adding value to timberland investments with dsss

Adding value to timberland investments with decision support

tools

Antti Mäkinen, CTO, PhDSimosol Oy

by

© 2012 Simosol Oy. All rights reserved.

Why forest investors do not utilize forestry IT and DSSs all that often?

Why forest investors should utilize forestry IT and Decision Support Systems (DSSs)

more?

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© 2012 Simosol Oy. All rights reserved. 3

Utilization of decision support systems in forestry in general

‣Storing, handling, processing, analyzing and visualizing forest data

‣Modeling of forest growth and yield

‣Planning of operational activities into the future

‣Comparing alternative courses of action and the effects of the actions

‣Reporting of meaningful information from the generated plans


What kind of information investors want from a DSSs?

‣ Information for helping in the initial decision to invest and tracking of the investment performance

‣Current value of a forest property and expectations on DCF, IRR?

‣The uncertainties associated with the expectations?

‣How to react to the changes in the surrounding world

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Difficulties in utilizing typical forestry DSSs in forest investment projects

‣Extensive geographical coverage of projects

‣…in varying natural environments and using multiple units of measurement and languages

‣…conforming to diverse conventions and regulations

‣…done by people that are not necessarily that much IT oriented

‣Typical forestry DSSs are not that flexible, except for expert users


The two extremes in analysing a potential forest investment

‣Typically two extremes: the "DSS solution" or the "spreadsheet solution” (the ”quick and dirty” solution)

‣The "DSS solution" can automate many processes, but requires a significant initial investment

‣The "spreadsheet solution" is initially a lot less expensive and more applicable to ad hoc analysis but leads to repetition of simple tasks

‣ In the past, there hasn’t been that much options in the middle of these two extremes

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Case

‣Valuation of a tropical hardwood plantation in Latin America

‣Need for assessing the value of the plantation using DCF approach and a ”spreadsheet solution”

‣Shortcomings of a "spreadsheet solution”:

‣ simplifying assumptions about the growth

‣ age structure vs. market demand do not meet

‣ timber price developments difficult to account for

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Typical pitfalls of the ”spreadsheet solution” in a valuation project

Optimal DCF=+ +

Market capacity is often exceeded in harvest

plans

Price trends are difficult to integrate into

valuation

Simplified growth models lead to unreliable

projections


‣ Annual cash flow for a 10-year period, predicted using a simple MAI value as the growth model and a fixed regime for harvests and silvicultural operations

Example valuation case DCF


‣ The simple growth models were systematically overestimating the harvest potential (as well as the DCF) by an average of 5%

Growth model adjustment


‣ The fixed regime recommended harvests that significantly exceeded market capacity, and overestimated the DCF by over 10%

Age structure & market

Market capacity


‣ Market price scenarios did not affect the DCF optimisation, as there commonly is no DCF optimisation in spreadsheet tools

Price scenario & DCF generation

Timber price scenario


The lessons learned from this exercise

‣Real world phenomena are in many cases complex

‣What you are doing with a DSS or spreadsheet when you’re looking at a forest from an investor’s point of view, is creating a model

‣The more things you want to include in your model and the higher the detail level, the more complex the model gets

‣Spreadsheets offer you only limited set of tools for handling the complexity


Other common bottlenecks

‣Vertical information flow, or the lack of it

The flow of aggregated information from the forest-level to the decision makers

The flow of directions and feedback from the decision makers to the operators at the forest-level

‣Many cases using a "broken telephone”

‣ Luckily, modern information technology solutions can come to rescue


The Nordic experience

‣Big organizations with huge forest databases and long traditions of utilizing IT in forestry

‣Recently, everybody moving to tailored web-based forest information systems

‣But, only the big players can afford these type of heavy customized IT systems

‣And, these systems are very much designed for Nordic conditions: boreal forests, long time horizon, specific forestry regulations…


Vertical flow of information: relevancy for investors?

Forest inventory and operations databases

Long-term / operative planning

Reports: woodflow, DCF, IRR...Directors

Forest managers

Field operators

Real tim

e infrmation


Where is the sweet spot?


www.iptim.com

[email protected]

Thank you!Questions?

adding value to timberland investments with dsss

Technology

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