Determining the value of a particular stand of timber is a complex task. We must take into account the individual trees in the stand, logging conditions, and the distance to the mills than can use them.
Trees are the unique feature of the timberland asset class. Land is an important feature, but land is also a component of commercial real estate and agricultural investments. Trees are unique in that they grow (unlike commercial real estate assets) and they can be stored (on the stump), unlike agricultural crops.
Here we look at what determines the value of softwood trees. (Hardwood tree values will require a separate Research Note.) In How Trees Grow (Vol 8 No 2), we looked at total volumes. But, except in very rare cases, timber stands produce more than one product. Figure 1 shows a typical product breakdown of the total yield from a hypothetical loblolly pine stand. The biological rotation age of this stand is 30 years. At that age, 57% of the volume would be in sawtimber, 22% would be in chip n saw and 21% would be in pulpwood (Table 1)
Figure 2 shows what happens when stumpage prices are applied to the volumes in Figure 1. (The prices used here are those reported by Timber Mart-South for the first quarter of 2012.) At age 30, this stand will yield almost $3,000 an acre, and due to the difference in the value per ton of the different products, nearly three-fourths of this will be from the sawtimber.
It is obvious that sawtimber provides more value than pulpwood or chip n saw, but what makes this so? What makes one log (or tree) more valuable than another log (or tree)?