Timber vs. Row Crops

Under what circumstance can conversion of forestland to

crop land be justified financially?

William L. Hoover

Cash Rent for Crop Land

$0

$20

$40

$60

$80

$100

$120

$140

$160

Year

1982

$'s

per

Acr

e

Indiana

Ohio

Proxy for net-income from row crop farming

Average Value of Farm Real Estate

$0

$500

$1,000

$1,500

$2,000

$2,500

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

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1999

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2005

Year

1982

$'s

per

Acr

e

Indiana

Ohio

Comparing Crops and Timber• Use equivalent annual income to landowner• Tax treatment

– Land rent – ordinary income– Timber income – capital gains income

• Cost of timber growing stock – not considered

• Conversion costs – considered in terms of how much can afford to pay– Land clearing– Drainage– Soil modification

Basis of Timber Values

• Purdue Forest Products Price Report and Trend Analysis– Weighted average price series

• Quality stand• Average stand

• Growth– Quality stand – 350 board feet per acre per

year (bf/A/year)– Average stand – 150 bf/A/year

0

100

200

300

400

500

600

700

57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05

Year

$ p

er M

BF

Weighted Average Price for Quality Stand

Nominal

Deflated

Trend line is equivalent to 1.5% per annum

W. Hoover. Annual. Indiana Forest Products Price Survey and Trend Analysis, Purdue Univ. Coop. Ext. Svc.

Cash Rent – PU AGEC Annual Survey

Timber Growth - .35 MBF per Acre per Year

Timber Value – PU FNR Weighted Average Price for Quality Stand, 1982 $’s

Timber Annual Cost - $4 per Acre, 1982 Base Year, Adjusted for Inflation

Cash Rent Compared to Net Value of Timber Growth, Nominal

$0

$50

$100

$150

$200

$250

$ p

er

Acre

Cash Rent

Net Value of Timber Growth

Both series adjusted for inflation by PPI for Finished Goods

Cash Rent

Net Value of Timber Growth

Cash Rent Compared to Net Value of Timber Growth, Deflated

Net Value of Timber Growth

Cash Rent

0

20

40

60

80

100

120

140

160

180

19

82

$'s

pe

r A

cre

Cash Rent

Net Value of Timber Growth

Net Value of Timber Growth minus Cash Rent

Premium of Managed Timber Over Crops, Deflated

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

1975

1977

1979

1981

1983

1985

1987

1989

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1997

1999

2001

2003

200519

82 $

's p

er A

cre

0

50

100

150

200

250

300

350

400

450

500

57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05

Year

$ p

er M

BF

Weighted Average Price for Average Stand

Nominal

Deflated

Trend line is equivalent to 1.1% per annum

W. Hoover. Annual. Indiana Forest Products Price Survey and Trend Analysis, Purdue Univ. Coop. Ext. Svc.

Cash Rent minus Net Value of Timber Growth

Timber Growth – 0.15 MBF per Acre per Year

Timber Value – PU FNR Weighted Average Price for Average Stand

Timber Annual Cost - $1 per acre in 1982 adjusted for inflation

$0

$20

$40

$60

$80

$100

$120

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

1982

$'s

per

Acr

e

Premium of Crops Over Unmanaged Timber, Deflated

Case 1, Existing Stand of Productive Timber

• Well stock stand of central hardwood timber

• Harvest every 10 years– Harvest revenue annualized at 3% APR

• Cash rents range from $80 to $120 per acre

• Calculate timber revenue that it takes to breakeven with cash rent– Land clearing costs on considered

Case 2, CRP Land With Trees

• Timber plantation 15 years old

• First harvest in 50 years– Harvest revenue annualized at 3% APR

• Cash rents range from $80 to $120 per acre

• Calculate timber revenue that it takes to breakeven with cash rent– Land clearing costs on considered

Breakeven Level of Timber IncomeExisting Stands / CRP with Trees

Cash Rent

Before Tax Timber Value Increment, $’s

After-Tax Timber Value Increment, $’s

80 107 / 180 91 / 152

100 134 / 226 113 / 190

120 161 /271 136 / 228

Breakeven Level of Timber GrowthExisting Stands / CRP with Trees

Cash Rent

Before-Tax Timber Growth

bf/A/year

After-Tax Timber Growth

bf/A/year

80 178 / 450 152 / 380

100 223 / 565 188 / 475

120 268 / 678 227 / 570

Average Annual Net Growth

• Indiana – 127 bf/A/year (Doyle)– 533,016 MBF – 4.34 million acres

• Ohio – 123 bf/A/year (Intl.)– 965,540 MBF (Intl.)– 7 million acres

• Ohio – 80 bf/A/year (Doyle)

Conclusions

• Doesn’t pay to clear highly productive well managed forestland

• May pay to clear low productivity poorly managed forestland

• Clearing of CRP land with trees will usually pay