Compounding Interest
By expressing tree growth in terms of compound interest, forest investments can be compared with other enterprises. The rate of compound interest of stands can be determined with a simple growth study or by comparing inventories. Divide the past volume of the stand by the present volume. The factor obtained is then applied to compound interest tables to determine the compound annual rate of interest returned.
Diminishing Growth
We know that as trees age, vigor and growth tend to decline. As growth rates diminish, so does the earning power of the tree. Even if trees grow at the same rate year after year, the interest they return decreases each year. This is because as their volume increases, the same amount of wood added annually represents a smaller percent return each year. For example, $.05 added to $.50 would represent a 10 percent increase, while $.05 added to $1.00 represents only a 5 percent increase.
Financially mature
With this in mind, we can easily see that somewhere along the line, tree growth returns will drop below an acceptable level. At this point, trees might be considered financially mature. The time to reach this level will vary from site to site. Some individuals will demand a higher return on their investment than others and will make a final harvest before those who will accept a lower rate of interest. Three common ways tree interest rates may be used include:
-
determining when to cut stands,
-
selecting trees to cut when removing individuals and
-
determining whether to cut immature timber to liquidate debt.
Managing the investment
Sometimes interest rates may be misleading. In crowded stands, low interest rates may only indicate a need to thin the stand. Often the removal of the slower-growing individuals will immediately boost the interest to acceptable rates. Sparse stands may show good growth, but due to the small number of trees, they are not paying for the use of the land. Cut and re-establish such stands so that the full site can be utilized. In determining the minimum acceptable rate of growth for trees, it is necessary to consider net return. Such factors as income taxation, handling costs, risk and flexibility of operations may make a lower rate of return more acceptable. And finally, as timber reaches large sizes, trees become more suitable for higher-valued products. Be sure to check on these markets before liquidating a stand that might appear to be financially mature.
|
