Forest Certification: What Have We Learned?

3 07 2013

What should forestland owners know about forest certification in the U.S.?  Recently published research highlights the inconsistent implementation and varying operational impacts across U.S.-based forest certification programs.  In sum, the findings indicate that forest certification creates, ironically, uncertainty for landowners and, in cases, destroys landowner value while producing unclear forest health benefits, if any, relative to standard and commonly applied best management practices (BMPs).

Forest Certification Refresher

Forest certification includes third-party programs that signal responsible forest management based on an audited set of criteria. Established forest certification programs in North America include:

  • Sustainable Forestry Initiative (SFI).  In 2005, the Programme for the Endorsement of Forest Certification endorsed SFI, giving it international recognition.
  • The Forest Stewardship Council (FSC), based in Oaxaca, Mexico, is a major international certifier.
  • The American Tree Farm System (ATFS) supports a program for nonindustrial family forest owners in the United States.

Generally, landowners enrolled in SFI or FSC programs are industrial owners that participate in certification as an industry standard and to satisfy investor requirements for sustainable management and public relations.  Typically, small or nonindustrial private landowners either participate in ATFS or not at all.

Previous Research

Private landowners question the added costs for programs that seem to mirror existing sustainably-oriented forest management plans (“Forest Certification Conundrum”, June 8, 2012). This has been reinforced by research that shows state-mandated management practice guidelines provide effective means to protect water quality (Lang, A.H. and B.C. Mendell. 2012. Sustainable wood procurement: What the literature tells us. Journal of Forestry. 110(3): 157-163).  For example, when BMPs are followed, water quality on forest stands in the South recovers in 2-5 years following a timber harvest. Research in the Pacific Northwest also confirms that buffer zones along stream banks allow water systems to recover following timber harvest.

Key Findings from Recent Research

Recent studies commissioned by the American Consumer Institute (ACI) and EconoSTATS at George Mason University assess implications from on-the-ground implementation of ATFS, FSC and SFI.

ACI’s white paper, “Comparing Forest Certification Standards in the U.S.: How Are They Being Implemented Today?” by Brooks Mendell and Amanda Lang at Forisk, notes that “adherence to a given certification program does not necessarily confirm specific forest management practices or restrictions.”  To better understand how the certification programs implement standards on the ground, the authors conducted nearly two dozen interviews with timberland owners, managers, and auditors. Findings indicate that forest owners and certification auditors have wide latitude to design and interpret management plans that broadly conform to responsible forest management and satisfy forest certification objectives. In the words of one forest certification auditor interviewed for the paper:

“The way that foresters interpret plantations in the South is not the way FSC defines plantations. FSC has narrowed its definition of plantation: basically, the only plantation in the South would be a Eucalyptus plantation.”

EconoSTATS, in “Comparing Forest Certification Standards in the U.S.: Economic Analysis and Practical Considerations” by Brooks Mendell and Amanda Lang at Forisk, supported efforts to model and quantify operational and economic implications to timberland owners in Arkansas and Oregon from implementing four forest certification scenarios: FSC-Natural, FSC-Plantation, SFI, and a base case that corresponds with state timber harvest guidelines that approximate ATFS.  FSC has two scenarios because it imposes different forest management standards on forest plantations versus natural stands.

The estimated effects are above and beyond what forest owners already account for in current management activities.  The modeled scenarios comprise criteria from ATFS, FSC and SFI related to clear cut size, land set-asides, adjacency (“green-up”) and streamside management zones.

Key implications to timberland owners based on the EconoSTATS study include:

  • In Oregon, both FSC scenarios significantly reduce economic returns to landowners. Relative to base forest management practices and SFI scenarios, forests managed as either natural stands or plantations under FSC reduce the estimated present value of net operating cash flows by 31% to 46% for modeled 46-year operating period. The FSC guidelines reduced the acres available for timber harvests, which resulted in 30% to 42% lower harvested volumes of wood compared with the base case and SFI scenario.
  • In Arkansas, the FSC-Plantation scenario significantly reduces economic returns to landowners. Forests classified as plantations under FSC reduce the estimated present value of net operating cash flows by up to 26% and reduce total harvest volumes by up to 28% for the modeled 36-year operating period compared to other scenarios. For those seeking FSC certification in the South, this creates tremendous incentives to avoid classification as a plantation as defined by FSC.

Conclusions

Timberland owners enrolled in third-party certification programs adhere to program standards and are subject to confirmation by third-party auditors.  However, when implemented, forest certification criteria remain subject to interpretation.  Certification under a given program does not necessarily confirm specific forest management practices or restrictions. Even auditors responsible for verifying landowners’ compliance with certification programs acknowledge how some standards, even if explicit, remain subject to interpretation in implementation.

Forisk will discuss forestland ownership issues  during “Timber Market Analysis” on August 12th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here

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Forisk Forecast Scorecard: 2012 versus Actuals

27 03 2013

This is the fourth in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

How did Forisk’s Forecast perform in 2012?  For pine stumpage prices in the U.S. South, the Forisk Forecast was within 2% regionally across all products.  Analyses of eleven state-by-state forecasts relative to Timber Mart-South shows that Forisk was, on average, $0.21 per ton lower than the actual pine sawtimber prices and $0.33 per ton higher than the actual pine chip-n-saw prices.  For pine pulpwood, Forisk’s estimates for eleven state-level prices for 2012 had, on average, $0.00 per ton difference from the actuals, with seven states realizing slightly higher prices than forecasted by Forisk and four states realizing lower prices than forecasted by Forisk.

20130327 Forisk Forecast Scorecard

For delivered softwood prices in the Pacific Northwest relative to those reported by Wood Resources International and the Oregon Department of Forestry, the Forisk Forecast was within 1% for three out of four state-product forecasts for 2012, and within 2% for the fourth state-product. Across categories in Oregon and Washington, Forisk underestimated the actuals for 2012 by, on average, $4.41 per MBF or 0.8%.

To learn more about the 2013 Forisk Forecast or 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. 





2013 US Timberland Ownership: Descriptive Statistics

21 03 2013

According to Forisk tracking of timberland ownership in the United States, 117 firms currently own or manage in excess of 100,000 acres of timberland. These firms feature the following descriptive statistics:

  • As a group, they own/manage 86.2 million acres of timberland.
  • On average, they own/manage 736,589 acres of timberland.
  • The median ownership is 312,000 acres.

Assuming an average per acre value of $1,500, each firm owns or manages on average $1.1 billion in timberland assets.

Analysis of private timberland in the U.S. affirms the concentrated nature of large ownerships.  While U.S. Forest Service research by Brett Butler concludes that 10 million family forest owners account for 264 million acres (35%) of U.S. forestland, Forisk research indicates that the 286 largest owners alone account for 92.1 million acres.  Each of the top ten own or manage in excess of 2 million acres.

The top 10 timberland owners as of January 2013 include:

20130321 Timberland ownership

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.





Forisk Forecast: US Housing Starts Outlook

20 02 2013

This is the second in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

Herman Chapman, in his 1935 book Forest Finance, wrote:

Forestry is an empirical art and not a mathematical science.  The two major premises upon which it rests, namely, human needs expressed in consumption of forest products, and the vital forces of tree life in their reaction to the composite factors of site including climate and soil, can be measured and predicted with only approximate accuracy. 

In this quote, I hear lessons echoed by friends and colleagues in the forest and timberland industries who remind us to maintain perspective and prioritize the most important factors.  Timberland investment pioneer Forrest Kellogg teaches, “It’s all about the soil!”  Timber buyer and procurement forester Fred Voyles reminds us, “You’re not doing your job if you stay in the truck!” Even professional gambler Amarillo Slim – neither friend nor colleague – advised, “You can shear a sheep a hundred times, but you can skin it only once.”

While I might not talk to Slim when it comes to future prices – or anything related to money, unless I want to lose some – we acknowledge that timber forecasts depend on appraisals of the future that we develop with “approximate accuracy.”  In this process, we do the best can to account for the strengths and weaknesses of the data available and the objectives across participants in forest industry markets.

From the macroeconomic perspective, housing starts critically affect timber forecasts.   Increased home building leads to periods of strengthening stumpage prices through growing demand for lumber and other building products.  The buying and building of new homes also fuels spending on wood products such as cabinets, furniture and hardwood floors.   Ultimately, however, our primary interest is the movement of stumpage prices in each local market as it plays out its role in satisfying national and export markets for forest products and wood bioenergy.

Every six months, Forisk builds a composite housing starts outlook based on publicly-available, independent forecasts from professionals in the housing industry.  These include Fannie Mae, Freddie Mac, Mesirow Financial and the National Association of Home Builders (NAHB), as well as long-term assumptions from the Energy Information Administration’s (EIA) model of the US economy (Figure 1).

20130220 Forisk Forecast_Housing

Our 2013 Base Case peaks at 1.75 million housing starts in 2018.  For comparison, our Mid-Year 2012 Base Case peaked at 1.78 million housing starts in 2017.  Overall, housing has recovered a bit quicker than forecasted in 2012 with the expectation of a slightly flatter, long-term trend.  In this Composite Outlook, the primary source of sensitivity with respect to lumber demand is the assumed single-to-multi-family housing mix.

To learn more about the 2013 Forisk Forecast or 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. 





Thoughts on Forecasting Timber Prices

17 02 2013

Forecasting timber (stumpage) prices and wood demand relies primarily on the manipulation of historical data and relationships to assess future scenarios and prices.  While the statistical techniques are somewhat agnostic, the development and application of relevant forecasts requires judgment.  How? Context and experience help determine which data may or may not be relevant, what scenarios may or may not reflect reality on the ground, and on what critical assumptions we depend to realize or negate our view of the future.  In sum, stumpage forecasts combine statistics with the smell of sawdust.

Generally, a purely data-driven, “built-in-a-vacuum” forecast that relies solely on historical information assumes a future that reflects the past and differs only by the specific variables of interest.  It sets aside data inconsistencies, technology shifts, demographic preferences and emerging markets.  However, the world of timber prices evolves, adapts and swerves.

For example, in our forecast of pine pulpwood stumpage prices in the U.S. South, we rely heavily on historic macro and micro factors to establish the baselines by state and region.  However, wood bioenergy markets lack the history to influence the price forecast in this way.  So we develop a separate view, based on how we understand demand to affect prices locally, and layer this into the forecast using a combination of quantitative analysis and experiential judgment.  We supplement the effort with multiple tests and scenarios.  Every six months, we rebuild our forecast models and review, test and reconsider scenarios and assumptions.  (After which we toast the gods and have a drink.  Wouldn’t you?) Generally, the amount of testing and supplemental judgment is inversely proportional to the amount and depth of historic data available.

In our business, we analyze markets and advise management on capital allocation for timber-related and wood-using assets. Our views on timber markets and modeling prices must be transparent, coherent and integrated. Models need flexibility and transparency to deal with questions, potential errors and new information. To quote Mellody Hobson, the president of Ariel Investments in Chicago, “If you have a problem, the only way to fix it is if you have a process you can dissect, so that when something is missed you can go back to your source document.”





“Getting Smart” in Forest Finance

17 10 2012

What opportunities exist for “getting smart” in forest finance?  I field versions of this question regularly from students seeking work in the timberland investment sector and from forestry professionals looking to broaden their skills and offerings to current clients.  To me, the opportunity is to be and remain knowledgeable and strong in at least one of the following areas in addition to forestry.

  1. Understand taxes.  You can make a lot of money and lose a lot of money based on what you know or don’t know about timber taxes.  Taxes matter.  For example, tax laws encourage ownership changes.  Issues associated with tax efficiency facilitated the movement of timberlands to institutional investors, Real Estate Investment Trusts (REITs) or subchapter S Corporations.
  2. Understand financial statements.  They are the language of investors and executives.  At the end of the day, the results of managerial business and capital allocation decisions get translated through audited financial statements which, like haikus and box scores, require interpretation and translation.
  3. Understand ownership structures.  At a minimum, be able to explain a C-corporation vs. a REIT vs. the range of other single-tax entities (LLC, S-corporation…)
  4. Understand true risks (and accounting for them).  Timberland investment and forestry novices ask first about fire, bugs, disease and hurricanes. Forest investment professionals can help them put these into perspective and understand more about markets. Part of getting comfortable with timberland risk results from being familiar with available information on physical, operational, financial, and regulatory risks.  The long investment horizons associated with forestry investments increase the interest in understanding the frequency and severity of potential risks.  Forest analysts should be prepared to think about and answer “how should we think about timberland risks?”
  5. Understand markets and forestry data.  Know current prices and industry trends.  Wood prices provide a key signal in understanding the economics of a given wood basket today and historically in an easily communicated form.  Be familiar with indices and data sources such as NCREIF, the FTR Index, and the US Forest Service.  Remember, all forestry data is a sample…..
  6. Understand how to communicate with a range of individuals.  In person and in writing.  I wrote a book – Loving Trees is Not Enough – and speak on this topic because my mentors, starting with my parents, have long emphasized its central importance to success.  Forestry and investment analysts communicate with a broad range of groups and individuals, including researchers, clients, private consultants, executives, our bosses and colleagues. Our analysis has little value if it cannot be easily communicated, either by us or by others, as part of a presentation or in writing. We owe it to them to be able to explain our findings, our assumptions, how we came to these conclusions, and how they could help or affect them.

Click here to learn about and register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.





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

27 09 2012

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.