Logger Equity and Forest Operations

Transcription

1 Logger Equity and Forest Operations Investments in Logging Businesses S. Bick Northeast Forests, LLC FRA February 2015 Meeting Brewer, ME

2 Business Equity & Why it Matters Running on Equity? PATH 2.0 Financial Calculations Understanding Logging Investments Productivity Ranges Implications for Forest Owners & Managers

3 Forester to Logger: You need a bigger feller-buncher. Logger to Forester: I need a bigger income.

4 Running on Equity

5 Equity What I ve seen happen lately, and its partly the mills they want to continue making record profit they ve asked the loggers over the past three years to reach into equity to produce their wood.

6 THEME ONE - Sustaining Productive Forest Communities: Balancing Ecological, Social, and Economic Considerations

7 ifor Team Hard Skills Soft Skills Unskilled

8 Study Goal #3: Calibrate a recently developed harvest planning model called PATH

9 What is Equity? The value of the portion of business assets that the logger owns outright Equity is fluid depreciation (loss of value) occurs every time equipment is used Depreciation must be recovered before a return on investment can be realized Unrecovered depreciation = equity lost forever

10 Depreciation 2 types Accounting to minimizes taxes Wearing out equipment

11 Shutdown Rule Theory A firm will shutdown production when the sale of goods or services cannot cover the variable cost of production. In the short run, as long as variable costs are covered, the firm loses less money by operating than by shutting down Practice Loggers have many reasons for operating as long as variable costs are met Depreciation is a variable cost and must be recovered for continued operations Lost equity through unrecovered depreciation removes any incentive to replace worn-out equipment

12 Lost Equity Unrecovered depreciation occurs when a logger works for rates that are insufficient to cover all costs Equity lost to unrecovered depreciation is easily overlooked because cash flows may remain positive Buying a job

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14 Productivity is the Key to Contract Logging Hiesl & Benjamin Pub Provides cycle time and productivity equations for various pieces of logging equipment An excellent resource to use in building a productivity index!

15 General WTH Logging Productivity Index Built from Hiesl & Benjamin Equations A value of 1 represents average conditions Other values are multiples or fractions of the average conditions, showing the effort needed in machine hours to equal average production A value of 0.5 is half as hard as average; a value of 2.0 is twice as hard as average

16 Example WTH Productivity index for Northern New York With skidding distances up to one mile 3-4 fold range in productivity levels Greatest increase in machine hours is in skidding Skidding conditions in northern forest region of NY, VT & NH considerably longer than in many other areas

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18 Logging Productivity Spectrum Notes

19 Lost Equity Example Small Mechanized Crew Site 1 - average conditions 40 day job Average 1 load sawlogs, 2 loads pulpwood per day Modestly profitable job; with ROI of 5.1% Site 2 similar conditions, but skidding distance increased by 50%; prices same as Site 1 40 day job Average 1 load sawlogs, 2 loads pulpwood per day PMH for skidder increases by 36% ROI = -29.6%

20 This money isn t falling from the sky it s evaporating! (Especially when fuel was $4 per gallon)

21 So what? If a logger will is willing to produce at a given rate, isn t that all that matter? This is a poor business strategy Falls short of sustainability standards Production logging price schedules that are insufficiently flexible to reflect the wide ranges of productivity on sites in the Northern Forest may violate third party certification standards.

22 FSC Forest Management Standards, Principle 4 COMMUNITY RELATIONS AND WORKER'S RIGHTS: Forest Management operations shall maintain or enhance the long-term social and economic well-being of forest workers and local communities.

23 FSC Forest Management Standards, Principle 4 Indicator 4.1.c says that "Forest works are provided with fair wages."

24 FSC Forest Management Standards, Principle 4 Indicator 4.4c requires that: "people who are subject to direct adverse effects of management operations are apprised of relevant activities in advance of the action so that they may express concern"

25 FSC Forest Management Standards, Principle 4 Indicator 4.5.a states that: "the forest owner or manager does not engage in negligent activities that cause damage to other people."

26 FSC Forest Management Standards, Principle 4 Indicator 4.5.c : "Fair compensation or reasonable mitigation is provided to local people, communities or adjacent landowners for substantiated damage or loss of income caused by the landowner or manager."

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30 Traits of Innovative Loggers Identified Will we have people like this to help us manage forests in the future?

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32 Sustainability? I think the day is going to come and really soon, that their going to have to pay for it all, because when you destroy the guys that are there today, that next crop, unless you pay them well, their not coming. They won t.

33 Production Technology in Logging (new project) Continuous Improvement Theory Training and Workshops for Loggers & Foresters 1. How to increase production 2. How to accommodate production 3. When prices are fixed, loggers can only focus on production 4. Need more projects like this in the northern forest

34 PATH 2.0 Download: