Rate of Value Growth

Karl Davies kdavies at igc.org
Sun Jun 14 11:54:32 EST 1998


Joe and others have remarked in this newsgroup about the problem of low
pay for consulting foresters.  There have also been complaints about the
big salaries and benefits that the forestry burros get.  Here's why this
is the case, IMHO.

If you want to earn money in our capitalist system you have to produce
something of value.  If, for example, you're a manager and your
department is only earning 3-4% on investment, how much do you think
you'll get paid?  Right--not much.  But if you're a gubmint employee
with all kinds of grants and programs to save such departments, how much
do you think you'll get paid?  Right again--a lot. 

Say your forestry client has some nice, straight 14" red oaks and wants
to know how fast they're growing.  You get out your trusty increment
borer and find that they're growing at 8 rings per inch.  Then you whip
out your Rate of Growth table and find that means .037 or 3.7% per
year.  And that's what you tell your client.  After all, this is what
you were taught in forestry school and what all the gubmint forestry
burros have been reinforcing for decades.  

Your client looks at you with this look that says `Why in hell did I buy
this land and how much am I paying this guy?`  Fortunately though you'd
be wrong about the 3.7%, and wrong by a factor of 4--on the low side! 
Here's why.  

First, the table only shows basal area growth.  It doesn't account for
height growth on trees without height stoppers (forks, crooks, limbs). 
So you have to multiply by 1.4 to correct for that.  1.4 X 3.7% = 5.2%. 
Okay, that's a little better.  But we're still talking just volume. 
Most trees also grow in grade value and market value at the same time.  

A nice straight red oak is definitely growing in grade value.  So you
have to calculate that.  The first 8' log is now a 12" tip grade 2 log
at the mill, which is worth $220 per Mbf on the stump after subtracting
for logging and trucking costs.  If it grows into a 14" tip grade 1 log
in 10 years, it will be worth about $440 per Mbf on the stump.  (The
upper logs are following the same pattern, but at lower prices.)  

To figure the rate, you have to get out a table of compound interest
rate multipliers.  These are available lots of places--even from the
Forest Service.  If something doubles in value in 10 years, it's growing
at 7% per year in value, in this case grade value.  This is on top of
the volume growth rate.  So all of a sudden your 14" oak tree is growing
at 12.2% (3.7 x 1.4 = 5.2 + 7 = 12.2) instead of a measly 3.7%.  Not
bad.  

Meanwhile, the tree is just standing there doing the same things it was
doing before.  Your client likes this magic.  Instead of being a
miserable flunky who has to be subsidized by the gubmint, you're almost
a financial wizard. <G>  And you're not done yet.  

Third, you still have to estimate market value growth.  This is because
10 years from now, oak is going to be worth more (hopefully) than it is
now.  So you pull out the old stumpage price reports that you've been
tucking away over the past 10 years, and find out that oak was going for
about 2/3 of current prices back then.  This means a 1.5 multiplier. 
You look it up in the interest rate multiplier table and find a compound
interest rate of 4%.

You add the 4% to the 12.2% and finally, you're done.  Your client's oak
tree is growing at 16.2% per year in total value.  The guy is really
happy now and you truly are a financial wizard in his mind.  Not only
does his retirement picture look a lot rosier, he can tell the wife to
stop bugging him about getting another part-time job to put more money
into the 401-K! <G>

But to be a good and honest boy scout, you may want to fool around with
some calculations of producer price inflation, taxes, management costs,
mortality rates and consumer preference trends.  These factors will
subtract from that 16.2%, but you're still going to come out looking
pretty good. 

Treatment and growth simulation programs like the TVA's INFORM and
WINYIELD will do all of this magic for you, but they're less dramatic. 
You may find it more effective to stick with the tables.

As I've said before, and will probably have to say again, I think it's a
matter of fraudulent information put out by the state service forester
establishment.  Maybe 50 years ago there was an excuse for the subsidies
because we didn't have the data.  Now we have the data and the computer
models.  (TVA models include grade value growth.  FS models still
don't!)  There's really no excuse for this kind of ignorance and
disinformation.

If you're telling landowners the same rates of growth the burros are
giving them, you're playing right into their hands.  That's exactly what
they want you to tell landowners because at those rates the landowners
need the subsidies that the burros provide.  That's also how they keep
you in your place and in poverty.



More information about the Ag-forst mailing list