Calculating Rate of Return on Timber Stand Improvement

By Paul Dietmann, Market Specialist, Badgerland Financial

Investments deliver annual rates of return; trees do the same.

Here’s an example: An S&P investment over the 15-year period from 1999 to 2013 produced an annualized rate of return of 4.63% (data source: http://www.moneychimp.com/features/market_cagr.htm). Typical of the investment marketplace, this stretch included a dramatically low return in 2008 (-37.22%) and a high return in 2013 (+32.42%).

In order to capture the 4.63% annualized rate of return, a person would have had to invest their money on January 1, 1999, leave it there for 15 years, and cash out on December 31, 2013.

These same calculations apply to managing trees. And, interestingly, managing trees competes with the S&P 500, but your decisions make all the difference.

Annualized rate of return can be estimated for managing timber under different scenarios. We simply need to know the initial value of the standing timber, an estimate of the annual cash expenses and income, and an estimate of the value of the timber at some point in the future.

The numbers can be plugged into a simple internal rate of return calculator to generate the annualized rate of return.

I ran several scenarios for woodland management that range from doing nothing to grazing (to lower the taxes) to managing timber (enrolling in Managed Forest Law and not).  They are in my presentation “Timber Stand Improvement: Cost of Doing Nothing or Getting a Return on Management.”