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RISK MANAGEMENT IN FORESTRY |
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by Daniel L. Goerlich1, Harry L. Haney, Jr.2, Robert M. Shaffer3, Bob Smith4 |
Production
In forestry, the word “production” can have several meanings.
From an industrial standpoint, production may involve sawing
lumber, shaping posts, or turning chips into paper.
A forest technician may think about production in terms of how
many inventory plots he can measure per day.
To a logger, production is determined by factors such as
equipment downtime, lay of the land, and hauling costs, among others.
In the following paragraphs we will discuss production risk in
terms of growing and managing a forest stand to produce merchantable
timber products like pulpwood or sawtimber.
During a forest harvesting operation--such as thinning--a logging
contractor can damage trees in the residual stand. Injuries like broken tops, broken limbs, or removing bark
from the butt log can weaken and deform the tree, introduce insects
and disease, and ultimately reduce the value of your forest stand.
Careful equipment operation and felling practices can help reduce the
damage done to a timber stand during a forest harvesting operation. During the reforestation process, seedling survival is an important
consideration for forest landowners.
Pine seedlings compete with other trees and vegetation for
light, water, and nutrients. Weather
conditions--like drought, for example--also influence seedling
survival. Due to the use
of genetically improved pine seedlings, low seedling survival is less
of a risk now than in the past. Herbicide
applications and prescribed burning can reduce competition and give
pine seedlings a head start. There are several environmental factors that can introduce risk into the forest management process. Ice storms and glaze can damage woodlots and devastate recently thinned loblolly pine plantations, bending trees over and breaking them off. Drought can stress trees, weakening them and increasing their susceptibility to insects and disease. Deer may browse regeneration and rodents can girdle pine seedlings. Although fire is commonly used for prescribed burning, intense fire following stand establishment can kill young trees and those with thin bark. Natural disasters such as hurricanes and tornadoes are also a reality for parts of the country. Human Resources
Virginia’s 1200 timber harvesting firms produce the
raw material for the Commonwealth’s largest manufacturing sector
employer, the forest products industry.
Logging firms employ approximately 6,000 full-time workers in
Virginia. Logging is a dangerous occupation, with injuries occurring
at a rate 2.5 times the average for all other industries, and
fatalities at a rate that is 9 times higher. Nearly 60 percent of all
logging injuries involve a worker using a chainsaw to fell or delimb a
tree. Most often the worker is “struck by” a falling tree or limb.
Loggers can reduce the risk of injury on their job
by: 1) eliminating manual
chainsaw felling and delimbing through mechanization (feller-buncher,
stroke delimber, etc.); 2) instituting a workplace safety program that
includes regular safety awareness and training programs, and; 3)
carefully training, monitoring and supervising first-year employees,
who are twice as likely to incur an injury as more experienced
employees. A reputable Worker’s Compensation Insurance firm can also
help a logger to design and implement a safety program and
successfully practice good risk
management. Financial
The risk of default is probably the greatest
financial risk facing small timberland owners.
With the exception of large forest holdings, forestry
operations are unique in that revenues are periodic.
This means that income may be realized every 15 years, for
example, rather than every single year.
The expenses associated with holding land and growing stock
occur yearly and are generally weighted to the beginning of the
rotation/investment cycle (i.e., when the trees were planted or
established). These
expenses include property taxes, annual management expenses, mortgage
interest, and estate taxes on inherited property.
Since income from forest operations is periodic,
timberland owners must plan to cover expenses in the non-revenue
years. In addition, they
should set aside some income that can be used to keep the growing
stock productive. For
example, precommercial thinning, timber stand improvement, and
herbicide treatment—also referred to as intermediate
treatments—are forest practices that may be needed to ensure proper
stocking levels. These
intermediate investments must earn a competitive rate of return.
That is, the investment in growing stock should never exceed
the expected net income (income left over after costs), including
interest. In southern
pine stands, the average annualized (yearly) income after costs will
vary from $50 to $100 per acre per year.
Financial risks are minimized when site index, timber
prices, and interest rates are combined with annual costs for taxes,
forest management practices, and debts to determine the optimum
rotation length for a forest stand.
In Virginia, the optimum rotation for pine on average sites
varies from 30 to 35 years with state of the art management. Marketing
The prices paid for standing timber—also called
stumpage—are dependent on many factors. Prices primarily reflect the
current state of the economy, the demand for different species at the
time of the sale, the timber quality on the tract, and current market
conditions in the area. In forestry and wood products, our markets are
closely tied to the housing segment of the economy. As housing starts fluctuate, so will the demand for lumber
and associated products. When
the demand for housing products goes down, the prices paid for
standing timber and logs will eventually go down.
The threat from substitute products such as plastic and steel
also affect lumber prices. As
more of these materials are used in home construction, less wood is
used, which puts less demand on our forests.
Technology influences log and lumber prices as well.
As we increase recovery in sawmills with better cutting
technologies, we produce more lumber from fewer logs, reducing the
demand on our forests. Another important marketing issue is the quality of
raw material coming out of the forest.
There is a general opinion that the overall quality and size of
the logs coming from hardwood forests has declined in recent decades.
This material produces less lumber and lower grades for final
consumption. In hardwood
markets the highest quality (and priced) material, FAS lumber, is
normally exported or used in furniture.
The middle quality lumber is sold to manufacture furniture,
cabinets, molding, dimension stock, or flooring.
The lowest grade material is used in flooring, railroad ties or
pallets. The pallet
industry is the largest single market for lower grade hardwood lumber
and uses over 4 billion board feet annually.
Certain hardwood species always tend to demand higher prices
than others do. For
example, red and white oak, cherry, hard maple, and yellow poplar
demand better prices than gum, sycamore or aspen.
Weather is another factor that affects the prices of stumpage
and wood products. Harsh
winters reduce harvesting efforts and tend to raise prices, while mild
winters allow loggers to work year round and reduce stumpage prices. Tariffs and international trade can affect the demand for lumber, which ultimately will affect log and stumpage prices. Although we live in the heart of southern yellow pine country, most building retail stores stock spruce/pine/fir (SPF) from Canada. Since the Canadian government subsidizes their timber stumpage, the Canadian lumber producers can ship SPF from British Columbia to Virginia at competitive prices. We are also seeing radiata pine from Chile and spruce from Russia entering our markets. Global competition is now very common in the United States. For a
landowner to maximize the return on their timberland, they should have
a good management plan and keep close eye on the market to determine
the best time to sell. Legal
Legal risks associated with forest management result
from laws and regulations that alter, inhibit, or prevent the proposed
management of the resource. Ignorance
of the law is also included due to the often-complex nature of rules
and regulations. Examples
of state laws include the Virginia Seed Tree Law, Virginia Water
Quality Law, Virginia Forest Fire Laws, and the Chesapeake Bay
Protection Act. Federal laws that affect private property include the
Endangered Species Act, Clean Water Act, and Clean Air Act. Even local regulations--such as zoning laws and various
ordinances—that restrict harvesting and silvicultural activities may
affect forest management. As population density, disposable income, and public expectations for use of natural resources increase, the restrictions on timberland management also tend to increase, and sometimes multiply. Such restrictions result in higher costs of production, lower outputs, or both. Summary
As you can see, there are a variety of risk factors involved with forest
management, and they may seem intimidating at first.
Working with a professional natural resource manager and
following a management plan will minimize these risks, and help you
realize your goals. Financially, small farmers with unproductive land
are actually taking a larger risk by leaving the land idle than by
putting the land into timber production. |
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1)
Associate Extension Agent Forestry and Natural Resources, Virginia
Cooperative Extension - Central District |