Forestry investment: What is your internal rate of return?

Lots of people invest their money into the stock markets, bonds or other investments. Like all of us, they are looking to maximize their internal rate of return. I was in the bank recently and looked at their return rates for CDs. They were in the neighborhood of 1.8 percent for a 24-month CD.

What if you owned trees? What would you expect your internal rate of return (IRR) to be? Three percent IRR? Ten percent IRR? What would be the rate of return you would want for a 26- to 30-year investment?

In forestry, I think that most times, something around 6 to 8 percent is quoted for the average IRR. But could that get higher?

First of all, your IRR is greatly dependent upon your input cost. If you have CRP trees and your input cost after cost share is $50 per acre or less, you will greatly raise your IRR.

Secondly, the earlier you have the first thinning and take out all the ugly trees, leaving about 240 per acre, the higher the IRR will be. The next thinning should take place when the total live crown ratio of the dominant trees reaches 35 percent to 40 percent. The stand should be thinned as often as needed until there are about 85 to 90 trees per acre. By the time the trees are age 21, there should be no trees left that will not make sawtimber by age 26. (Unless you have a perfect stand to start with, this can only be achieved through fifth-row thinning.)

The other factor that greatly influences the IRR is always leaving the best of the best trees and taking out the junk.

Forest fertilization lowers your IRR, even though it helps the trees grow. The window for additional diameter tree growth is only 4.5 years average. Forest herbicide application during midrotation also lowers the IRR, but the trees gain tree growth over an eight- and nine-year period, thus,giving you greater growth for a longer period of time.

If sawtimber prices are about $35 per ton by the time my two demonstrations get to 12,000 board feet, then the IRR will be about 22 percent by age 26.

The more mistakes you make, the lower the IRR. The longer it takes your trees to all make sawtimber, the lower the IRR. Thus it is easy to see why foresters tell landowners that their IRR is about 6 percent to 8 percent.

Third-row thinning

There is no research that shows that third-row thinning promotes diameter growth. Thus, if you have a third-row thinning, you are not maximizing your trees' diameter growth.

A fifth-row thinning leaves you 80 percent of your trees to choose from to leave the very best of the best. In an ugly forked, diseased, crooked tree stand, you will need every one of those 80 percent trees to choose the best. Unless your stand is perfect, the third-row thinning will lower your IRR because you have fewer of the best trees to choose to leave.