Monday, April 29, 2013

                                             LUMP SUM TIMBER SALES: BECOMING VERY SCARCE?

Those of us who handle and supervise timber sales have had to change our ways in determining the best sale technique when selling client timber in today's market.

When I first started selling timber the dominant sale technique was lump sum sealed bid sales. Many of the sale contracts allowed the timber buyer 1 year or more to log a tract. The advantage of this was that the seller received all cash at closing. Our job then was to inspect the logging operations for contract and BMP (Best Management Practice) compliance. At closing the buyer assumed all risk from market losses due to price decreases or storm losses.
The disadvantages could be considerable as prices could increase during the contract term and it is not uncommon for buyers to have access to specialty markets, such as transmission poles, where they could merchandise products at higher value than the market specifications used in the timber cruise that was done to set up the sale. Over cuts put money in the timber buyer's pocket, especially when pine and hardwood top wood was significant. The land owner didn't get paid for  top wood/pulpwood as no volume tables exist to accurately estimate top wood volume.
Pay as cut/per ton/per unit sales are the main timber sale method we have been using over the last five years. This sale method requires much more monitoring and auditing effort on our part as loads and payments must be carefully scrutinized. Merchandising at the loader is key, so caution is needed in making sure that the logger complies with the sale contract and the product specifications as identified in the contract.  Most payments are periodic and not lump sum and prices are based on bid or negotiated prices.
In today's tough timber market environment caution is required as weather variations and mill price guarantees can create havoc between the timber buyer and the land owner. The buyer executes a contract with the land owner and has a specified time to cut the timber. In many cases the mills place quotas on the number of loads that can be delivered or can drop the delivered price which basically causes the buyer to default on the agreement/contract or absorb the shortfall. Can you imagine being a timber buyer/logger when it takes 90 normal days to log a tract when the mills will not hold prices beyond 45 days? They may say they will hold the prices firm but they will not take the wood. what difference does that make?
Unless the sale is dominated by products directly needed by a mill the pay as cut method usually brings the most money to the land owner, in my opinion. The managerial cost is higher but so is the volume that is merchandised and hauled for the benefit of the land owner. If high grade saw timber is sold the lump sum method may still be the best route.
Some trust departments or other fiduciaries are not allowed to use pay as cut sales. This lack of flexibility in timber sale management  is not smart in today's volatile stumpage markets.
It is wise to size up each sale prospect by ground conditions, access and volumes in place before the sale method is decided upon. In today's market we feel more like stock brokers than foresters as we have been playing weather and market related spot markets to capture higher prices which relates to greater revenue for our clients.
In conclusion, I think that if you have multiple products that must go to many different outlets you will do best if you use a pay as cut sale, assuming that you have all controls in place and a very reliable logger. If you have high volumes in products that appeal directly to a mill then the lump sum method may work best. Both have advantages and disadvantages that must be evaluated before you proceed to market your client's timber.


Monday, April 22, 2013

 Land Sale Contracts- Caution to Rural Land Brokers

As a broker for many years, I have learned, sometimes the hard way, to pay close attention on behalf of my client, on what is implied in provisions in a land sale contract. In most sales of rural property a generic form agreement is not always specific enough for the situation to be covered in sufficient detail. MLS or office supply store forms have limitations and should be used with caution. Be advised that contract variations between states is not unusual. If you have a significant estate would you want to use a form Will ?

Most land transactions I handle are based on Attorney prepared agreements. I just got a draft of a land sale contract that was prepared by an Attorney who represents the Buyer. On the surface the contract looked simple and straightforward but when studying several of the provisions regarding minerals, Hold Harmless and environmental issues I realized that every time I read these sections that I was more unsure of the legalize and if I really understood what I was reading. I can just imagine the confusion that some sellers and buyers have as they sell or buy very infrequently. Sometimes we interpret what we read to go along with what we want but that may not be the case.

I sent an email back to the Attorney requesting clarification of the terms and provisions and asked my client to have his personal attorney to review the agreement prior to executing the agreement. Do not be afraid or embarrassed to ask questions that will protect your client's interest. I am not qualified to be an Attorney nor are most of my clients but we are qualified to ask questions as to meaning and implication. I would rather be embarrassed up front than cause my client to sign an agreement where we made a mistake in meaning and consequence. In these and in most cases encourage them to consult with their Attorney.

I would like to hear some of your experiences .Hope you will add comments to this article!