The Myth of Low 
 Tree Value Growth Rates

The Myth of Low Tree Value Growth Rates
(Don't Confuse Diameter Growth with Value Growth!)

This article appeared in the Fall 1999 Massachusetts Woodland Steward (Volume 29, Number 4).

Let's say you have some timber on your property and you want to know how fast it's growing in value.  Maybe you're thinking of cutting some of it.  Maybe you're doing some retirement planning.  Maybe you're just curious.

So you ask a local timber buyer who knows the property and he tells you those 14-inch-diameter trees are only growing at 2% per year, so you might as well sell them to him so you can concentrate growth on smaller, faster growing trees.

But you'd just read in the latest WS (June/July 1999) where a big sawmill owner said that timber should grow at more like 5%.  So you call up a state service forester, and ask him the same question.  He takes a minute to check his volume growth rate table, and agrees that the rate is probably more like 5% for those 14" trees.

Then you remember seeing another article in the WS (Jan/Feb 1997) in which a forest economist (Bob Bond) said trees that size grow at up to 20% per year in value.  Now you're really confused!  He at least implied that one such tree on his land grew that fast.

What Does "Grow" Mean?

So who's right?  Would you believe that all of them are right?  Well, it's possible.  It all depends on how you define the word "grow," or more precisely, how many of the five dimensions of tree value growth you want to include in your definition.

Let's take a 14-inch-diameter hardwood tree growing at 8 rings per radial inch (i.e. a quarter inch in diameter per year).  The annual diameter growth rate of our study tree is 1.8%.  So maybe that's what the timber buyer was talking about.

But of course trees don't just grow in diameter, or width, they also grow in depth.  Width and depth combined are what's called basal area - the surface area of a slice of the trunk.  With the help of a tree volume growth factor table, you find that our study tree is growing in basal area at 3.7% per year.

Unfortunately, that table is deceptive.  It doesn't account for growth in height.  If our study tree also adds half a log in merchantable height every 10 years, then it's actually growing in volume at about 5.2% per year.  Now this is more like what the mill owner and state forester were saying.

So how did the forest economist come up with 20% per year?  That's a much bigger leap than from 2% to 5%!  Well, while trees GROW in three physical dimensions (width, depth, height), they also grow, or more precisely they INCREASE, in two value dimensions: grade value (quality) and market value (supply and demand).

Wizard's Hats and Dunce Caps

To understand how grade value works, visualize a very tall wizard's hat.  This shape approximates the shape of the sheath of new wood that trees add every year.  It's like putting progressively larger wizard's hats on top of each other.  And if each wizard's hat is more free of defects (such as dead branches) due to previous wizard's hats covering them up, the tree increases in grade value, which is a function of the amount of clear wood in a log or tree.

If a tree's limbs have self-pruned due to competition with its neighbors, or if they were pruned off in a TSI operation, logs in a tree will jump a grade every two inches in tip diameter, or about every 8-10 years at 8 rings-per-inch.  Starting at a 10" tip diameter, the butt log in our study tree will go from grade 2, to grade 1, to select, to prime, and even to veneer grade.

If you went back to that timber buyer and got a copy of the sawmill specs and prices that he gives to loggers, and if you subtracted logging and trucking costs, you'd find that the stumpage value per Mbf of your trees roughly doubles with every increase in log grade.  Those bigger, clearer logs are worth more per board foot because their board feet have fewer defects.

If you have a financial calculator, spreadsheet program, or a table of interest rate multipliers, you can quickly determine that with a doubling of grade value every 10 years, the rate of grade value increase is about 7% per year.  Wow!  Grade value increase alone is more than all three physical growth dimensions combined!

When you add grade value increase to physical (volume) growth, you get 5% (rounding off) plus 7% = 12%.  Of course this isn't likely to happen on all your trees, unless you've been (or hired) a very good manager.  It's likely that some won't be growing at 5% in volume, and some will have too many defects to make those grade jumps every 10 years.

Study Tree 1.  High-grade residual tree after commercial thinning/improvement harvest.

Age

50

60

70

80

90

Diameter at 4.5 Ft

12

14

16

18

20

Annual Rate of Diameter Growth Previous 10 Yrs

 

1.6%

1.3%

1.2%

1.1%

Log Height

1

1.5

2

2.5

2.5

Volume per Tree (Bd Ft Intn'l)

60

110

180

280

350

Annual Rate of Volume Growth Previous 10 Yrs

 

6.2%

5.0%

4.5%

2.3%

Butt Log Grade

2

1

Select

Prime

Veneer

Tree Value per Mbf

$50

$130

$240

$410

$760

Value per Tree

$3

$14

$43

$115

$266

Annual Rate of Value Increase Previous 10 Yrs

 

16.9%

11.7%

10.3%

8.8%

Annual value growth per acre (25 crop trees)

 

$28

$72

$179

$378

By contrast, low-grade trees left after high-grading operations have much lower rates of value growth, both in percent of annual value growth and in annual value per tree and per acre.  You might say they are adding dunce caps instead of wizard hats.  The difference in per tree and per acre values is especially dramatic: up to 30 times more value on well-managed, high-grade trees.

Study Tree 2.  Low-grade tree left after high-grading operation.

Age

50

60

70

80

90

Diameter at 4.5 Ft

10

11

12

13

14

Annual Rate of Diameter Growth Previous 10 Yrs

 

1.0%

0.9%

0.8%

0.7%

Log Height

0.5

0.75

1

1.25

1.5

Volume per Tree (Bd Ft Intn'l)

20

40

60

85

110

Annual Rate of Volume Growth Previous 10 Yrs

 

7.2%

4.1%

3.5%

2.6%

Butt Log Grade

4

4

3

3

2

Tree Value per Mbf

$10

$15

$20

$30

$40

Value per Tree

$0.2

$0.6

$1.2

$2.6

$4.4

Annual Rate of Value Increase Previous 10 Yrs

 

11.6%

7.2%

7.8%

5.6%

Annual value growth per acre (65 crop trees)

 

$3

$4

$9

$12

Our high-grade tree is growing pretty fast in value.  However, we're still not up to the forest economist's 20% annual rate.  What kind of magic did he use to get that number?  Was he wearing a real wizard's hat when he did those calculations?  No, he was just calculating that second value dimension - market value increase. 

During the time period he was referring to - the 1970s - inflation was running pretty high.  That accounted for most of the difference between our 12% (so far) and his 20%, but not all.  There was still about 3% in market value increase not accounted for by inflation.  This factor is known as real, or net-of-inflation, market value increase.

When you add in this last factor, you get a total real rate of value increase of 15% for our 14-inch study tree.  Of course, we don't know what will happen to prices over the next 10-30 years.  Not even wizards will guess at this.

What About Costs and Risks?

Finally, there's the matter of cost and risk connected with your timber investment.  You have to pay taxes on land and/or timber. You have to pay forester's fees, and you have to worry about growth lost to insects, diseases, storms, etc. 

As it turns out, real market value increases have historically been pretty much canceled out by costs and losses (risks) anyway.  Real market value increases have averaged 2-3% per year for the past 200 years in the U.S., as have costs and risks.  So it sort of makes sense to just leave both of them out altogether.

Another thing to keep in mind is that tree value growth rates decline over time.  You'll find the highest rates in the 12-18 inch diameter range.  After that, both volume and grade value increases slow down unless trees are of exceptional (veneer) quality, in which case grade value increase rates will stay high right up to 20-24 inch diameters.

Managing Your Portfolio

It will come as no surprise to WS readers that landowners can do a number of things to ensure that their trees actually attain the high value growth rates we've discussed.  The first step is planning: locate the stands that have the potential to achieve rapid, high-quality growth.  Next, devise a silvicultural strategy to concentrate physical growth on the most valuable species.  This may involve harvesting or girdling competing trees, removing grapevines, and pruning off lower branches.  These activities may need to occur a number of times as the stand matures.

Plan on monitoring your prized stands over the years so that you can make adjustments and respond to unforeseen problems.  Seek sound, state-of-the-art advice throughout the process.  And finally, when it comes time to sell, make sure you get fair market value for your trees.  Often, a competitive bidding process is the best way to discover what the fair market value actually is.

Editor's Note: Karl Davies is a Consulting Forester based in Northampton.  Please note that Karl's piece is a general discussion only - each woodlot must be evaluated on its own merits.