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Using a lump sum with over-cut sale lets timber owners eat their cake

By Jim Griffith
Registered Forester #1616

It’s human nature to want the best deal possible. Which brings us to the question: when selling your timber, is it possible to have your cake and eat it too?

A seller wants to get every penny his timber is worth. Ideally, selling each individual tree for its highest and best use for the maximum price would enable the landowner to receive every penny his trees are worth. This would entail selling timber on a pay-as-cut (per ton) type basis. However, there are risks and drawbacks to the seller in this type sale.

Most sellers want to avoid all risks possible. Selling trees with a lump sum payment helps the seller avoid risks, and many times, selling lump sum ends up giving the seller the best price for his trees.

However, it goes against logic to maximize income while minimizing risk. That is why playing the stock market is like gambling. Actually, it is not like gambling, it is gambling. That’s why the level of income is associated with the level of risk. The higher the risk, the more one expects in return for his investment. Lower risk investments generally pay lower returns. This is common sense and widely practiced in the real world. So, is it any different in the timber business?

Most timber is sold by the pay-as-cut method. The seller assumes all of the risk in this type of sale. He also assumes the logger is honest and is going to pay for all trees cut and removed from the property, that each of the trees is going to be graded to their highest value, that none of the trees will be left uncut, and the prices paid for each product is tops.

Occasionally, our foresters will sell timber where we take a lump sum price up front with an over-cut value to be paid when the trees are harvested. How do we do that? Well, you bid or trade the lump sum price that is received up front. At the same time you bid or trade a per unit/per ton price with the timber buyer. The usual contract length is used, then as the trees are being cut, a record of each load and the associated tonnage is maintained during the harvest. As the value of trees removed exceeds the lump sum price paid up front, the seller is paid for the over-cut based on how much timber volume is removed from the property and the associated per unit price traded in the contract. The lump sum with over-cut type sale can be a good compromise.

A landowner with a timber cruise showing more value than the timber dealers are willing to pay can negotiate his best lump sum price up front and still get the over-cut that is believed to be there. The risk is that the timber cruise is high and the actual timber value is less than expected. The best case scenario is that the cruise be correct, or even low, and the overage cut result in the owner making more money than anticipated. This is getting your cake and eating it too.

Jim Griffith is general manager of the GFB Real Estate and Mortgage Companies.

Farm Bureau News – February 2004

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