Pine Plantation Investment Returns

Transcription

1 Pine Plantation Investment Returns 4 State Forestry on the Grow Conference Idabel, OK 2012 FORES ECH Barry Shiver bshiver@forestech.us

2 Where do investment returns come from? Land Price Appreciation Stumpage Price Changes Biological Growth Product Transfer

3 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?

4 but not always possible

5 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

6 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

7 Tree genetics We haven t quite found this gene yet!

8 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 1 st generation improved seedlings. Now, at least 2 nd Gen and some 3 rd Gen are widely available along with CMP and varietal seedlings

9 Genetics as an investment enhancer Advanced genetics seedlings = $5-$10 more/thousand 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 1 st gen = 9%-17% green weight gain

10 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 2 nd 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

11 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.

12 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.

13 Percent change for varietals vs. 2 nd Gen open pollinated for different tests. 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 Height Dbh D 2 H (ft 3 /ac) STP

14 Stem Quality is a Big Factor 2 nd Gen Varietal

15 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 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.

16 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

17 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

18 Fayette Study

19 Mechanical vs. Chemical a closer look Site: Avg site quality (S.I. = 62) Stumpage prices: PW=$8, CNS=$15, SAW=$27 Seedling genetics: 2 nd gen OP Treatments: Avg. level of hardwood for mechanical Low level of hardwood for chemical 2 thins 15 & & 20 ROI For timber investment alone no land Real, no inflation of prices or costs Mechanical 8.8% Chemical 9.8%

20 Comparison of Yields Total Tons Site Index Chop,Burn ChemSP Grn Wt (ton Age

21 Herbaceous Weed Control (HWC) An optional treatment that we did not have chemicals to perform prior to mid 1980 s

22 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

23 Mechanical Site Prep Bedded No HWC November after 1 st GS Chemical Site Prep Bedding HWC May 1 st Growing Season

24 No HWC; Didn t Make it; July 1 st Growing Season

25 COMP Study Results Age 15 from Miller et al. (2003) Conversion: 100ft 3 is about 3 tons so a gain of 1000 ft 3 =30 additional tons

26 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

27 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.

28 COMP Study HWC Effect on Height

29 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% *,18 Now, Mech + HWC ROI = 8.7% 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

30 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

31 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

32 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

33 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 inches and good stocking Dominant height ft Basal area per acre 100 +

34 Dbh of Stands very Sensitive to Density The longer stand stays at higher density the longer it takes to grow average tree to solid wood size Average Dbh (inches) TPA 200 TPA 400 TPA 600 TPA 800 TPA 1000 TPA Age (years)

35 Density high, too late to thin

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

37 How intensive should we thin? With differences in price of 2:1 expected by a 2 nd 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

38 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

39 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!

40 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

41 Effects of Hardwood Levels on Pine Merchantable Volume (COMP study) Conversion: 100ft 3 is about 3 tons so a gain of 1000 ft 3 =30 additional tons

42 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 older) Over ten years that is 14 or so more tons of wood to sell Now for the best part..

43 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 years old) So got more tons and those tons were worth about double what they would have been worth more historically

44 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

45 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

46 Especially in Coastal Plain Fert grows more wood! GN WEIGHT/ACRE (TONS) Coastal Plain Piedmont >15 tons/ac/yr! CONTROL HERB FERT HERB/FERT

47 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

48 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

49 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

50 Fertilization Incremental Value is $186 over 7 years Marginal rates of return for different fert costs: Cost MROR $ % $ % $ % $ % Does this mean we should not fertilize?

51 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 2 nd 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

52 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

53 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

54 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 1 st 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

55 QUESTIONS? Comments? Barry Shiver ForesTech International