TIMBER MANAGEMENT & RETIREMENT: A CASE STUDY
Editor's Note: The following article is a reprint of an article that
first appeared in the NEFCo newsletter five years ago. Over the years, I
have received a number of comments concerning this article, and the fact that it
concisely explains the financial benefits of actively managing a woodlot.
The article uses the example of a farmer; however, the premise applies to all
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
The landowner nodded his head as if in full agreement, but then stated that
he was planning on retiring in abouit 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
My meeting with this landowner is 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 an comparative example of the financial benefits of a
managed woodlot versus an 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.
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 of 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. After paying the capital gains tax, the landowner will net
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.
If that same woodlot were thinned now (assuming the removal of 1/3 of the
basal area), the timber harvest would generate $43,104. After paying the capital
gains tax, the landowner would net $38,794. The landowner, looking at the
long term, decides to put that money into a mutual fund that has a modest rate
of return of 8% per year.
After the thinning, the remaining stand after 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 the
competing trees, those residual trees are now growing at an annual rate of 3%
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 hemlcok, 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. After paying the capital gains tax, the landowner nets $114,207.
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 which 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, the original $38,794 would now be worth $102,681 after
taxes. Combine these earnings with the stumpage value of the residual
woodlot. The total value of this asset is now $216,888. The value of
$84,227 greater than the unmanaged woodlot.
One farmer explained to me that while my reasoning was sound and logical, the
fact of the matter was the 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 my 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 that 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.