Timber Management & Retirement: A Case Study

Recently I had the opportunity to meet with a landowner concerning the management of his timberlands.  As we walked his land, it was obvious that the woodlands were over-stocked to the point where there was no regeneration on the forest floor due to the absence of sunlight caused by the thick forest canopy.  After walking around for about two hours, I suggested to the landowner that it would be appropriate to conduct a thinning in order to increase the growth of the remaining trees and get some regeneration established.

The landowner nodded his head as if in full agreement, but then stated that he was planning on retiring in about 15 years and thought that he would wait and harvest then.  Although I was marginally successful in explaining my reasoning to him, I achieved the frustration of trying to explain something verbally that should really be done on paper.  Hence, the impetus for this article.

My meeting with this landowner was not unusual.  I hear this line of reasoning used often, especially by farmers.  They have been looking at that back 40 woodlot for 20 years, and they are just going to wait to cut it after they get out of the dairy business in about 15 years.

The following is a comparative example of the financial benefits of a managed woodlot versus and unmanaged woodlot.  For the sake of this example, the following assumption is made:

  1. The stand contains a total volume of 100 MBF of sugar maple, 75 MBF of red oak, 100 MBF of beech, 50 MBF of hemlock, and 50 MBF of ash.
  2. The current annual growth rate is 1% per year.

Unmanaged Woodlot

At the end of 15 years, using an annual growth rate of 1% compounded annually, the total volume on the parcel is 116.1 MBF of sugar maple, 85.4 MBF of red oak, 116.1 MBF of beech, 56.9 MBF of hemlock, and 56.9 MBF of ash.

Using year 2000 stumpage prices, the total stumpage value of this timber is $147,401 dollars.  After paying the capital gains tax the landowner will net $132,661 dollars.

The unmanaged woodlot is also being given the benefit of the doubt.  The stumpage prices used to determine the timber value is the same for the unmanaged woodlot as for the managed woodlot.  However, there is a very high probability that the quality of wood in the unmanaged lot will be much poorer than in the managed woodlot.  This diminished quality is due to the slow growth rate, which will cause a disproportionate increase in the heart size of the sugar maple.

Managed Woodlot

If that same woodlot were thinned now (assuming the removal of 1/3 of the basal area), the timber harvest would generate $43,104 dollars.  After paying the capital gains tax, the landowner will net $38,794 dollars.  The landowner, looking at the long term, decides to put that money into a mutual fund which has a modest rate of return of 8% per year.

After the thinning, the remaining stand of the harvest contains 66.7 MBF of sugar maple, 50 MBF of red oak, 66.7 MBF of beech, 33.5 MBF of hemlock, and 33.5 MBF of ash.  Also, due to the timber harvest and the removal of competing trees, those residual trees are now growing at an annual rate of 3% per year.

At the end of 15 years, this stand now contains a total of 98.0 MBF of sugar maple, 73.4 MBF of red oak, 98.0 MBF of beech, 49.2 MBF of hemlock, and 49.2 MBF of ash.  Stop at this point and take a look at the original start volumes.  We are almost back at where we started.  Also, due to the previous harvest, the stand now contains a greater percentage of higher quality trees.

15 years after the thinning, the total stumpage value of this lot is $126,896 dollars.  After paying the capital gains tax, the landowner nets $114,207 dollars.  Again, this value is based on the same stumpage value as was used for the unmanaged stand.  However, in all probability the stumpage value would be higher in the managed stand due to the higher quality trees with resulted from the growth benefits of the previous harvest.

The skeptic has already figured out that the stumpage value of the managed stand is a bit lower than that of the unmanaged stand, but we must now account for the timber proceeds garnished 15 years earlier from the timber harvest.  If the landowner put those proceeds into a mutual fund with a modest rate of return of 8% per year, that original $38,794 dollars would now be worth $102,681 dollars after taxes.  Combine these earnings with the stumpage value of the residual woodlot.  The total value of this asset is now $216,888 dollars.  The value is $84,227 dollars greater than the unmanaged woodlot.

One farmer explained to me that while my reasoning was sound and logical, the fact of the matter was that many farmers would not have invested the original timber sale proceeds into a mutual fund, but would rather put the money back into the farm with the purchase of a new piece of equipment or improve the barn. This scenario may be true, but the principle of the argument still holds.  If the farmer used the timber proceeds to invest in the farm, then he/she was able to avoid taking a loan for the new equipment and the interest charges that go with it.  The math would still support the fact that the managed stand is monetarily advantageous to the landowner.

While the example presented here is simplified, and there are a number of variables which must be considered, it is quite evident that a managed woodlot benefits the landowner.  Even if you own a woodlot only for retirement income purposes, it is illogical to allow this asset to simply sit and suffer economically and ecologically.

- Tony Lamberton
Manchester Center Manager


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- Last updated on 13 February 2003 -
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