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Economic Considerations

Whether its stocks, bonds, mutual funds, or savings accounts, as an investor you are interested in getting the greatest return on each dollar invested. Forest land is no exception. Many landowners, however, overlook the potential opportunity to increase the return on their forest land investment. In addition to providing important wildlife, recreation, and aesthetic values, investing in forest management can add to your forest's bottom line. Because management is a long-term proposition, the investments you make need to be carefully considered. When properly applied, modest investments in management early in a life of a forest stand can have a substantial impact on financial returns through increased forest growth, improved wood quality, and greater economic yields in the future. In addition, investing in forest management often compliments many other reasons individuals own forests such as improving wildlife habitat.

While forest management investments are, by their very nature, site specific, the cumulative impact of making these investments across a large forest area can be substantial, both economically and ecologically. Economically, investments in forest management repeatedly made across large areas can significantly increase the area's forest productivity and yield. In addition to providing a higher return on an owner's investment in forest land, significant investments in productivity have the potential to increase regional economic activity. Ecologically, increasing regional forest productivity through forest management means the same volume of wood can be produced from a smaller land base, enabling greater acreage to be used for non-economic purposes.

There are a number of factors to consider when making an investment in forest land management. These include:

  • Tolerance for risk. Due to the long-term nature of forest land management, investing in forest management often carries with it a large degree of uncertainty that an anticipated return on the investment will be fully realized. This includes uncertainty about future prices for your products (e.g., What markets will exist when my products are ready for sale?), management costs (e.g., What will be my annual property tax liability for the property?), and future forest conditions (e.g., Will forest growth increase in response to management as expected? Will the forest be susceptible to insect or disease infestation or wildfire?).
  • Investment timelines. Landowners need to consider the timeframe associated with many forest management investments. These investments may not be realized for years or even decades. In some cases, it may be your heirs that realize the investments you make today in your forests.
  • Portfolio diversification. For many individuals, investing in forest land management provides added diversification that compliments an existing investment portfolio.
  • Stand and ownership analysis for potential practices. The existing conditions of your forest (e.g., tree types, sizes, ages) will often dictate the opportunities to invest in forest management, as well as the specific practices that can be applied.
  • Financing. Depending on the access you have to capital to fund your investment in forest management, you may need to secure outside funding. The terms of outside financing (i.e., the interest rate charged by the lending institution, repayment period, amount of the investment financed) can vary considerably and have substantial impact the financial feasibility of the investment.
  • When to sell your products. How will you know when your timber and other forest products are ready for harvest? What criteria will you use to make this determination? From a strictly financial perspective, you will want to sell your products when they no longer increase in value at a rate that exceeds your next best investment opportunity (e.g., your opportunity cost). For example, if you could invest the proceeds from the sale of your forest products into an account earning an eight percent annual return, you would want to let your forest grow until its value increases at a rate that is less than eight percent per year.
  • Marketing. When your forest products are ready for sale, there will likely be costs associated with preparing your stand for sale and finding a market for the products. Many landowners use consulting foresters to oversee the sale of forest products, who typically collect a fee that represents a percent of the gross sale value.
  • Taxes. Property taxes are usually the single largest recurring annual cost of forest land management. What are the expectations about the future level of property taxes? Additionally, how will federal and state income tax provisions (e.g., treatment of timber income and management expenses) affect the performance of my investment?
  • Record keeping. Important, but often overlooked is keeping complete and detailed records of your forest management activities. These records are not only important for tax purposes, but they also enable you to better document the timing and types of treatments applied to your stand.
  • Government and other support or incentive programs. There are several government-sponsored programs that provide technical and/or financial assistance to forest landowners interested in making investments in forest land management. This includes cost-share funds to help with certain management practices such as tree planting or other silvicultural activities. A consulting forester or your local DNR office can help you identify the programs applicable for your forest management needs.

 

 
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North Central Region Forest Management Guide: A cooperative project of the USDA Forest Service and University of Minnesota.
USDA Forest Service - Northern Research Station
Last Modified:  05/25/2006