Timberland Ownership in the US South

In the US South, most timberland is held privately by two primary ownership groups: Non-corporate and Corporate (oftentimes referred to as Industrial) landowners. Non-industrial private forest (NIPF) landowners make up approximately 55% of all ownership types, and corporate landowners make up approximately 32%. All remaining timberland is owned by federal or state government agencies.

• The NIPF ownership category includes thousands of private owners who may own as little as a few acres, or several thousand acres of timberland. While some of these landowners choose to actively manage their timberland with rotations of planted pine, many simply allow their acres to grow unencumbered resulting in “natural” stands of timber. Since this ownership group is so fragmented, a network of wood brokers (also called “dealers” or “suppliers”) operate to bring this wood to market. These intermediary suppliers purchase the rights to the timber from NIPF landowners on a stumpage basis, contract the harvesting and hauling (or own their own harvesting equipment and trucks) and deliver to area mills.
  
  Since a significant amount of NIPF timberland is controlled by individual families and maintained for varying reasons, the motivation for selling can differ from corporate owners. NIPF owners have flexibility with respect to the timing and strategy of their timber harvests; they are oftentimes price conscious and may delay harvests until they perceive prices to be acceptable.

Corporate owners, on the other hand, focus on maximizing value as quickly as possible – typically with multiple rotations of planted pine. Corporate Timberland Investment Management Organizations (TIMOs) and Real Estate Investment Trusts (REITs) are the largest groups making up this category. The two groups have similar goals in that both concentrate on maximizing cash flow and value through intensive management practices. Where they differ, however, is in the structure of the business and how they approach the marketing and sales of timber.

• TIMOs are generally private companies that manage timber for pension funds and/or trusts where the fund or trust is the landowner. Typically, investment funds are raised, and the timberland is purchased with a finite investment period ending when the fund will be closed. So, while the TIMO is concentrated on timber cash flow to a certain degree, its larger goal is to maximize the exit valuation of the timberland.
  
  In addition, TIMOs are paid a management fee with incentives around the rate of return on the investment (ROI). Usually due to this payment structure and since the exit value drives their ROI, TIMOs are reluctant to add management costs to the business and, therefore, tend to sell timber on a stumpage basis rather than a delivered basis (where they would have to manage harvesting and hauling contracts).

• REITs have a different operating structure, as many are publicly traded companies that focus on earnings for their shareholders. Cost controls, cash flow and timber sale maximization are essential to their bottom line. As a result, REITs are highly focused on marketing and turnkey services including delivering timber. Managing harvesting and hauling contracts is the norm for these ownership groups, particularly since they are focused on lowering operating costs and maximizing margins. In addition, their portfolio of timberland acres will likely be balanced at various stages in the growth cycle (i.e., various age classes) for liquidity, guaranteeing a steady flow of different timber products.

With a high percentage of privately owned timberland acres under NIPF and corporate control, supply in the South is rarely an issue and healthy competition between these ownership groups keeps prices in check. Unlike many other wood basins around the world, southern timber also comes with a number of added perks: Efficient supply chain components from forest to mill, well-developed transportation and infrastructure solutions, robust rural forest communities, deep, competitive labor pools and healthy manufacturer margins.

With so much competition and available timber, why do landowners keep growing more trees?

In the wake of the Great Recession that began in 2007, lumber demand disappeared almost overnight. While timberland owners across the South waited for a quick recovery, their trees kept growing and southern sawmills—owing to new-found efficiencies in the intervening years—simply learned to do more with less tree volume.

What has been the net effect of this trend after 13 years? Southern forests now have more trees that are larger in size, and sawtimber prices in the region have demonstrated minimal volatility since 2007. As a result, capital investment has been pouring into the South due to the region’s oversupply of cheap logs.

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Despite this oversupply, returns are still good for timberland and timber revenues, and landowners have learned in this most recent cycle to keep expenses in check while making their acres more productive. Southern landowners are getting better each year at increasing production and cash flow, and we will likely continue to see planting density increase and the rotation age shorten. While the price rally has not been as swift or as significant as many had planned and hoped for, the weighted average price of all timber products continues to go up.

With world-class resources, a vast amount of privately-owned timberland acres, low costs and the capabilities to manufacture and market a myriad of wood products, the US South will remain the land of forest products opportunities for the foreseeable future.

*The information in this post is meant to provide a broad overview of the prevailing timberland ownership dynamics in the US South. It is important to note that individual timberland owners may operate under different structures to best suit their near- and long-term strategic goals.