Rate of Value Growth

Joseph Zorzin redoak at forestmeister.com
Sun Jun 14 10:32:43 EST 1998


Verrrrry interestiiiiing. <G>

Karl Davies wrote:
> 
> 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.

I agree that the financial estimates based on that 3.7% are wrong, but
I'm not to sure that even God could give us the true yield. In lieu of
him showing up at my next meeting with a landowner, I'll consider your
400% improvement going in the right direction. <G>


> 
> 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.

But a high percent of trees do have those height stoppers; so does your
factor of 1.4 consist of an average- i.e., that some grow even faster
and some not at all in height?


> 
> 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.

Good point about the young tree going from a low value sawlog to a much
higher value prime specimen. But this tree would not be the typical tree
on a woodlot. If you consider that many trees do not go into higher
grades as they grow, then your 7% factor is too high.

> 
> 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.

And since the stock market is due for a crash any day now, they better
move their money in to a safer place, which also has good growth. I
think I'll write an article for the Wall St. Journal on this. Actually,
maybe I will.


> 
> 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%.

A safe value to use- in the realm of the inflation.

> 
> 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>

Hmmmm.... OK, but I hope you give the landowner this figure with a plus
or minus factor attached, in case he comes looking for you in 30 years!
<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.

And all of these extra costs will actually be more than covered by the
dramatic drop in real estate taxes, in those states with such laws. I
always factor in the actual tax savings into my long term economic
analysis. Here in the yuppie Berkshires with very high taxes, these
savings often are greater in value than the growth of timber value, so
once they understand this my phone ....er... email... won't stop day or
night.


> 
> 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 the only "product" of the service foresters is subsidies- then it's
certainly questionable because their salaries plus overhead vastly
exceed the amount of subsidies handed out. One would hope that other
values also come from the states' efforts- such as promotional efforts,
which so far haven't accomplished much, and I know that you'd just as
soon not have them even make the effort. It probably is hopeless.

> 
> 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.

Well, a discussion of subsidies can be long and complex as it has a long
and complex history.

Almost every industry in America has been and currently really is
subsidized in less obvious ways. All transportation has been HEAVILY
subsidized from given land to the railroads, to billions spent on
airplane design, the building of roads, etc. Farmland has been
subsidized because much of the land was essentially given to the
farmers. Billions were spent in the '60s to build the Saint Lawrence
Seaway to pump up the heavy industry in the mid-west. Hundreds of
billions of subsidies go to the medical industries. Telecommunications
wouldn't exist without many billions of defense and NASA subsidies. I
could go on all day about this. Without subsidies we wouldn't have the
kind of nation we have and it's economy. Like, no computers. Subsidies
is a legitimate form of political action once it's decided that a
certain economic activity is needed. It's part of nation building. And
Republicans only like to cut subsidies on poor people, not THEIR
industries in THEIR district. If our nation decides we need to pump up
the forest industries, subsidies (or use some other term) will be needed
to adjust the economic flow in favor of forestry. I'll support the
ending of forestry subsidies when ALL other industries lose THEIR
subsidies. Let the auto industry pay for the roads, the airlines pay for
airports and research, let the oil companies go defend our flunkies in
Kuwait, etc. ad infinitum. Let Bill Gates pay for the infrastructure of
the internet- and let's not forget that until about 1980, it was the US
gov. that spent most of the money on computers and computer research,
with the result that Gates is now worth $50,000,000,000. Would have been
so successful as a forester??

It all comes down to politics, although I agree we haven't paid enough
attention to basic forestry economics. Economics AND politics, 2 issues
not readily discussed by woodsmen.

Then again if those phony "leaders" of our profession got off their fat
asses and showed up here on the net, we might have a better and richer
dialogue- rather than the idiocy of their annual meetings and the
vacuousness of their publications. Actually, of course, they're lurking
but won't say anything. They can't impress us here with their suits and
titles. They'll have to actually impress us with their intelligence, and
that's what they're afraid of.

Viva la revolution!
JZ



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