Dominant height 40-45 ft Basal area per acre 100+

Dbh of Stands very Sensitive to Density

0

2

4

6

8

10

12

14

16

0 5 10 15 20 25

Aver

age

Dbh

(inc

hes)

Age (years)

100 TPA

200 TPA

400 TPA

600 TPA

800 TPA

1000 TPA

The longer stand stays at higher density the longer it takes to grow average tree to solid wood size

Density high, too late to thin

An extreme example, but a tree grown at 200 tpa planted – good dbh growth but not a solid wood tree

How intensive should we thin?

With differences in price of 2:1 expected by a 2nd thin (not necessarily now!) thin as lightly as possible when taking out lower priced product

May thin heavier when taking out a combination of the two

Would say not to thin to basal area 60 on first thin, but to 75 or 80 or even slightly higher on good sites with intensive management

These decisions lead to higher returns

Thinning

In previous example with stumpage prices of PW=$8, CNS=$15 and SAW=$27/ton thinnings always produced higher returns and two thins were always at least slightly better than one thin

If PW=$15 then no thin is as good as 2 thins with the same number planted. With more trees planted it is slightly better than 1 or 2 thins

If the ratio of prices is relatively unchanged: say all 3 products move up or down, the return changes, but the best management does not change much at all

No thin vs 2 thin returns

ROI for no thin in example we have used earlier was 8.1%

ROI for 2 thin management regime was 9.8% 1.7% does not sound like much, but people

refinance their mortgages over less! If had 100 acres and spend $300/ac and held for 30

years making 8.1% vs 9.7% would have $310,000 vs $496,000 Increase is $186,000 Management Matters!

Woody Release

Foresters are very sensitive to planting density Can easily start an argument over whether to plant

475 or 600 (or any other number) per acre We conveniently ignore hardwood competition

though multiple studies have demonstrated that basal area for basal area hardwoods are more competitive with pines than pine density Understory hardwoods and shrub are very competitive

Effects of Hardwood Levels on Pine Merchantable Volume (COMP study)

Conversion: 100ft3 is about 3 tons so a gain of 1000 ft3=30 additional tons

COMP: These treatments are from planting. What about older stands? Two large regional studies and multiple single

location studies indicate that loblolly pine grows an average of 1.4 tons/ac/yr more when released from hardwoods than the check stands Stands were in 2 age groups (5-9 younger and 12-16

older) Over ten years that is 14 or so more tons of wood to

sell Now for the best part…..

Woody release in existing stands

Response to treatment was almost all in larger trees in the stand and resulted in movement into higher value classes sooner (in some cases at all)

For older treated stands within 10 years 100% of the response became chip-n-saw size material

For younger stands within 10 years 77% of the response became chip-n-saw size material (still only 15-19 years old) So got more tons and those tons were worth about

double what they would have been worth – more historically

Example – Return for Woody Release

In previous example with Mechanical site preparation and two thins – ROI 8.8%

Add a release at age 3 to move from average level of hardwood to low level of hardwood at cost of $50/ac

Allows for earlier thins – ROI 10.3% and lowers rotation age by 3 years

Of course to isolate the treatment return we should calculate a marginal rate of return – double digit As costs fall for release chemicals returns look better

Fertilization

Most sites in the South cannot provide nutrition to grow pines at anywhere near their potential

Usually need supplemental feeding at or near crown closure

As we manage more intensively and create and keep heavier, thicker crowns the need is earlier and more important

We have seen organizations fertilize multiple times on previous site index 65 and have 22 year old trees more than 90 ft tall with light hardwood levels

Especially in Coastal Plain Fert grows more wood!

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>15 tons/ac/yr!

Fertilization

Problem with fertilization in terms of investment returns recently has been costs

From 2005 to now prices have been very expensive related to historical prices

Standard treatment 200 lbs N + 25 lbs P cost about $80/ac historically. Over past 6 years has ranged from $125 to over $200/ac

Like woody release, fertilization growth response is highest on largest trees and increases movement to more valuable product classes

Fertilization

Response shows up right away, but decreases after 5-6 years Again, not a response to model using site index gain

Unlike woody release which takes 2-4 years for response to show up, but lasts at least 14 years

Managers have often fertilized following a thinning to put even more of the response on solid wood potential trees Also have to carry the investment fewer years

Fertilization

Assume that we have a stand that is 12 years old and we fertilize it

At age 19, the following values are realized depending on fertilized or not fertilized: Fertilized Value $1291 Not Fertilized Value $1105

Marginal rate of return over the 7 years is based on the incremental value, the cost, and the incremental time

Fertilization

Incremental Value is $186 over 7 years Marginal rates of return for different fert costs:

Cost MROR $80 12.8% $120 6.4% $160 2.2% $200 -1.0%

Does this mean we should not fertilize?

With Capital, same ROI may generate much more income An intensive management regime:

Spend $300+ on regeneration – best O.P seedlings Spend $65 on a second HWC in 2nd Growing Season Fertilize at ages 3, 7, 12, and 18 with DAP, Urea or a

Combination and spend $75, $80, $100, and $120 Thin at age 10, 15, 22 and clearcut at age 30 Have spent $740 by age 18 plus annual taxes and

management fees ROI = 8.3% Is this worthwhile compared to mechanical site prep

and spend no money? Get about same ROI

Intensive vs Non-Intensive (OER)

Both management regimes generate ROI of about 8.25 % or slightly higher

Intensive spends $740 over 18 years and generates $3965 through thins at 10, 15, 22 and final harvest at age 30

Non-intensive spends $185 on site prep and planting and generates $668 through thinnings at age 15 and 22 and $3520 at age 37

So intensive got earlier cash flows and generated slightly less cash, but at an earlier age

The Winner: Intensive vs Non-Intensive? Some depends on investor – if don’t have the

money to invest it doesn’t mater If do have the money to invest – intensive is the

clear winner If you can grow enough tons/acre you can generate

high returns even while spending large sums Have more risk from catastrophe (fire, wind, ice, etc.) Actually have less risk from planting failure

What can we count on to boost investment returns?

Biological growth and faster product transfer from silvicultural treatments that have long history of increasing production

Management Matters! Thin when you should, treat 1st thins especially as investments, oversee logging to insure the right trees are removed AND the right trees stay

No control over stumpage prices or land appreciation, but realize these have a history of volatility

QUESTIONS? Comments?

Barry Shiver ForesTech International

bshiver@forestech.us www.forestech.us