The following concise expose is written to educate new or novice pine timberland owners and managers. The following topics are included:

1)       Rates of Return

2)       Market

3)       Soil

4)       Pine Silviculture

5)       Marketing Timber

6)       Taxes

7)       Best Management Practices

Properly managed loblolly pine plantations have the rate of return of a high-risk mutual fund while exhibiting the combined stability of a Treasury-Bill. The following returns can generally be expected:

The value of your timber is directly related to new construction in the United States (US) and indirectly related Internationally. “New housing-starts” in the US is a popular indicator for the timber industry and the economy as a whole. There is a six to 12 month lag between the lumber market and the timber market (stumpage). Stumpage refers to the value of the tree standing in the woods. Over the past 30 years, timber has appreciated at approximately 10% per year. However, over the past two years timber has depreciated by approximately 10% per year. This well demonstrates the cyclic nature of the timber market. Timber generally follows eight-year cycles. Four-years going up followed by four-years going down. Consequently, as shown on the 30-year outlook, it always goes-up less than it goes-down, providing long term 10% appreciation. Presently, we are in the second year of our theoretical four-year down-trend. The past up-trend lasted for over 6 years (extending itself two years past the expected norm).

 In addition to the economy, the following variables generally have local influences on timber values:

a)       Greater number of Pine Mills within 100 miles (prices go up).

b)       Closer to the Mill (prices go up).

c)       Wet Weather Logging Capabilities (prices go up).

d)       Decreased supply of Private Timber (prices go up).

e)       Increased supply of Corporate Timber (prices go down).

f)         Increased number of gate-wood Loggers (prices go down).

g)       High quality timber (prices go up).

h)       Thinning (prices go down).

i)         Final Harvest (prices go up).

j)         Good road system (prices go up).

k)       Legal Access (prices go up).

l)         Near large community or sensitive area (prices go down).

m)     Low volume sale (prices go down).

n)       Landowner or forester with history of violated contracts (prices go down).

   Timber is marketed via four primary product classes: sawtimber, export sawlogs (three clear faces), chip-n-saw, and pulpwood. When utilizing lump sum sealed bids, the export sawlog prices are averaged into the sawtimber prices (increasing the over-all average). When utilizing pay-as-cut, the export sawlogs are separated from the sawtimber and given separate values. The summary below excludes export sawlogs because they occur in less than 10% of our forests in Arkansas. The average sawtimber prices increase 10% – 20% when export sawlogs are blended into a timber sale.

Summer Prices per Ton

1997

1998

1999

2000

Pine Sawtimber

$50

$46

$43

$40

Pine Chip-n-saw

$20

$25

$20

$16

Pine Pulpwood

$10

$08

$07

$05

Winter Prices per Ton

1997

1998

1999

2000

Pine Sawtimber

$60

$56

$53

NA

Pine Chip-n-saw

$20

$25

$20

NA

Pine Pulpwood

$10

$08

$07

NA

There are five basic soil types in Southern Arkansas:

a)       Sandy Loam with Clay Base: Excellent for pine – Sandy Loam drains moisture during wet winters and the Clay Base holds-up the moisture during dry summers.

b)       Deep Sandy Loam: Good for pine - excellent during the winter and dry during the summer.

c)       Clay Loam: Good for pine – high nutrient concentration and tends to be wet in the winter.

d)       Sandy Loam with Clay and Gravel: Fair for pine, tends to be dry and hard during the summer.

e)       Silty Clay Loam: Poor for growing pine – too wet in the winter and too dry in the summer.

   Various site preparation and intermediate silvicultural techniques utilized to maximize individual soil capabilities are:

a)       Subsoiling (All soil types benefit).

b)       Tillage (Sandy Loam with Clay Base; other soils when packed after tillage).

c)       Bedding (Clay Loam and Silty Clay Loam on level sites).

d)       Seedling Genetics (Select by soil type).

e)       Fertilization (All soil types benefit; greater benefit in poorer soil types).

Silviculture is as to timber as agronomy is to farming. It includes all the various methods and techniques for growing trees. A summary of current primary Silvicultural practices are:

      a)       Site Preparation Burning

b)       Intermediate Burning

c)       Methods of Thinning

·         Thinning from above

·         Thinning from below

d)       Stages of Thinning

·         Pre-commercial Thinning

·         First Thinning (pulpwood)

-          Third Row Thinning

-          Fifth Row Thinning

·         Second Thinning (chip-n-saw)

·         Third Thinning (small sawlogs)

e)       Final Harvest (mature sawtimber)

f)         Chemical Site Preparation

·         Arsenal/Accord

·         Chopper

g)       Mechanical Site Preparation

·         Shear

·         Rake

·         Subsoil

·         Tillage

·         Bed

h)       Fertilization

·         Early Fertilization (high in phosphorus)

·         Intermediate Fertilization (high in nitrogen)

·         Late Fertilization (high in nitrogen)

i)         Genetically Improved Seedlings

·         Bare-root

·         Containerized

·         1^st , 2^nd, 3^rd  Generation

·         Atlantic Coastal, Deep South, Piedmont, etc.

j)         Regeneration Methods

·         Genetically Improved

-          Plant

-          Burn/Plant

-          Chemical Spray/Burn/Plant

-          Subsoil/Plant

-          Tillage/Plant

-          Bed/Plant

·         Natural Regeneration

-          Seed Tree

-          Shelterwood

-          Uneven-Age

k)       Herbaceous Spray

·         Velpar/Oust

·         Arsenal/Oust

l)         Release Spray

·         Arsenal/Escort

Many private timberland owners limit their timber management to thinning and selling timber. As a result, their net returns are very low (> 5% net) and their term to maturity is very long (> 40 years). Marketing is as important as silviculture, and both must be given equal emphasis to obtain satisfactory net returns (> 15%) and reasonable maturity terms (< 30 years). Timber Marketing techniques are:

a)       Lump Sum

·         Volume/Weight Determination

-          100% Marking

-          5% – 20% Inventory

·         Marketing

-          Sealed Bid

-          Direct Negotiation

b)       Pay-As-Cut

·         Volume/Weight Determination

-          Trucks weighed at the mill (tickets totaled by product class)

·         Marketing

-          Sealed Bid

-          Direct Negotiation

~ Index

~ Single or flat rate

·         Unit Rate

-          Blended Stumpage

-          Stumpage by Product Class

-          Delivered rate minus fixed Operation Cost

To maximize returns and to protect soil integrity, it is important to market wet-weather logging tracts during the winter and dry-weather logging tracts in the summer. Generally 12-month contracts are awarded to winter logging sales and 18-month contracts to summer logging sales.

 A general summary of our United States Federal Tax structure is:

·         Ordinary Income (Marginal Rate: 15%, 28%, 31%, 36% and 39.6%)

-          Salaries

-          Social Security

-          Rental Income

-          Interest Income

-          Treasury Bills, etc.

·         Capital Gains (Flat Rate: 10% and 20%)

-          Timber (held longer than one year)

-          Land (held longer than one year)

-          Stocks and Mutual Funds, etc.

·         Estate (Marginal Rate: 18% to 55%)

-          All accumulated assets

   Timber proceeds are directly taxed while we are alive via Capital Gains and when we die by Estate Taxes. Timber income has an indirect influence on wage related taxes through the loss of certain deductions. However, the loss of said deductions does not start occurring until after approximately $250,000 in timber proceeds. Otherwise there is no influence or relation between timber proceeds and our ordinary income marginal tax bracket. For example, if you are in the 31% tax bracket and you receive $500,000 in timber proceeds in a single year, then your ordinary income is still taxed in the 31% tax bracket and your $500,000 is taxed at 20% under capital gains.

   The only exception to the 20% capital gains rate is for those persons in the 15% ordinary income tax bracket. Their timber proceeds are taxed at 10% until their combined wages and timber proceeds exceed the 15% wage tax bracket (approximately $43,000). All those portions of the timber proceeds above the combined $43,000 is taxed at the regular 20% capital gains rate.

   State Capital Gains for Arkansas is approximately 6% creating a combined capital gains tax of 26% (20% federal and 6% state).

   All expenses during the first year of a stands establishment are subject to a cost basis treatment (taxes paid into the cost basis are refunded on a percentage from future thinnings), except for the first $10,000, which can be optioned as an expense. All Silvicultural treatments (after the first year), consulting fees, surveys, and timber sale costs are expensed.

Best Management Practices (BMP) include (but not limited to) the following:

a)       Properly constructing and maintaining roads and stream crossings.

b)       Reserving Streamside Management Zones (SMZ) along all waterways.

c)       Protecting Endangered Species.

d)       Ensuring proper handling of logging debris and clean-up.

e)       Re-seeding logging decks and logging roads to stabilize soils.

f)         Re-establishing final harvested stands.

g)       Maintaining timber management plans.

h)       Aesthetics.

    Presently, Best Management Practices has a voluntary compliance position and is promoted by the Arkansas Forestry Commission and supported by Arkansas Forestry Association, Arkansas Timber Producers Association, many private landowners, most forestry consultants, and all the major timber corporations (Weyerhaeuser, International Paper, Plum Creek, Potlatch, etc.).

    Costs incurred from following proposed BMP, is more than returned in the enhancements to your forests’ increased marketability and sustained yield.

          The above presentation was designed to provide you an introductory knowledge of timberland and its respective management options. If you would like to learn more, I encourage you to do the following:

a)       Listen to "Timber Talk" each Tuesday at 9:30 a.m. on 100.5 FM in Magnolia, Arkansas or Saturday at 8:30 a.m. on 99.5 FM in Nashville, Arkansas.

b)       Join “Forest Landowners” and begin attending their meetings and receiving their quarterly magazine. I have a featured articled in their latest publication titled, “Regeneration – Your Choice”.

c)       Join “Arkansas Forestry Association” and begin attending their meetings and receiving their quarterly newsletter.

d)       We also have several web links to affiliated forestry organizations.

e)        Drop by and visit our office; we have tangible displays illustrating much of the information in this article.

 If you have any questions, or would like additional information about the above topics, just call me at 870-234-0200 (ext. 1202).

 Teddy Reynolds, BSF, RF

President/CEO