Timber Marketing & Timber Sale Contracts

Transcription

1 Timber Marketing & Timber Sale Contracts By Jay C. Hayek Extension Forestry Specialist Jay C. Hayek

2 Outline What is Timber Marketing? The Timber Marketing Effect Independent Consulting Foresters Timber Sale Contracts Summary

3 Five Questions for the Audience

4 Show of Hands How many of you know how much your timber is worth? How many of you know how to scale and grade standing trees? How many of you feel comfortable selecting, marking, marketing, administering, and monitoring your own timber sale?

5 Show of Hands How many of you have sold timber before? How many of you utilized the services of a professional forester in order to assist you in the marketing and administration of your timber sale?

6 What is Timber Marketing?

7 John S. Pritchett

8 Selling Timber The vast majority of woodland owners are at a huge disadvantage when selling timber because 1. Most owners don t sell timber very often and most owners simply do not know how to value their standing timber, and 2. Loggers and timber buyers are in the business of buying timber at the lowest possible price in order to increase their own profit margins! NOTE: this doesn t make them crooks; rather, it makes them business savvy!

9 Marketing Your Timber Timber Marketing is the use of common-sense business practices and basic economic principles Used to advertise your standing timber (i.e., stumpage) to multiple timber buyers In order to maximize financial returns, while simultaneously maintaining a high-quality residual woodland for future timber sales!

10 Marketing vs. Selling Timber marketing is best practiced through the expertise and advice of a respected and trusted professional forester! Marketing leverages competition and supply/demand for your standing timber Selling your timber directly to the first logger who knocks on your door violates basic marketing principles and competition

11 Spot Markets Timber marketing is NOT based on the average price paid for timber! The timber marketing process spots the maximum amount a timber buyer is willing to pay for a particular lot/tract of timber at a particular time and place! Source: The Woodland Steward, Vol. 21, #2, Summer 2012

12 Spot Markets High bids frequently reflect Desirable species mix & high-quality sawlog/veneer logs Urgent need to fulfill existing contracts & Special orders Local competition for quality logs and volume Low log inventories at the mill Poor logging conditions or other special market/weather conditions Source: The Woodland Steward, Vol. 21, #2, Summer 2012

13 Absence of Competition In the absence of competition (i.e., no timber marketing), the value of your timber is solely dictated by your one-on-one negotiations with a single timber buyer So, you need to ask yourself, Do you really want to horse-trade with an expert who buys and sells trees and logs for a living?

14 The Timber Marketing Effect

15 $35,522 more than the lowest bid, or a 161% increase over lowest bid!

16 Timber Marketing Effect [$13,989] [$6,736] [$4,100] [$9,520] [$7,300] [$8,940] [$9,150] Source: Robert Petrzelka & Gretchen Cline, Geode Forestry; Swedesburg, IA

17 Sale Conveyance Methods Timber can be sold in a variety of ways: Sealed-bid, lump sum stumpage (most hardwood sales) Lump sum stumpage Shares or Percentages (low-value sales) Frequently leads to high-grading Pay-as-Cut (amount paid per unit of product cut) Mill Scale / Mill Tally

18 Sealed-Bid, Lump Sum Method Trees are selected, marked, and tallied by you and your consultant Timber sale is advertised to multiple buyers Buyers are mailed prospectus/announcement Buyers submit sealed-bid on bid opening date Owner accepts or rejects submitted sealed bids Landowner s contract is signed / executed Payment received in-full prior to harvesting

19 Source: web.extension.illinois.edu/forestry/il_timber_prices/index.html

20 Understanding Prices Stumpage the value of standing timber; value to the landowner. F.O.B. the value of logs/trees delivered to a mill or yard; accounts for logger profit, logging, and hauling costs. Lumber the value of mill-sawn lumber; lumber prices can be green or kiln dried.

21 Professional Consulting Foresters

22 Consulting Foresters Step #1: Seek the advice and expertise of a professional consulting forester A professional forester is an individual with a forestry degree accredited from the Society of American Foresters Must be an Independent consultant Work solely for woodland owners No conflict of interest, such as business affiliations, ties, or contracts with loggers, buyers, log yards, or sawmills

23 Consulting Foresters Step #2: Ask the consulting forester for a letter that outlines their Scope of Professional Services Fee structure for services References of past clients

24 Consulting Services & Fees

25 Consulting Forester Services Properly select, tally, and mark trees for harvest Confirm and mark property boundaries Assemble timber sale prospectus (announcement) Advertise timber sale on behalf of owner Establish timber basis for landowner Administer timber sale contract Monitor timber harvest operation (stump counts, BMPs, etc.) Close-out Timber Harvest

26 Jay C. Hayek [Marking a low-fork sugar maple]

27 Paint the Bole / Stem Jay C. Hayek Paint at Ground-level Jay C. Hayek [Marking an off-site, broken-top black walnut for harvest]

28 Jay C. Hayek [Well-marked Boundary Line]

29 Consultant Fees Most Consulting Foresters Charge: 6-12% commission based on winning bid Commission needs to be commensurate with services offered Ex: Does their commission include periodic monitoring of the logging operation, stump counts, and harvest close-out? Alternatively, some consultants charge: Flat rate $/acre $/hour

30 Owner/Forester Agreement Get everything in writing Scope of services, timeframe, deliverables, expectations, and fees Sign a contract with your consultant outlining services, deliverables, and fees

31 Be an Active Participant Foresters enjoy it when landowners accompany them to the woods Allows the forester to explain the subtle differences associated with marking/leaving certain trees, grading defects, and determining product classes Remember, this is YOUR woodland and YOU need to be confortable that your forester is listening to your shortand long-term objectives Financial goals Residual stand quality, hunting, and recreation Future timber sales

32 Keys to a Successful Sale 1. Get a professional forester involved 2. Select, mark, and tally only those trees ready for sale 3. Establish and mark your property boundaries Notify your adjacent neighbor(s) 4. Advertise your sale 5. Award winning bid 6. Develop and execute a legal timber sale contract 7. Monitor the logging operation

33 Where to Find a Consulting Forester?

34 Find a Consulting Forester Illinois Consulting Foresters pdf Iowa Consulting Foresters s/pdf_files/f-361.pdf Wisconsin Consulting Foresters

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36 Timber Sale Contracts

37 Rule #1: Avoid Handshake Agreements Photolink/Getty Images Don t rush, or be pressured, into an immediate decision to sell your timber!

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39 Timber Sale Contracts A well-written timber sale contract is an absolute necessity when selling timber! According to the IRS, the sale of timber is both a reportable and taxable financial transaction!

40 Elements of a Contract Name and Address of Buyer and Seller Buyer s License Number Location and Legal Description of Property Exact number of trees marked/designated for sale Approx. volume of timber being sold Color of paint used to indicate designated sale trees Payment amount & Method/terms of payment Log landings, skid trails, forestry BMPs Penalties, liabilities, damages, insurance, etc. Contract duration; Contract extension options Clause for arbitration Signatures and witnesses

41 Source: Iowa State University Extension Forestry

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45 Timber Tax

46 Deductible Expenses All ordinary and necessary expenditures associated with growing timber, held with the intention and reasonable expectation of producing income, can be recovered in one of three basic ways: Deduct from sale proceeds: Expenditures associated with a timber sale or other form of disposal are deducted from any proceeds received. Direct Source: National Timber Tax (

47 Deductible Expenses To be deductible the expenses must be ordinary and necessary for the proper management of the timber for timber production Only the net gain from a timber sale, after deducting timber depletion and sale expenses, is taxed Direct Source: National Timber Tax (

48 Timber Sale Expenses Legitimate Timber Sale Expenses Include: Consulting forester fees/expenses Property boundary or survey fees Advertising your timber sale Fees paid to appraisers, attorneys, and other advisors directly related to sale activities also may be included Source: Federal Income Tax on Timber: A Quick Guide for Woodland Owners, 4th ed., 2012

49 Timber Sale Expenses Source:

50 National Timber Tax Your one-stop destination for all timber tax related questions and answers: Woodland owners Foresters Farm Managers Accountants Attorneys

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52 Summary

53 Summary Foresters promote timber marketing because it levels the playing field for woodland owners, It promotes competition and basic supply/demand economics, and It translates into greater financial revenues now and into the future for the woodland owner!

54 Summary The vast majority of loggers and timber buyers just like most everyone else are honest, hardworking, tax-paying citizens. There in this business to make a living and to pay their bills EVERYONE WINS when loggers, timber buyers, foresters, and woodland owners work together to promote good forestry, low-impact harvesting, and sound silviculture!

55 Summary Even the most respectable and honest loggers and timber buyers are not ethically bound to pay landowners fair market value or more for their timber THIS IS EXACTLY WHY WOODLAND OWNERS NEED TO MARKET THEIR TIMBER TO MULTIPLE BUYERS! Is a car salesman ethically bound to sell you a new or pre- owned vehicle at the lowest possible price? Is the salesman a crook if you overpaid for a new/used car, or Are you simply guilty of being an uniformed consumer?

56 Questions? Jay C. Hayek, Extension Forestry Specialist W-521 Turner Hall (MC-047) 1102 S. Goodwin Ave Urbana, IL

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58 Timber Basis What is my basis? - The original basis of property is usually its cost, along with any other expenditures incurred to acquire the property. The cost is the amount you pay in cash, debt obligations, or in other property. The basis is used to calculate the depletion unit needed to determine the taxable gain (loss) when you sell timber on the stump, cut timber, or dispose of it involuntarily, such as by a casualty, theft, or condemnation. Source:

59 Timber Basis Source:

60 Timber Basis Purchased land, timber, and a building for $200,000 Building Bare Land Timber Totals