How Do Wood Bioenergy Projects Affect Local Stumpage Prices?

Foresters and timberland owners in Texas could care less about wood bioenergy projects in Florida or Georgia.  Why?  Because wood bioenergy markets impact timberland investments and the forest products industry at the local level.  The uncertainty of new project announcements requires project-by-project assessments and assumptions to estimate the potential impacts of bioenergy projects on stumpage prices in local timber markets. In the September issue of Wood Bioenergy US (WBUS), Brooks Mendell and Amanda Lang explore two bioenergy-related variables as they affect stumpage price projections: project risk and feedstock volumes by type.

An analysis of six scenarios of announced and operating biomass projects in Alabama/Mississippi revealed that assumptions regarding project viability affect stumpage prices to a greater degree than assumptions regarding feedstock mix.

The results are specific to Alabama/Mississippi, in which only 32% of currently announced and operating projects pass viability screening. A systematic, repeatable approach to screen bioenergy project risk provides a transparent and flexible process for testing different assumptions. Modeling feedstock mix requires assumptions related to the percent of pulpwood versus logging residues versus other forestry volumes and urban wood wastes.   Overall for the Alabama/Mississippi case, assumptions related to project risk and viability had 6.7 to 7.2 times more impact on forecasted stumpage prices than did assumptions related to feedstock types.

National update: as of September 25 2012, WBUS counts 452 announced and operating wood bioenergy projects in the US with total, potential wood use of 124.8 million tons per year by 2022.  Based on Forisk analysis, 298 projects representing potential wood use of 77.0 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.

Forisk announces the recent publication of its book “Wood for Bioenergy: Forests as a Resource for Biomass and Biofuels” by Brooks Mendell and Amanda Lang.  This book was published by the Forest History Society with support from the Plum Creek Foundation, U.S. Forest Service Research, Forest Investment Associates, National Alliance of Forest Owners, Potlatch Corporation, Price Biostock, the Westervelt Company, and the Lynn W. Day Endowment for Forest History Publications.  For more information and to purchase, click here.

“Wood for Bioenergy” Book Published by the Forest History Society

We are thrilled to announce that The Forest History Society published the book “Wood for Bioenergy: Forests as a Resource for Biomass and Biofuels” by Forisk authors Brooks Mendell and Amanda Hamsley Lang.  The book reviews the historical context and contemporary issues surrounding wood bioenergy and provides a primer for teachers, policymakers, investors, landowners, forest managers, and journalists on this critical energy source.  With a Forward penned by Roger Sedjo, Senior Fellow and Director with Resources for the Future, the book includes chapters on:

• History of Wood Energy in the United States
• Wood Pellets
• Wood for Electricity
• Cellulosic Ethanol and Other Wood Liquid Fuels
• Sources of Wood for Energy
• Wood Bioenergy Markets and Public Policy
• Investment Challenges and Keys for Success Moving Forward

To purchase the book, click here.

This book is part of the Forest History Society’s Issue Series and was published with support from the Plum Creek Foundation, U.S. Forest Service Research, Forest Investment Associates, National Alliance of Forest Owners, Potlatch Corporation, Price Biostock, the Westervelt Company, and the Lynn W. Day Endowment for Forest History Publications.

About the Authors

Brooks Mendell and Amanda Hamsley Lang have coauthored studies of the volume and availability of wood raw materials for energy, the status and progress of wood bioenergy projects, and the potential consequences of legislation for the evolution of wood bioenergy markets.

• Amanda Hamsley Lang is Senior Consultant at Forisk and Managing Editor of Wood Bioenergy US.  Her background includes operations experience with International Paper and award-winning forestry operations research at the University of Georgia under Dale Greene. She received B.S. and M.S. degrees in Forest Resources from the University of Georgia. 
  
• Dr. Brooks Mendell is President at Forisk and Vice President of Research.  An award-winning teacher and speaker, his 20 years of experience include roles in forestry operations with Weyerhaeuser, in forest industry consulting with Accenture, and in academia as a member of the forestry and finance faculties at the University of Georgia. He earned B.S. and M.S. degrees at the Massachusetts Institute of Technology, an MBA at the University of California–Berkeley, and a Ph.D. in Forest Finance at the University of Georgia.

Forisk is a management consulting and research firm specializing in the forestry and timberland sectors. Forisk advises senior executives in areas such as business strategy, asset and market due diligence, timber market analysis and risk, and organizational development. Forisk’s bioenergy research program includes the screening and ranking of wood bioenergy projects, as well as detailed studies evaluating the market and investment implications of alternative technologies. Forisk publishes Wood Bioenergy US, which tracks, screens, and analyzes the wood bioenergy sector in the United States. In 2011, Forisk published Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies, which detailed 36 biofuels projects and 12 technology pathways for converting wood raw materials to liquid biofuels.

Overseas Discount Rates and Multi-Dimensional Timberland Investment Strategies

This post includes summary comments from Brooks Mendell’s presentation “Evaluating Overseas Timberland Investments and Discount Rates” given on September 20^th, 2012 in Portland, Oregon at Who Will Own the Forest?

Like NFL quarterbacks with respect to winning and losing football games, discount rates get a disproportionate level of credit and criticism with respect to the success and failure of timberland investments and valuations.  While simple math tells us that changing discount rates alters significantly the results of any valuation model, basic finance and market analysis remind us that client objectives, timeframes and risk tolerance actually dictate investment strategies when attempting to acquire – and to value – timberland assets.  This is especially true when evaluating international timberland investment opportunities.

Previous research (e.g. Mendell, Sydor and Lang. 2011. “U.S. Investor Perspectives of International Timberland Investments and Colombia” published in International Forestry Review) and investment due diligence efforts highlight the dimensions of client-specific experience and risk tolerance in developing investment strategies and discount rate assumptions.  In short, the “comfort” of clients and their asset managers with doing business in a given country can be more important than the availability and quality of available forestry assets in that country.

The dimensions of relative client experience and risk tolerance can manifest themselves directly in the estimating of risk-adjusted discount rates for overseas timberland investment.  Investors commonly “build-up” discount rates to account for a range of asset and market-specific issues.  For example, the relevant layers can include:

• Base hurdle rate required by the fund or firm;
• Country risk to account for regulatory or political concerns;
• Market risk specific to the wood/forest industry specific issues in the country/region;
• Firm/client risk to account for client comfort, execution concerns and “greenfield” investments.

Multiple approaches or assumptions can address each of these layers.  [The figure above includes examples of building up discount rates, along with an example of accounting for multiple client-specific dimensions over time for investments in a market such as Colombia.] A starting point for country risk can be the spread between ten-year US treasuries and long-term bonds of the foreign country.  Approaches to market risk vary by country and investment vehicle.  In addition, firm/client risk can change over time.  For example, investors can use a higher discount rate in the early years of a first, greenfield investment to account for the initial establishment and execution risk, and then apply a normalized discount rate for the duration of this and other investments in the country.

Timber markets are uniquely local and local experience is hard-earned.  Due diligence work for international timberland investments require the quantification of these realities in valuation models and investment timelines.

To learn more about Forisk’s screening of global wood and timberland markets, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447. For a copy of the Mendell et al 2011 article “U.S. Investor Perspectives of International Timberland Investments and Colombia”, email Heather Clark at hclark@forisk.com. 

Forisk Forecast, Part III: Forest Supplies and Market-Specific Stumpage Prices

This is the third in a three-part series related to Forisk’s modeling of future softwood stumpage prices in the US South and Pacific Northwest.  Part I focused on housing (Studying US Housing Starts) and Part II addressed wood demand (Sawmill Capacity and Utilization).

In the movie “The Lord of the Rings: The Two Towers”, the great tree-like Ent named Treebeard talks of a great conflict and says, “We must weather such things as we have always done.” To his harried Hobbit friends, the perspective is insufficient, but it does capture an essential truth of taking a long view when making decisions during turbulent times.  When housing slumped in the United States, forest owners and timberland investors took the long view and deferred harvesting sawtimber, the logs needed to produce lumber. Now, as markets improve, we wonder at the new supply and demand equilibrium.  In particular, have forest supplies changed in ways that will affect stumpage price recoveries at the local market level in the near-term?

Forisk analysis of timber markets across the South over time indicates that excess sawtimber volumes could dampen or delay the “strengthening” of pine sawtimber and chip-n-saw prices in the U.S. South.  Specifically, the effect slows pine grade price growth by ~30% per year on average and reduces Base Case pine grade prices by ~$1 per ton over the next two years.  This effect varies by state and local market.

Forisk uses the “removal year” metric – accessible inventory divided by removals – to identify local markets with potential supply imbalances.   This approach builds on research and common measures used for other depleting natural resources.  The removal year estimates how many years it would take to deplete standing inventories, given a set level of removals per year. We compare the current removal years to a benchmark comprised of the average removal years specific to the local market or state over the previous 10 years.  In doing this, we estimate inventory levels that account for pine grade specifications, timberland ownership and forest accessibility associated with steep slopes and hydric sites.

For nine of the eleven states studied in the U.S. South, average removal years range from 14 to 24.  In other words, at the state level, a typical state with a robust forest industry has 14 to 24 years of standing pine grade inventories during normal times.  However, today, all of these states have at least five years more of inventory relative to historic averages.  In forecasting wood demand through 2022, Forisk estimates the excess continues to 2013 for all states except Texas.

To learn more about Forisk’s market-specific stumpage forecasts tailored to individual wood-using facilities or timberland ownerships, contact Brooks Mendell at bmendell@forisk.com, 770.725.8447.