Closing Range

Past, Present, Future Part 4

Examining Montana's role in Weyerhaeuser's strategy

In examining Montana’s forestry sector, let’s move now to Montana’s role in the “big picture” of the national forest-products market basket, more specifically, Montana’s part in Weyerhaeuser’s strategy.

After merging with Plum Creek, Weyerhaeuser now owns over 13 million acres of U.S. timberlands in 19 states, plus harvest rights on 14 million acres of Crown lands in Canada – a continental empire of which Montana comprises a tiny, tiny part.

In any business, long-term investments should have the highest possible rate of return. For “core” productive timber lands, the rate of return is determined mainly by the growth rate of the forest – functioning fiscally as the “interest rate” of the forest land investment of buying land, planting trees and guarding them until harvest time.

The Montana Department of Natural Resources and Conservation, along with commercial forest owners everywhere, uses a guideline called culmination of mean annual increment (CMAI), which is “the ideal harvest or rotation age in terms of most efficient net annual volume production.” This CMAI is used to determine “rotation,” or the number of years between harvest, which when combined with data on site productivity, allows Montana state trust managers to determine long-term sustained yield harvest from on Montana state forest lands.

What is Montana’s typical rotation age? For many lodgepole forests in Montana, the CMAI is generally regarded as 80 years, even though lodgepole lives at most 120 years. My buddy, Evel the Logger, or just Evel, tells me that most of the trees he cuts for sawlogs (not pulp) tend to be between 60 and 100 years old.

As for Weyerhaeuser’s continental expectations, the company’s website explains that “25 to 40 years might pass before final harvest delivers the full return on our investment” – that is basically the overall average CMAI for Weyerhaeuser’s national land base, the “biological rotation.”

Is this difference important? No, it’s critical. Businesses today focus on “net present value” (NPV) for shareholders, so let’s again consider Net Present Value and say we want a 6 percent annual return realized at harvest, years 25, 40 and 80. Our dollar collected in year 25 is worth 23 cents today. 40 years, 9.7 cents. 80 years? Zero point nine four cents – and we haven’t adjusted for either inflation or “risks” like wildfire or disease.

Crazy? Seems so, but it’s the bitter reality of forestry, compound interest and time. Forests that take 80 years to grow are worth less than a tenth, not half, of a forest that will grow in 40 years. With that in mind, might Weyerhaeuser’s managers (or those of any other timber REIT) be actively considering disposing of those properties with rotations higher than 25 to 40 years? Say, in Montana?

Sure – Plum Creek was already thinking, and doing, that for a much longer period of time than most people realize.

After buying Champion International’s 867,000 acres for $260 million ($300 an acre, $500 today) in summer 1993 (Stimson bought the mills, all now closed), Plum Creek stopped expanding in Montana, mainly because there wasn’t much left to buy.

Instead, Plum Creek went to work acquiring shorter-rotation timberland in other states, examples being buying SAPPI in Maine and merging with Georgia Pacific’s land division in the southeast. Plum Creek was able to do so thanks to A.) tax-favored REIT status after 1999, which made loans easy; and B.) cash from existing stands of comparatively old, dense, quality wood – the legacy of railroad-focused Northern Pacific’s sort-of-but-not-really-benign neglect.

In 2004, Plum Creek sold 89,000 acres in the Blackfoot, in 2008, 311,000 acres in the Swan, Potomac and Fish Creek country, and last year, sold the 117,000-acre Clearwater/Placid block. Significantly, these sales were not to any forest-sector competitor or private entity. Rather, these sales were brokered by The Nature Conservancy with the intent of eventual sale to government agencies as well as select private “conservation” buyers.

Why were none of these lands bought by, say, Pyramid? Stoltze? Stimson? R-Y? Or even another Real Estate Investment Trust? Simple – from the government, from taxpayers, via TNC, Plum Creek was paid crazy-stupid prices no rational private investor would ever touch.

Might Weyerhaeuser seek the same for an exit strategy?