By Angus Malcolm*
With log prices rising over 10% in 2013 one forest owner asks: "If log prices have gone up by 5%, will my forest value have increased by 5% also?"
"No".
Now let me explain: I will use a simplified example to illustrate.
My forest will yield 500m3/ ha at age 30. Costs for harvesting the logs and delivering them to port/mill is $60/m3 . The average log price is $100/m3.
Net return (stumpage) is therefore $40/m3 ($20,000/ha).
After taking into account annual costs, inflation, tax, and discounting from the harvest date, my forest is valued at:
A 5% increase in average log price (assuming no other changes) will have the result of changing gross revenue from $100 to $105 (+5%) and net revenue from $40 to $45 (+12.5%).
This has the following impact on value:
Changes in costs have the opposite effect. In this example to achieve the same $5 increase in net revenue would involve a reduction in costs of 8.3% (from $60 to $55).
In summary: rising (or falling) log prices will have an amplified effect on forest value, but the exact level will depend on the timeframe until harvest (assuming all other factors remain unchanged).
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Angus Malcolm is a senior adviser at Crighton Anderson. You can contact him here.
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