CHAPTER ONE

YOUR LAND, YOUR CHOICES AND YOUR OPPORTUNITIES

Basic Factors Affecting Total Woodland Returns

Your woodlands provide many immediate and long-term values to you, your family, and society as a whole. Tending your forest prudently and responsibly can be a challenging and rewarding experience. The demand for wood products from Tennessee's woodlands has a long history, and the future for wise investors is bright.

Just as a factory has a finite production capacity, so too your forest has a finite and measurable capacity for wood production. Many variables apply that will be discussed in detail later, but the need to utilize the inherent capabilities of the land to maximize the production of the right kind of wood on your land is fundamental to acquiring top dollar returns from your woodlands.

Successful businesses, large and small, possess first order marketing skills and understand the importance of identifying and targeting clients in highly competitive business environments. In like manner, successful woodland owners must either acquire the knowledge to market their timber for the highest possible price, or else learn where to get expert marketing assistance.

"Production and marketing" is virtually the name of the game in maximizing economic returns from woodland investments. To be successful in your forest enterprise you must learn to apply the many basic rules of the game.

The Concept of Woodlands Portfolio Management

A cartoon circulated several years ago in which a large, obviously affluent gentleman was walking along a wooded path with a small boy. In the caption the gentleman was telling the boy, "You know, it's nice to know about trees, but nobody ever made any real money by knowing about trees." Obviously that fellow knew quite a bit about investments and the value of real money, but what he did not know anything about... was trees. You, as a woodland owner with economic expectations in mind, must be more knowledgeable than this cartoon character if you hope to attain high returns on your forestry investments.

Successfully tending your personal portfolio involves managing various individual investment accounts, (stocks, bonds, mutual funds, real estate, or whatever), in order to attain your goal of maximizing income. Investments are selected and realistic objectives are set based upon some prior knowledge of the opportunities, costs and risks involved. Wise investors opt for a diversified portfolio in which they place their money in several, unrelated investments to maximize income while distributing risk, as opposed to keeping all of their eggs in one basket.

A wooded property of any meaningful size, like your personal portfolio, must also have an overall management goal with realistic objectives based upon a thorough understanding of various investment alternatives, costs and risks. Simply stated, you've got to know what you've got, exactly what you want, and map out a plan to get there. Only one thing is more important than planning….taking action.

Forests aren't just "woods." To the experienced, trained eye, virtually all private woodlands have "one of a kind" characteristics. In fact, considerable variations in forest conditions are commonly noted on relatively small areas within one ownership. A properly structured woodlands portfolio identifies those individual forested areas throughout the property, each of which is managed as a separate account offering a unique investment opportunity. This naturally diversified woodland portfolio, when displayed on a map showing each unique area, resembles a patchwork quilt. To carry the same thought further, each area contains hundreds, or perhaps thousands of individual assets... your trees. As a woodland investor, you won't make any real money unless you "know about trees."

Commonalties of Woodland Ownership

Typically, woodland owners have more than one objective for ownership, but somewhere within their list of priorities is an economic interest. Growing and selling wood products is a business. But, few landowners have the interest, expertise, or time to develop the full investment potential of forested property, or optimize returns from the sale of forest products.

Regardless of the investment or business venture involved, certain fundamental financial principles apply. A working knowledge of the investment or business is basic to decision making. Forests and trees are too often thought of in a warm, rustic, "out-doorsy" manner, rather than being considered in the context of valuable assets. If you intend to sell timber, then it is crucial that you think of yourself as being in the timber business.

Tennessee's forests can produce desirable investment returns, as well as many personal, social and environmental benefits. But remember that "there aren't any free lunches" out there in the woods. You simply cannot cut what you want, when you want forever, and never expect to pay a bill. Neither can you "trust to luck" and hope to get "top dollar" when you sell timber. Poor financial planning, coupled with naive timber sales procedures will cost you many, many thousands of dollars!

By growing timber, you are preparing products to be sold in a fast-paced, highly competitive, very specialized market. America's wood products industry is a complex, sophisticated, multi-billion dollar, international business that includes several Fortune 500 companies. While local loggers and sawmill owners may not have the stature of a Georgia Pacific, rest assured that they view their enterprise strictly as a business. Woodland owners must be very well prepared to do business in a notoriously merciless business environment.

Still, the common view held among many, if not most, woodland owners is that forest income is periodic free money, and all they have to do is let their timber grow until some timber buyer shows up on their doorstep. Then a deal is struck, often on a handshake, and at that point the purchaser becomes the timber owner and property manager with a chainsaw.

Timber buyers are experienced, hard-nosed businessmen who are skilled in "the art of the deal." They use the same principles as any other businessman: "buy low" and operate as cheaply and efficiently as possible. So, typically a buyer will try to purchase a tract of timber at as low a price as possible. Remember too, the timber buyer’s only purpose in life is to ensure a constant flow of low cost logs to their mill. Unless contract restrictions otherwise apply, trees are almost always harvested solely to best meet the immediate economic needs of the buyer. Whether or not those same trees were earning the property owner a very nice annual rate of return, or were poised to gain significant value in only a few short years is not important to most buyers. Whether the trees still standing following the harvest have no financial future is irrelevant. The future economic value of that woodland over the long- or short-term is not important to most buyers. Their job is feeding logs into the mill today.

Through ignorance or indifference, woodland owners very often abdicate "management" responsibility to timber buyers and loggers, and sell their timber for only a fraction of its true value. Even though there is no hard data to support the claim, at least one University of Tennessee forestry professor agrees that this uninformed, short-sighted management, harvesting, and sales process costs woodland owners far more in lost income than all of the losses from wildfires, storms, insects, and tree diseases combined.