economics of timber production on private land in indiana
DESCRIPTION
Economics of Timber Production on Private Land in Indiana. Economics or Finance?. Economics Timber owner is in general a price taker Competitive market position Market for high quality timber of preferred species is global, unitary to slightly elastic demand - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/1.jpg)
Economics of Timber Production on Private Land in Indiana
![Page 2: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/2.jpg)
Economics or Finance?
Economics Timber owner is in general a price taker Competitive market position
Market for high quality timber of preferred species is global, unitary to slightly elastic demand
Market for low quality timber and non-preferred species is local, highly inelastic demand
![Page 3: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/3.jpg)
National Hardwood Lumber Production
MMBF Peaked in 1999, 12.6 bil
2010, 6.3 bil
![Page 4: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/4.jpg)
Weighted Average Price, Quality Stand
![Page 5: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/5.jpg)
Black Walnut Sawlogs
![Page 6: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/6.jpg)
Black Walnut Sawlogs, Real
![Page 7: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/7.jpg)
Beech Sawlogs
![Page 8: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/8.jpg)
Beech Sawlog Prices, RealTypical “flat-line” trend for non-prime species
![Page 9: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/9.jpg)
Indiana Farm Real Estate
0
500
1000
1500
2000
2500
3000
3500
Year
$ pe
r Acr
e
1982 $’s
Nominal $’s
Trend line - 1.3%
![Page 10: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/10.jpg)
Economics or Finance?
Finance Capital intensive
Land Growing stock
Long-term Highly appreciated
![Page 11: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/11.jpg)
Position in Investment Markets Primarily a “life-style” investment
Highest and best use not timber production Cost of entry may exceed income potential
Some vertical integration Not attractive to institutional investors and
private equity capital Can’t capture economies of scale Can’t economically accumulate tracts into
investment grade bundles Limits resale market to other lifestyle
investors
![Page 12: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/12.jpg)
Standard Measures of Financial Return
Net present value (NPV) Present value of discounted stream of revenues
and expenses V0 = Vn/(1+i)n
Internal rate of return Discount rate that makes NPV zero
![Page 13: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/13.jpg)
NPV Calculation
Enter land and timber growing stock as up-front CAPITAL cost Standard assumption – capital costs based on fair
market value, Life style assumption – capital cost based on
actual cost, or zero if inherited Discount (interest) rate used
Nominal – rate on long-term corporate bonds Real – nominal reduced by average inflation rate
![Page 14: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/14.jpg)
Real Interest Rate, 10-Yr. Treas. Sec., 3-Yr. Moving Average
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
![Page 15: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/15.jpg)
NPV Calculation
Time period Date of acquisition, to Expected date of death, or date of liquidation
Ending return on capital Bequest - none Standard - sale price (FMV) of land and growing
stock
![Page 16: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/16.jpg)
Operating Costs
Allocate between personal and business use Property taxes Management fees Depreciation on equipment Other
![Page 17: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/17.jpg)
Operating Revenues
Timber income Generally assume all-age management with
periodic harvests Estimate mean annual increment Project timber price
Other income Hunting lease payments Non-timber forest products Sale of development rights
![Page 18: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/18.jpg)
Willingness to Pay for Land (WPL) Net present value of stream of revenues and
expenses Represents amount that can be paid for land
and growing stock Discount rate represents opportunity cost of tying
up capital in timber production instead of next best opportunity
![Page 19: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/19.jpg)
Base Case, WPL, No Bequest Liquidate at dod, assumed to be 40 years 3% real discount rate Liquidate land at $1,500 per acre Liquidate all timber at $587/MBF real
![Page 20: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/20.jpg)
Base Case, WPL, No Bequest Per acre costs
Annual - $20.00 Every 5 years - $250 Mean annual increment – 250 mbf Harvest revenue
Every 10 years, 2.5 MBF Price – quality stand price series, $643 nominal, $397
real Linear real price increase, $4.33 per year
![Page 21: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/21.jpg)
Base Case, WPL, No Bequest – Liquidate
WPL40 = $1,755 per acre, real WPL40 = $2,845 per acre, nominal
![Page 22: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/22.jpg)
Base Case, WPL, Bequest
WPL40 = $755 per acre, real WPL40 = $1,208 per acre, nominal
![Page 23: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/23.jpg)
Barton Tree Farm (BTF)
Acreage – 292 Initial acquisition in 1980 Acquisition cost - $175,250 Total timber revenue - $324,800
![Page 24: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/24.jpg)
![Page 25: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/25.jpg)
BTF Initial Cost and Timber Revenues
1980 -$175,248.00
1984 $11,313.00
1985 $11,678.00
1988 $9,503.60
1990 $14,323.35
1995 $21,951.08
1997 $61,746.95
1998 $387.91
1999 $85,300.00
2001 $70,102.00
2005 $38,500
![Page 26: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/26.jpg)
BTF Rate of Return, No Expenses, Bequest No operating or holding costs included
i = ($324,800/$175,250)1/25 -1 = 7.4% IRR = 2.50% nominal Internal Rate of Return
3.65% nominal 2.65% nominal after-tax
Inflation averaged 2.31% from 1980 to 2005
![Page 27: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/27.jpg)
BTF, Rate of Return, Bequest Annual cost - $15.05 per acre per year,
$4,400 per year Before tax
IRR – 0.89% After tax – 28% ordinary, 15% capital gain
IRR – 0.5% after-tax
![Page 28: Economics of Timber Production on Private Land in Indiana](https://reader036.vdocuments.us/reader036/viewer/2022062521/56816972550346895de147d8/html5/thumbnails/28.jpg)
No Bequest, Liquidate
$15.05 per acre per year cost Sell land for $1,500 per acre
$438,000 Sell 2,354 MBF timber for $660/MBF
$1,553,640 ($5,320/acre) IRR
Before tax – 10.8% After tax – 10.2%