CHAPTER EIGHT

UNDERSTANDING AND MANAGING RISKS

What About Risks?

Woodland investments are not without risks, some of which are controllable while others relate to influences within the natural environment. Clearly, risks can potentially cause a partial or total loss of an investment. As with any other business decision, woodland owners must understand what those risks are, and make individual decisions as to the amount of risk they are personally willing to accept. Many risks can be minimized through prudent planning and management practices.

When it comes to risk assessments for forestry activities, there are no readily defined "beta factors" that apply. Far too many variables can affect a woodland investment to establish an objective, quantifiable risk factor that applies in every situation. Decisions about risk must be considered from a somewhat subjective perspective. However, it is possible to make some assumptions and define categories of risks from which generalizations about probabilities for loss can be made.

Since you are taking the time to read this publication, we will assume that you are a prudent woodland owner. It can also be assumed that you will search out and apply the professional and technical advice found at Tennessee Timber Consultants with respect to managing your investment. Therefore, you won't be your own worst enemy by carrying out ill-conceived management activities. As a result, the only risks that should apply are those, which are normally and reasonably beyond your direct control.

The Four Risk Categories

Now that we have established that you are a wise manager, it is possible to define four broad risk categories. While all four categories apply to every woodland, the degree to which they do so can vary significantly depending on the nature of each stand being managed through time. Under each category are some of the specific types of risks that are commonly encountered.

CATEGORY 1. ENVIRONMENTAL RISKS. Natural factors related to weather and biologic influences affecting forests.

Storms: wind/snow/ice. Severe windstorms can cause partial or total damage to forests through breaking and uprooting trees, and sometimes cause a problem known as ring shake. The latter problem is a phenomenon in which permanent separation occurs between the concentric growth rings within the trunks of trees that, of course, ruins the tree for lumber production. Snow and ice storms can bend, break, and uproot trees. Pines are normally more susceptible to these storms than are hardwoods. Snow and ice damage can damage or destroy entire stands.

Climate. Climates change gradually over a period of centuries or even thousands of years. Are greenhouse gases causing a rapid rise in annual temperatures? Will "global warming" actually occur? Even the experts are confounded by the almost limitless factors that affect climatic change. However, there can be no doubt that Tennessee's forests will be dramatically impacted should global warming occur.

A more tangible effect of climate comes into play if you plan to plant trees. Determining those species of trees that are suitable for your local climate is an early consideration. Clearly, Tennessee's climate varies significantly from the mountaintops in the eastern portion of our State to the Mississippi River floodplain in the west. White pine, for example, will generally do well in the mountains, but are ill suited for planting in the relatively hot, dry uplands of western Tennessee.

Another very important tree planting consideration is locating tree seedlings with the proper "seed source." That is, significant genetic variations occur within a single tree species due to the long-term influences of local climates. For example, loblolly pines native to Florida have, over thousands of years, become adapted to that region's year-round warm climate. Similarly, loblolly pines native to the northern range of the species, such as southern Tennessee, have adapted to a different, much colder, environment. Indeed, genetic differences occur not only from north to south, but also from east to west. While seed source differences may appear subtle, they are, never the less, extremely important factors affecting seedling survival and long term stand development. Woodland owners should seek the advice of a professional forester to locate nurseries producing trees with the proper seed source for their area.

Diseases. With only a few notable exceptions, tree diseases rarely pose a serious threat to forests. Everyone knows the history of the Chestnut Blight that virtually eradicated American chestnuts during the 1930's. Dutch Elm disease is another widespread problem that has gained a lot of media exposure.

Virtually all species of trees have certain diseases that affect their growth or condition. Productive forests, however, normally have few disease problems.

Insects. Many insects inhabit trees, although few are destructive. Indeed, insect pests rarely kill healthy trees on a large scale, although outbreaks do occasionally occur which cause widespread losses. There are far too many species of insects that affect forests to discuss them all within the limitations of this publication, so we will only cover a few of the classics. The most damaging insects fall into the general categories of wood borers and defoliators.

By far the most devastating wood boring insect is the Southern Pine Beetle. This pest can completely destroy a forest of loblolly, shortleaf, or Virginia pines over the course of only a few weeks. Similar pine borers cause the deaths of trees on a smaller scale. Oak and other hardwood borers cause significant financial damage to individual trees, but rarely kill the trees themselves. However, the collective economic loss from hardwood borers over a wide area can be significant.

Many species of caterpillars defoliate entire trees, and at times, virtually entire stands of trees. Normally, healthy trees can withstand one or two years in a row of defoliation, and serious outbreaks of defoliating insects rarely last for the third consecutive year. A new pest, the Gypsy Moth, has changed all of the rules. This pest, which was introduced into the United States, has been wreaking havoc in several New England and Mid-Atlantic States for the past several years. Gypsy Moths favor old oak stands, and stay in the same stands year after year until most, if not all of the trees are dead. This pest is already moving into eastern Tennessee. It is much too early to estimate the damage the Gypsy Moth will impose on Tennessee's forests.

At Tennessee Timber Consultants, we recognize that thrifty, well-managed forest is much less likely to suffer widespread insect damage than one that is old and decadent. Basically, healthy trees can withstand damage and rebound quicker than unhealthy trees.

Beavers and Flooding. Most important commercial tree species cannot long withstand ponded water during the growing season. The longer that water remains on a stand during the growing season, the greater the likelihood that damage and tree mortality will occur. Annual flood events occurring for brief periods are generally no threat to trees, with the occasional exception of newly planted seedlings. Indeed, annual flooding is part of a natural annual cycle that is important for the establishment and maintenance of wetland forests.

Beaver populations are continuing to build throughout Tennessee, with the greatest concentration being in the western region of the State. Beaver ponds will often reach many acres in size unless measures are taken to control them.

Stream blockages often cause year round flooding, and again, a single blockage can affect many acres. Efforts to remove these blockages are absolutely necessary to prevent the loss of valuable timber.

Property owners must become aware of certain provisions of Section 404 of the Clean Water Act that affect, and limit, the kind of work that can be done in forested wetlands. Violations of these provisions can, and often have, resulted in hefty fines. Generally, beaver control, and the removal of minor stream blockages do not require government permits before the work can be conducted. However, it would be wise that you check with the Division of Forestry, Tennessee Department of Environment and Conservation, USDA Natural Resources Conservation Service (NRCS), or Army Corps of Engineers prior to carrying out flood control activities.

Drought. Drought, or more specifically a lack of available ground moisture, affects tree growth and survival. Tree seedlings are especially susceptible to a drought during the same year in which they are planted. As trees grow older, however, they become more tolerant of dry conditions even though growth rates can be seriously affected. Very old, declining trees often die during periods of drought.

Certainly, Tennessee does not experience a drought every year, and their occurrence is unpredictable. The last drought period that seriously affected woodlands in the State was during the mid 1980's.

Lightning. You will very likely suffer the loss of some trees to lightning. Throughout the life of a stand, individual, or small groups of trees will be killed or seriously damaged by lightning strikes. Potential lightning losses may become the factor that triggers the liquidation of a very valuable stand where the loss of a single individual would be financially significant.

Age. Old trees, like elderly people, are far more susceptible to dying or becoming permanently damaged from outside influences than are younger, more vigorous individuals. Mature trees are invariably more valuable than young trees, but allowing stands of trees to develop into great ages will bring about the loss of many, many individuals from biologic or environmental influences. As a general rule, trees live longer on good sites than they do on poor sites, which is another reason why matching the proper species of trees to the proper site is extremely important.

Wildlife. Newly planted hardwood and pine seedlings are vulnerable to damage from browsing deer. In some cases, wide spread damage has been known to occur. Rabbits likewise are known to damage newly planted seedlings. Rodents, including squirrels, can cause extensive problems by digging up recently planted acorns and walnuts, while prairie voles girdle and kill fairly large trees in planted stands.

CATEGORY 2. MANAGEMENT COMPLEXITIES. Management practices which, due to the requirements of exact timing, availability of specialized equipment, or exacting or conflicting management prescriptions, could easily lead to errors of application or omission on the part of property owners or their agents.

Specialty Stands. Christmas trees, paulownia, walnut, or hardwood plantations require very exacting management applications. Seedling selection, planting standards, competing vegetation control, pruning, and proper marketing all must be performed in exactly the right way at exactly the right times. The window of opportunity for performing each of these tasks properly is not very wide. Many times, developing sizable specialty stands is the equivalent of opening and operating a small business.

Specialty stands mandate that investors spend a lot of time studying stacks of literature. As a case in point, should you use herbicides? Which ones? What equipment is needed? When should you apply them? At what rates? What are the safety precautions? What do they cost? Will you need an applicator's license to purchase and apply them? Can you apply them yourself, or do you need to hire specialists to do it? Where do you find specialists? What will they charge? If you do anything wrong, you could kill your trees. This is only one example of the kind of information needed to successfully manage specialty stands.

Once you have the knowledge, then you must apply it. Do you have the time, capital, and energy to stay on top of your project for several years? Good intentions won't get it done. Many woodland owners start these projects and give up after only a year or two. While the rewards can admittedly be great, talk with us so that you will be absolutely certain that you know what you are getting yourself into before you start.

Complex management requirements require sustained commitment to studying and hard work. Sure, we already determined that you are a wise and prudent manager. But, mistakes happen.

Quick Cash. Timber investments are long term. Even prudent investors are often tempted to sell trees long before they have reached their peak values. In almost every case, selling trees too soon will drastically reduce returns on investment.

In a sense, woodland owners often shoot themselves in the foot; "You know honey, that little red sports car sure is pretty, and I think I know how I can come up with the money to pay for it." Go ahead and buy it if you want, but if you cut your timber too soon, the cost of that car is going to be a lot higher than the sticker price on the window.

Of course financial emergencies happen to almost everyone, and woodland owners sometimes have no choice other than to access their timber assets. However, if their woodlands portfolio is structured properly, emergencies need not necessarily totally devastate their entire woodland investment. When our foresters are provided with concrete facts about specific short-term cash requirements, they can adapt timber management strategies to mitigate significant long-term financial losses.

Thinning stands too heavily is another temptation. A sufficient amount of wood must be available in a thinning for a buyer to economically harvest the tract. Thinnings have often been carried out which included the sale of potentially high value crop trees simply in order to attract a buyer. Very simply, from a longer-term perspective, such thinnings should have been delayed until a proper commercial thinning was appropriate.

Well-managed stands of high-quality, economically mature trees are worth a huge amount of money. They can sell for thousands of dollars per acre. Indeed, individual trees have been known to bring thousands of dollars. But that kind of income does not come about when woodland owners are consistently grasping for quick cash.

Grazing Livestock. If you raise livestock on your property this is very important. In effect, livestock and forests are not compatible. Over a period of time, domestic grazing animals will cause serious damage, especially in hardwood forests. Cattle, hogs, goats, horses, and whatever else grazes on tree seedlings, and, over the years, tree growth can be reduced due to soil compaction. There also seems to be a direct correlation between grazing animals and the occurrence of "mineral streak" in wood that significantly reduces the quality and value of hardwood trees.

Livestock can ruin a young planted stand. Not only do the animals graze on the seedlings, but also they often step on and break the small trees. Sensitive woodlands should always be protected from grazing livestock.

CATEGORY 3. MARKET TRENDS. Supply and demand factors in the marketplace influencing the value of wood products.

The Only Thing That Won't Change is Change. The wood of dogwood trees has very little value now, but at one time this hard, durable wood was in great demand for the manufacture of shuttle blocks used in the textile industry. Persimmon has long been used for manufacturing highly valued golf club heads, but new metal and graphite technologies are rapidly making persimmon golf clubs a relic of the past. What will the proliferation of metal baseball bats do to the demand for ash? These are a few of the many wood products that have felt the dramatic effects of alternative technologies, but there are many, many similar examples.

The effects of supply and demand have already been discussed. It bears repeating, however, that these factors over the long and short term will certainly affect investment returns.

Seemingly unrelated goings on in our society and national economies can affect timber values. What about the demand for Tennessee "sourmash," for example? If America's tastes for spirits decline, then so will distillers' needs for white oak barrels. Barrel stave manufacturers pay a high price for good Tennessee white oak.

Wood is one of our most basic and valuable natural resources. The use of wood products will certainly continue to change over the years. But woodland owners can rest assured that their renewable resource will still be in demand long after the last drop of oil is pumped from the ground.

CATEGORY 4. HUMAN INTERVENTION. Activities of individuals not directly controlled by a property owner that threaten woodland investments.

Wildfires. When thinking about risks to woodlands, the threat of forest fires is often on the top of people's lists. In Tennessee, fires are not caused by lightning or other natural events. Over 95% are caused by people. Careless debris burning causes about half the fires, while arson fires constitute the majority of the remaining causes.

However, statistics for Tennessee show that the average woodland acre burns once every 300 years. That is not to say that fire is not a damaging influence or that it should be totally discounted. Fire is certainly still a severe risk in many locations. It is important that owners discuss wildfire probabilities in their area with the Tennessee Division of Forestry.

The Tennessee Department of Agriculture's, Division of Forestry provides forest fire control services statewide. In addition, local paid and volunteer fire departments also take action on forest and brush fires in most areas of the State.

It could be prudent to install firebreaks or take other actions to minimize the risk from a potentially destructive fire. Management decisions such as interspersing hardwood stands throughout large stands of pine makes wildfire control simpler should a fire occur. Overall though, a wildfire threat is not a limitation for making sound forestry investments for the great majority of Tennessee's woodland owners.

Harvesting Damage. Care must be taken during thinnings to minimize damage to the remaining trees. It is important to understand that some damage will occur even with the very best loggers. A common occurrence is for heavy equipment operating in the forest to scrape against crop trees causing permanent injury. However, properly planning and conducting a timber sale can minimize equipment damage. Starting harvesting operations at the furthermost point away from a log concentration site is one way of reducing damage.

The act of felling trees is another way in which remaining crop trees can be damaged. Tree tops can be broken, and cut trees sometimes slide down the sides of standing trees as they fall.

Timber sale contracts should include a provision in which loggers are required to use reasonable care in protecting uncut trees. Logging operations should be monitored frequently to insure compliance with harvesting provisions.

Timber Theft and Timber Trespass. Unfortunately, it seems that if an item has worth, then someone is out there looking for an opportunity to steal it. Though rare, timber theft does happen from time to time across Tennessee.

High value individual trees such as walnut and paulownia that can be quickly cut and spirited away are the most frequent targets of tree rustlers. Where theft occurs, Federal tax laws indicate that owners may qualify for a casualty loss deduction.

Though again a rare occurrence, loggers have knowingly and intentionally cut timber from the property of another. In such cases, Tennessee law provides for civil liabilities to be paid to the property owner in the amount of treble the current market value of the harvested trees.

More frequently, loggers inadvertently cut timber belonging to another (trespass) because the property lines were poorly or incorrectly marked. In those cases, Tennessee law requires that the associated civil liability be double the current market value of the harvested timber.

In the case of any of the above situations, woodland owners should contact us at Tennessee Timber Consultants to appraise the value of the harvested trees. Even though timber theft or trespass rarely happens, the fact that these laws exist points out the importance of keeping property lines clearly marked or otherwise designated.

Societal Influences and Government Regulations. Our society has a growing interest in, and concern for, protecting environmental values. But, America still demands vast quantities of wood products. Clean water and air, protecting endangered species and wetlands, visual corridors, and old growth forests are but a few of the on-going public commentaries pertaining to regulating woodland management. During the past twenty years or so, scrutiny of timber management activities has been directed towards publicly owned lands. Increasingly though, environmental issues are tending to focus more attention towards conflicts between private property rights versus the public's interests.

Unquestionably, a well-managed public or private forest can and will provide many environmental benefits. A poorly-managed forest can cause significant environmental harm. The continuing battles pitting environmental activists against private landowners and wood products interests most often center around the definitions of good versus bad management. Points of dissension range from the vitally important to the inane, but seem destined to continue.

We must get past the "Voodoo" and "Who Do" of the environmental struggles portrayed in the media. It is also important to remember that woodland owners have legitimate economic interests, but also have both innate and legislated societal responsibilities. Public perceptions of private woodland owners and managers will ultimately determine how many societal responsibilities remain innate, and how many become legislated.

One concept often heard is the belief that a goal to maximize economic returns from woodlands is, by definition, incompatible with sustaining or enriching environmental quality. Economic theory tells us that the greater the value of a thing, the more willing we become to tend and protect the thing. How can it be said then, that managing for long term economic gains necessarily poses an environmental threat? Indeed, increasing the value of private woodlands may be the best insurance we have to assure the future of Tennessee's forests.

Levels of Risk

There is no such animal as a no risk investment, so it must be assumed that some probability for loss is associated with each of the four, primary risk categories. Assessing those probabilities must begin with obtaining all of the facts about each woodland investment option from experts in the forestry community. So, a risk assessment system can be helpful in evaluating and comparing these options provided it is based upon the knowledge and opinions of experienced professionals who are familiar with local conditions.

A suggested, straightforward process for evaluating risks involves simply classifying probabilities for losses into four comparative levels; Low, Medium, High, and Very High. While this is admittedly a process based upon many judgment calls, it does provide woodland owners with a systematic means of thinking through their investments, and comparing risks among various options. But, a further definition of each level is necessary.

Low. Improbable. Circumstances under which significant investment losses for the great majority of woodland owners are unlikely to occur.

Medium. Possible. Circumstances under which some woodland owners will incur significant investment losses.

High. Probable. Circumstances under which many woodland owners are likely to experience significant financial losses.

Very High. Very probable. Circumstances under which the majority of woodland owners routinely sustain significant financial losses.

Applying the Risk Assessment System

Using this system, the table below compares levels of risk for each of the four risk categories under three very different woodland investments given average Tennessee conditions. The three comparative examples are a stand of native hardwoods, a planted stand of loblolly pine, and a Virginia pine Christmas tree plantation.

RISK CATEGORY	Hardwoods	Loblolly	Christmas Trees
Environmental	Low	Medium	Medium
Management Complexities	Low	Medium	Very High
Market Trends	Low	Low	Very High
Human Intervention	Low	Low	Medium

Clearly, by the above example, risks associated with producing Virginia pine Christmas trees are far greater than those relating to growing either native hardwoods, or loblolly pine plantations. Can a practical average be determined from the four categories and levels of risk? Only in a very general sense. However, a Very High risk rating under any one of the four basic categories could make all of the difference in the world to an investor.

Whether woodland investments are any more or less risky than alternative investments such as stocks, bonds, or real estate is impossible to say with certainty. That is a determination only you can make provided you are armed with all of the facts. However, thousands of Tennessee property owners make woodland investments each year. Most have considered the risks that could affect their investments, and determined that the potential rewards far outweighed any risks.