 
"ROR" is Rate of Return. You already knew that, but many
forest owners use the ostrich approach to timber investments. They grow trees
like grandpa or smokey bear did, and hope that scary math and economic theories
go away by the time they pull their heads out of where ever they hid 'em.
TreeCents
Answers Real Forestry Questions
Although forest economists really get off on the esoteric
mathematical elegance of Faustmann formulations, the real reason you're using
TreeCents is get straight forward answers to real management questions. On my
own 400 acre Nora Creek Forest I've used TreeCents to ask questions such as:
How can I make my family forestry
profitable?...Ask
TreeCents!
How much should I pay for adjacent forested
acres?...AskTreeCents!
Which wildlife habitat improvement also
has timber income?...AskTreeCents!
Would log sales mitigate firescaping &
view enhancement costs?...AskTreeCents!
Should I plant crops or trees into my
conservation reserve acres?...Ask
TreeCents!
Should I thin, or prune, or fertilize?...Ask
TreeCents!
Does costly log sorting to different markets
pay?...Ask
TreeCents!
How long should my harvest
cycle be?...Should I cut now or wait?...Ask
TreeCents!
Estimate lost production costs of
roads...landings...ponds...campgrounds?...Ask
TreeCents!
How BIG are the tax breaks of private
forestry...Ask
TreeCents!
TreeCents
Makes Complex Financial Stuff Easy
We're slowly building these pages to discuss the basics of the
financial analysis theories and techniques that TreeCents uses to calculate
financial returns. That should make what TreeCents does more understandable and
credible. Unfortunately, business has been so hectic that this page is growing
slower than we intended. By the time we're done, you'll find that timber finance
is simpler than you thought, makes straightforward logical sense, and can be
really useful in making forestry choices. But you'll also be convinced that
TreeCents will make it all easier.
Key Timber Financial Analysis
Elements
 Financial & nonfinancial private forestry objectives are
compatible 
 God controls site quality, but you control how your trees grow and your
pay off 
 Visualizing the classic timber investment cash flow
patterns 
 Oops, costs don't occur in the same time or patterns as
incomes 
 Adjusting for pesky interest rates, inflation and value
changes 
 Profitability implies that it's nicer to have benefits bigger than costs&

 Taxes are inevitable, but manageable 
 Making sense of obtuse acronym financial indicators 
 Making profitable forestry and land use choices 
 Tweak analyses to forage for even better returns 
 Laughing all the way to the bank 
We built some of this into the TreeCents manual,
and you can download an example manual (see the TreeCents manual
web page)
Financial and Nonfinancial Private Forestry Objectives
 Private forest owners rarely list profits as a reason for
tree farming. There are usually 5 to 7 higher priority objectives ranging from
family traditions, aesthetics, environmental stewardship. A recent study of
newest forest owners shows rural lifestyle has highest positive appeal while
timber management potential has negative appeal. 
 The inconsistency is
studies that find private forests to be among the most responsive to shortrun timber
market price changes. This is not hypocriticalfor a private forest to
exist long enough to be sustainable for any other purpose, it must be
profitable. 
 TreeCents is designed to assess timber profitability in the
context of silvicultural designs to achieve other objectives. Given two forest
structures that control erosion or improve wildlife habitat or provide aesthetic vistas, with TreeCents we
can easily spot the most cost effective option or even eke out dollar
returns. 
How Management Affects Quantitative Timber Yields
 There are so many forest practices applied to so many
different forest types, it is impossible to describe or analyze a typical
timber investment. That's why TreeCents is designed flexibly to allow owners
to reflect their own unique forest and market conditions. First they need to
know how their different silvicultral options affect forest biology and the
physical condition of the forest. 
 In this discussion, we'll ask a very basic silvicultural
question about planning whether to thin an existing plantation after 10 years
more growth. Presumably, thinning would not only accelerates income flows, but
also concentrate growth on fewer healthier and more valuable trees. We'll ask
this question in a forest region (the Inland West) that is not known for
vigorous growth nor high valued markets. This investment decision should be
really sensitive to both biological and financial decisions. 
 First we went to a growth and yield model (FVS) to
calculate future growth of the unthinned and thinned stand options over time.
For this example we assumed that we had one acre of 40yearold Douglasfir
plantation with 218 uniform trees on site index 90 land. We asked FVS to thin
it next decade at age 50 and project the future yields. FVS took out a
hypothetical 6.7 Thousand Board Feet (MBF) of merchantable timber and
reflected lower future volumes in the thinned stand. In the graph
unthinned yield is blue...thinned
yield is green. 
 Both yield options are biologically plausible. Thinning at
age = 50 years would give us a cash flow from the 6.7 MBF removed. Future
yields are lower, but presumably the remaining trees are healthier and more
valuable. Indeed, FVS says if we wait to harvest at age 80, we'll be choosing
between 85 trees with 20.6" DBH or 238 trees with 15.2" DBH. 
 Oops, did you notice that even this simple example has a
couple of complicating new wrinkles. Would a thinning of small trees in 10
years offset thinning costs? If do thin, what is the size premium ($$/MBF) for
the bigger trees? And when should we cut the older stands to maximize our
returns in either case? Thank goodness we can ask TreeCents! 
Visualizing Timber Cycles as Cash Flow Patterns
 Forest owners aren't used to visualizing forest futures as
cost and income flows. I rely on simple diagrams to convert acres, leaves and
trunks into gross revenue and expenditure patterns. This step isn't necessary
to run TreeCents cause it does all the math and finance conversions
automatically. However, humans find this step to be a real visual aid. 
 First, don't even think about what you invested in
establishing this stand from time zero to today's age 40. The decision of
whether to start this plantation is behind youa done deal. Sunk (or
historical costs) should have little influence on what's best to do with the
40yearold Douglasfir stand now. 
 Next, make your forest changes really abstract. Visualize
this as $/acre at particular points in time. You have thinned volume in 10
years (stand age 50) and harvest volume in 40 years (stand age 80). I like to
convert my yield curves into gross cash flow/acre bar graphs. I can then
expand this per acre estimate by the number of acres in the stand later. 
 Multiply the volume harvested (MBF) per acre in some time
by the average stumpage value ($/MBF) for that size class of trees. TreeCents
does this internally in lots more detail from delivered log values, harvesting
and hauling costs and volumes of logs from different tree sizes. For us, let's
display our calculations simply in the bar graph. Use the conventions that
costs are bars of different lengths down, gross revenues are bars appropriate
length up and that the bars are spread along the xaxis according to their
time of occurrence. 
 In this example, only a $30/MBF size premium on 85 larger
trees almost equilibrates the potential cash flows on 238 smaller trees out 40
years. So the apparent financial choice is between a little income next decade
plus lots in year 40, or none today and slightly more in 40 years.

 Our example is so simple that it ignores operating costs,
taxes, capital costs and market value changes. TreeCents remembers all the
extra variables that you're willing to enter and would build them in
automatically. 
Building in Costs a Bit at a TimeThe Biggest One First
 Remember that we're ignoring any costs prior to today, and
there are probably no immediate costs in time zero. 
 The biggest cost in forestry is the cost of the financial
capital we have tied up in the trees. It represents the alternative amount
that we could have earned if we had the same amount of financial capital
represented by our initial 40yearold plantation invested instead in a mutual
fund paying 5%. 
 This cost accumulates over time while the trees grow. At
any moment that we don't cut we are reinvesting the forest stand capital into
our ongoing timber investment instead of into that tempting return in the
mutual fund. Luckily, we can account for this cost easily and at the same time
generate a financial indicator that will answer the "Should we thin?"
question. 
 Discounting is the process of adjusting for the alternative
cost of capital. A future sum is recalculated as its present equivalent. This
is the inverse of interest on a savings account where a present sum is
compounded over the years by an interest rate to get a future value of the
account in some year. 
 The math of this involves exponential discounting. The
simplest formula is called Net Present Value (NPV). It is the
sum of costs (C) in some time (t) discounted by a discount rate (i) from their
time of occurrence subtracted from the sum of discounted benefits (B) from
their time (t). This is the classic formula. I’ve left out all the
intertemporal adjustments and contingent cash flows that really complicate the
forestry applications formulas 
 Not to worry. Any decent calculator will do this. But in
TreeCents the process is so automatic that you don't even have to think about
it. 
 A difficult part of the process is determining the right
discount rate (i). There are complications like: which alternative investment
return?...is it in real or inflated terms?...Is there a risk rate component?
We're lucky that TreeCents would incorporate many of these concerns for
us. In this simple example, we'll use a 5% annual percentage rate and assume
away inflation. TreeCents would keep track. 

@ 5%, the NPV of not thinning is:
$7500/(1.05)^{40}
or $4604/acre

 @ 5%, the NPV of
thinning is:
$900/(1.05)^{10}+ $7200/(1.05)^{40} or
$4973/acre 
 Anyway, the simple answer is thinning looks good. NPV thin
> NPV unthinned 
 Notice that the present discounted value is lots less than
the future equivalent cash flows. Keep this in mind next time you win the
lottery. The current payout will also be lots less than the total prize that
the state typically drips our over 20 years. 
 The NPV actually represents the current wealth equivalent
of this acre to our personal financial portfolio. If more wealth is preferred
to less, then the highest NPV tells us what the best forest management regime
is. Thinning increases our current wealth by $369 per thinned acre. 
 Is the 5% assumption critical? You bet your birches it is!
A different rate gives a radically different estimate and if there are any
significant upfront costs can easily reverse the decision. TreeCents will
check the sensitivity of this assumption in about 7 seconds. 
 The highest NPV of all the hundreds of possible future
regimes tells us the very best financial forestry management. It also gives us
another insight to the value of this type of forest asset in a market
transaction. If the NPV of forestry is higher than what your neighbor wants
for his similar forest, buy it! If it is lower than what a subdivision
developer offers you (and you have no nondollar valued attachments to the
place) you would sell it to be financially better off. 
 And if you do have nondollar valued attachments that keep
you in forestry, this tells you your own threshhold of at least how much you
value them. 
What About the Other CostsOperations, Taxes,
Administration?
 In real life these cash flow patterns can get really
complicatedso much so that even financially astute analysts assume away the
complications. Over simplification is a dangerous approach. Sometimes all it
takes is one detail being large enough to radically change the basic answers
to your forestry questions. 
 In this example, what if thinning revenues were zero (precommercial
thinning) and thinning costs weren't tax deductible? Yiii! You would have an
upfront nondeductible cost that would blow away the present value of long run
returns to thinning! 
MORE TO COME AS WE CONTINUE TO BUILD THESE FINANCIAL ANALYSIS PAGES
However, the bottom line of
this section is clear.
Financial analysis is really
important
Although the logic is
obvious, the math and formulations can be prohibitively complicated.
Why not let an inexpensive
algorithm do the job for you?
