The Best Thing to Know When Selling Pay-As-Cut Timber

There are far more pay as cut timber sales than there are lump sum sales today.  Whether this is good or bad is the topic of another blog to come.  For now, you need to be aware of the most important factor when selling timber by the ton or conducting a pay as cut timber sale.

Before addressing the most important factor of a pay as cut sale, one needs to understand that the individual trees from a forest are grouped into piles according to the end-use product for which each specific tree will be utilized; and each of these piles of trees will be delivered to a corresponding product-specific mill.  These end-use products might consist of pulpwood, which is made up of the lower-valued trees which is not necessarily a function of diameter.  Other end-use products could be the higher-valued solid-wood products like chip-n-saw, sawtimber, or poles, and are listed in order of increasing value.  The trees are generally grouped according to species as well, or more specifically, pine and hardwood.

Bidding

In a pay as cut timber sale, trees are purchased from the landowner and priced on a per-ton basis.  The problem for a layman selling timber by this method is the evaluation of bids.  You can easily evaluate a logger’s quality of work by going to the woods where he is working and seeing for one’s self what the final harvested site might look like.  However, equally, if not more important, is determining which bid will net me the most money from my sell.

The Scenario

It is a rare case with multiple timber bidders to have one buyer higher than all other bidders on every product being harvested from your property; which would make the decision easy and the need for this blog needless.  So, let’s assume we are thinning a 20 year old stand of planted pine and we will have products of pine pulpwood and pine chip-n-saw being cut-n-hauled from the property.  Bidder A was high on pine pulpwood and Bidder B is high on pine chip-n-saw plus provides a very high price for the current market on pine sawtimber.

Now let’s assume that Bidder A is willing to pay $9/ton for pulpwood and $15 on the chip-n-saw, while Bidder B will only go $8 on pulpwood, but will pay $17 on chip-n-saw and $30 on sawtimber.  Which bid is going to net you more money from your proposed timber sale?  Note the high sawtimber price, but also note that there is to be no sawtimber removed in this harvest.  The sawtimber price is only fluff for appearance and is in no way to be a factor in the decision process.

Let’s consider that the effort to choose a best bid is too confusing and you decide to obtain a third bid in hopes the decision will become clearer with the additional bid.  And Bidder 3 offers $8.50 per ton on the pulpwood and $16.50 on the chip-n-saw.

Picking the Best Offer

Now the process of picking the best offer is only muddled because Bidder C is not high on of any of the product prices.  So what do we do?  The easiest means to pick the highest offer is to know the amount of tons of each product you plan to remove from your woods.  With the number of tons for each product you simply multiply the tons by the respective prices and add up the total value (Table 1).  But you have to know the acres and volumes which can require a costly timber cruise/appraisal.

Without going to the expense of a complete timber cruise, one could determine the proportion of each product that will be removed from the property.  With proportions, acres harvested and total tons will no longer be a factor in the evaluation process.  With proportions for each product to be harvested, you multiply the percentage of the product being harvested by the respective per-ton price and add the proportionate $ values of each product.  The result is the average price per ton regardless of the product to be removed (Table 2).  The highest average price per ton will yield the highest dollar return on your sale.

To check the proportionate method against the total tons method, we had 1500 total tons (1000 tons pulpwood plus 500 tons chip-n-saw) to be removed and at an average price of $11.17 per ton from Bidder C, we can expect a total of $16,755 (1500 tons x $11.17/ton regardless of the product) …exactly the same result, after rounding error, for the total tons method of Bidder C.

Would you have guessed that in our scenario presented that Bidder A and Bidder B would cut out the exact same total value.  Change the overall tons/proportions of products to be cut and this will not be the case.  And would you think Bidder C, who is not high bidder on any of the products, would actually be the best choice to get you the most money from your harvest.

Obtaining proportions to be removed could still be a cost to you, but not nearly as much as a timber cruise and certainly not as much as making an uninformed decision and picking the wrong buyer.  This process becomes even more complicated with sales of natural timber where there can be 10 or more timber products harvested in the sale; but the complicated can be made easy with the right information in hand.

The Most Important Thing…

There are numerous other issues to be concerned with in evaluating timber prices and timber harvesting, but when it comes to selling timber by way of  a pay as cut timber type sale, the most important factor to know is the proportion of timber products in your sale, so you can properly evaluate your bid.

Timber Update is here to help you in the timber management process. Contact us today.