Buying Land

Investing in Timber and Forests: Are You Guessing or Making Decisions?

Investing in Timber and Forests: Are You Guessing or Making Decisions?

We don’t succeed in business or investing by falling in love with our own ideas. We profit through continuously and doggedly comparing our prior decisions to actual results in order to calibrate our “model” of how the world works and improve future decisions. This model includes frameworks to organize data and structure our thinking.

In forest finance, we apply specific tools to make the “best” investment decisions possible. Investing, whether in trees or Turkish bonds, requires a “probabilistic” mindset that acknowledges uncertainties. And, over time, this type of systematic decision-making beats gut feelings or investment tips from Cousin Eddie.

Forest Finance Framework

The application of finance in forestry addresses three sets of investment questions related to how we deploy and allocate capital:

  1. First, how do we identify, screen and value timberland acquisitions or forest management decisions? This set of questions deals with the “investment decision” and includes proper valuation (appraisals) and the ranking of different forest management plans, such as comparisons of seedling types, thinning strategies and fertilizer applications.
  2. Second, how do we pay for this investment? This deals with the “financing decision” and addresses the relative advantages and disadvantages of applying debt, paying with cash, or issuing equity. This often includes conversations with our accountant or banker.
  3. Third, how and when is the appropriate time to divest – sell – the property, or to harvest timber to maximize profits? We refer to this set of questions as the “exit decision”, which includes how to evaluate “woods run” or “special” prices in a given local market.

The price of an asset can vary from its fundamental value over time because of uncertainty associated with future cash flows or from different investment theses and priorities. In forestry, financial analysis supports our efforts to estimate this value while making decisions related to the optimal (economic) rotation, when to harvest, how to manage (silvicultural), and the buying and selling of timberlands.

This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional. LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.

About the author

Brooks Mendell, Ph.D.

Brooks Mendell, Ph.D. is President and Founder of Forisk Consulting, a forest industry, timber REIT, bioenergy and timber market research firm. Dr. Mendell has over fifteen years of operating, research, and consulting experience in forest business and finance. Mendell has published over sixty articles and two books on topics related to timber and timberland REITs and markets, forest business management and operations, and communication skills.

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