Risk Management for Timberland Owners

Prior planning can help reduce or prevent losses due to catastrophic events such as hurricanes, tornadoes and pine beetles.

While predicting these events with any certainty is impossible, prior planning can help reduce or even prevent such losses. Landowners need to understand the risks that can affect their particular timberland investment and what impact they will have when and if they occur. Landowners need to be knowledgeable about the current condition of their forests.

The first step is to start with a thorough evaluation of the timber by a professional forester. The evaluation must provide information concerning the age of the trees, growth rate, stocking rate, overall health of the stand, evidence of recent mortality in the stand, current value, time until next planned harvest, etc. The forester needs to be able to evaluate this information and assign a risk rating to the stand. Even something as simple as a low, medium or high risk rating for losses would provide landowners with the knowledge to determine if they need to take any action.

Understanding the current timber conditions on your timberland is the first step toward managing the risks. Next you decide what action must be taken. In low risk stands, no action will probably be needed except following your existing management plan and implementing those management actions in a timely manner. In medium risk stands, again there may be no action needed until the risk increases. However, in high risk stands, some action is probably needed to prevent or reduce the loss. Management activities such as thinning, establishing fire lines, conducting prescribed burns, fertilization, etc. can decrease the risk to a more acceptable level. In other cases, such as mature, slow growing timber, a timber sale may be the only way to stop your current losses and avoid the risk of a catastrophic loss.

As a comparison, assume you had a $50,000 investment (timber value) at your local bank. If the bank was paying 2% interest (growth rate) on the investment and charging management fees that were higher than the interest (mortality, property taxes), the entire investment was uninsured and subject to the failure of the bank (catastrophic loss), it is a safe bet that you would quickly find another place to invest that money. Yet we frequently see landowners who accept this same type of scenario from their timber. They simply have not taken the time to investigate and understand the present condition of their timber and the risks it is subject to.

Selling the timber prior to a catastrophic event is always preferable than trying to salvage after the event. It allows you to sell during a good market and receive full value for all of the timber. Selling     timber after an event, causes the sale to become a distress sale. Much of your timber will have physical damage which greatly reduces the sale value. The time available to harvest the timber before it loses even more value is also greatly reduced. However, the greatest loss may be in the reduced market prices because of an excess supply of wood. Hurricane Fran flooded the market with timber and sawtimber prices fell by 75% overnight. There were some tracts that could not be salvaged at all due to wet conditions, where landowners lost almost everything.

The same type of catastrophic losses can occur with pine beetle infestations. Timber that is slow growing because of age or overcrowding is very susceptible to pine beetles. Losses can appear to be sudden, although they may have actually been occurring for some time. By the time the loss is

Understanding the current timber conditions on your land is the first step toward managing the risks.

recognized, some timber is already beyond salvage. The salvage must occur quickly, before the remaining timber deteriorates and to prevent further spread of the beetles. Often the timber will be lost if not salvaged within 30 - 90 days.  This urgency again creates a distress sale and reduces the total value you receive. In addition, pine beetle infestations are often wide spread and can cause a lot of timber to be marketed at the same time, further suppressing the market price.

The best way to manage the risks to your timber investment is to understand what they are. By taking an active role in the management of your timber, you will become more knowledgeable of the existing conditions and risks. Then you can make an intelligent decision as to what course of action is needed to protect your investment.

Reprinted from "Forest Management News" Spring 2004, Volume 24 Number 1, published by Timber Marketing & Management of the Carolinas, Inc.