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Why Invest in Timber Production 1
Michael Jacobson2Why Invest in Timber Production
What should a landowner do with his or her land? There are a number of alternatives. The choices include growing fruit or food crops, establishing a pasture for livestock, growing trees, selling it for development, or leaving it idle. This publication discusses the costs and benefits of growing timber. Understanding some basic information on environmental and economic factors can help a landowner make an informed decision.Financial Perspective
Timber production is unlike most investments. A timber investor does not see any revenues until the trees are harvested. This can range from 10-40 years depending on the species and product. What makes such a long-term investment worthwhile? There are a number of reasons landowners grow trees instead of using it for other uses. From a purely financial perspective, the landowner will invest in timber if:
- the revenues received at harvest exceed the costs of establishing and maintaining the trees until harvest time; and
- timber provides a better rate of return than other investments, for example, growing agricultural crops or a bank CD.
Other Perspectives
However, financial considerations are not the only factors a landowner can take into account before investing in timber. These factors are discussed under three broad categories.Landowner's personal considerations and objectives
Is timber one of your forest management objectives? Timber production is one of multiple uses from managing forest land. Depending on the intensity and type of tree planting, timber production can be carried out concurrently with other objectives such as pine straw production, hunting and recreation.Environmental, biological and legal conditions
Simply saying you want to grow trees is not enough. There may be certain conditions on the land that further encourage or prevent a landowner from producing timber. For example, what are the environmental impacts on soil, water, or wildlife from growing timber? Trees usually help reduce soil erosion and water runoff. Trees also provide suitable habitat for a variety of wildlife species. Timber production can enhance these attributes if they are important considerations. A landowner should also know whether the land is physically capable of producing trees. Soil quality should be analyzed to determine its capability to produce trees. Also, legal restrictions or regulations may limit the use of the land for timber production. For example, in wet areas or along rivers there are restrictions on harvesting.Economic and financial viability
A landowner should consider the costs and returns associated with the timber production. There are a variety of analytical tools available for assessing costs and benefits. In some instances, benefits may be realized in non-monetary terms. Examples include the benefit a landowner enjoys from merely walking on the land.Potential Costs (risks)
All investments have costs and returns. In some cases the costs and benefits can be quantified in dollars. Quantifiable costs of timber production include preparing the site, planting the seedlings, managing the land, property taxes, and harvesting expenses. Quantifiable returns to the landowner include payments from harvesting the trees and other income from enterprises such as hunting or recreation leases or pine straw production. There are other costs (risks) and benefits associated with timber production that a landowner may wish to consider. The following is a checklist of potential risks (costs) and benefits from investing in timber production.Long wait until payment
A landowner may need income annually. In timber production you receive timber after each harvest which can be many years. Depending on a landowner's income needs, annual hunting leases or periodic income from thinnings or pine straw may suffice between harvests.Natural disturbances
Hurricanes, wildfires, pest or disease outbreaks can destroy or damage trees.Higher financial returns
Higher financial returns can result from alternative uses such as livestock or agricultural crop production. This depends on the markets for these products.Potential Benefits
Wider choice of markets for products
In agriculture or livestock there is one product. When you grow timber you have a diversity of products ranging from pulpwood to sawtimber. A landowner can delay harvest until the market prices are favorable.Multiple products
In addition to timber, a landowner can receive income from hunting or other enterprises such as pine straw. Livestock production is also an option on timber land.Intangible benefits
Forests provide clean water, prevent soil erosion, and provide habitat for a number of wildlife species.Value
Trees can increase the underlying land value.Time consumption
Managing timber lands requires less time and labor compared to other land uses such as crops. After planting, the land needs only occasional maintenance such as firebreaks.Cost-share funds
Landowners can receive cost-share payments from the government for site preparation, tree planting and forest management. Most of the cost-share funds in government programs pay for a percentage of management costs such as reforestation or stand improvement. The Conservation Reserve Program provides annual rental payments for growing trees.Tax credits
Landowners can also receive reforestation tax credits for reforestation expenses.Preferable tax treatment
Landowners can receive preferable tax treatment for timber sales. Harvesting sales can be reported as capital gains rather than ordinary income.Comparisons
Table 1 compares the costs and benefits mentioned above among three alternative uses:
- Do nothing -- leave it alone;
- Convert to crops or livestock production;
- Plant trees (reforestation).
Summary
This paper is not intended to influence a landowner's decision but to provide information. It is shown that timber receipts are not the only benefit from investing in timber. Timber investments can be profitable for a landowner if they are willing to accept the long investment period. The keys to successful timber investment planning are understanding the potential risks and benefits of tree planting, gathering pertinent information, and then using the appropriate tools to make the wisest decision possible.
Tables
Table 1. A comparison of the benefits and costs for uses of your land.
Benefit/Cost
Do nothing
Convert to crops/livestock
Reforest with trees
Costs none high moderate Income none yes, annual yes, periodic Tax credits/deductions possibly moderate good Cost-share funds none none yes Increased land value some yes yes Wildlife enhancement possibly generally no yes Soil conservation possibly generally no yes Financial risk no yes moderate
Footnotes
1. This document is FOR 58, one of a series of the School of Forest Resources and Conservation, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Date printed: February 1999. Reviewed: 2003.Please visit the EDIS Web site at http://edis.ifas.ufl.edu.2. Michael Jacobson, assistant professor, School of Forest Resources and Conservation, Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, 32611.
The Institute of Food and Agricultural Sciences (IFAS) is an Equal Opportunity Institution authorized to provide research, educational information and other services only to individuals and institutions that function with non-discrimination with respect to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or affiliations. For more information on obtaining other extension publications, contact your county Cooperative Extension service.
U.S. Department of Agriculture, Cooperative Extension Service, University of Florida, IFAS, Florida A. & M. University Cooperative Extension Program, and Boards of County Commissioners Cooperating. Larry Arrington, Dean.
Copyright Information
This document is copyrighted by the University of Florida, Institute of Food and Agricultural Sciences (UF/IFAS) for the people of the State of Florida. UF/IFAS retains all rights under all conventions, but permits free reproduction by all agents and offices of the Cooperative Extension Service and the people of the State of Florida. Permission is granted to others to use these materials in part or in full for educational purposes, provided that full credit is given to the UF/IFAS, citing the publication, its source, and date of publication.