Items Needed for the Financial Analysis of Timberland
A financial analysis is typically used to analyze the stability, solvency, liquidity, and profitability of an investment, and assists in determining whether or not the investment makes financial sense. Financial analyses play an important role in the decision-making process for investing in timberland. When it comes to investing in timberland for sale in Florida, financial analyses are often used as a tool to compare factors such as land use, alternative timber species, and silvicultural treatments, to find the current value of timber resources, to understand the potential flow of income, and to determine the optimal rotation age of the stand and the cost effectiveness of commercial thinning.
The following information is needed to perform a Florida timberland for sale investment analysis.
1. Investment Period
Like many other investments, it is necessary to understand the investment period of timberland. Investment periods for timberland are measured by the rotation length of the timber. In the south, typical rotation lengths for pine stands are 30 years or more. Some pine stands are cut as early as 15-20 years for pulpwood. To produce products of higher value, which typically translates to a higher return, it is often recommended to hold the stand for a longer rotation.
Another important factor that is used for timberland investment analysis is costs. Costs that are associated with timberland investments include the costs of establishment, management, and maintenance. Some of the major costs of establishing a stand include site preparation, purchasing of seedlings, and cost of planting. Examples of costs associated with the management and maintenance of timberland include firebreak maintenance, thinning, fertilizing, insect and disease control, and the cost of professional management help. Other costs not previously mentioned, but should certainly be included in a financial analysis, are the carrying costs of the land which include property taxes, mortgage interest and insurance premiums.
3. Selling Price
The expected selling price of the timber you will sell, otherwise known as the stumpage price, is another necessary factor for financial analyses of timberland. Stumpage prices vary depending on the product the timber will be used for, i.e., pulpwood, saw-timber, or poles. When performing a financial analysis on Florida timberland for sale, the future stumpage price of the products at the time the timber is harvested must be used. To determine the future stumpage price of timber products, the current stumpage price, inflation rate, and past price trends must all be considered.
4. Growth & Yield
In addition to knowing the investment period, costs, and selling price associated with a timberland investment, it is also necessary to understand two other important factors, the investment’s growth and yield. The growth of timberland investments is a measurement of the change in a specific variable, such as the weight, basal area, or volume of a timber stand. The growth of a timber stand is often challenging to determine because timber is a living organism, and as such, does not uniformly grow at one standard rate. The yield of a timberland investment is the total amount of timber that is available for harvest per period or at any given time.