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.


5 comments:

  1. Great points Ed, landowners certainly need to know these issue's and how they relate to the process.

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    1. Thanks Buddy, As always I appreciate your comments and ideas.

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    2. Ground conditions are a major driver in determining what the best sale method should be. Marginal ground will affect stumpage prices for any method, so a prudent buyer will really back off on a lump sum sale. No one can afford to have a large sum of money tied up in timber that can't be logged for extended periods of time until weather permits. This is especially the case in today's market.

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  2. Great points Tyler. We have always dealt with ground conditions but it is more critical today than ever before. Buyers have no flexibility to warehouse tracts as they can't afford to invest large sums of cash up front. If they can log a tract in the short run they might commit lump sum funds or advances but it would have to be an exceptional tract, close to mills, etc.
    Seems like everything today is current spot market focused. what can you do for me today? and how fast can you do it?. oh, by the way, we need the top prices and can we rest assured that we will be paid what you said you would pay us?. Life in the logging woods used to be simple. Not anymore!

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  3. I agree sometimes all the money up front is not always best. Sometimes there are enough speciality products that the landowner misses out on but you have to have someone who is willing to merchandise for the highest value. This is becoming harder to find due to cheap log
    ging rates that are based on production.

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