Timber Marketing & Timber Sale Contracts

By Jay C. Hayek Extension Forestry Specialist

© Jay C. Hayek

Outline

What is Timber Marketing?

The “Timber Marketing” Effect

Independent Consulting Foresters

Timber Sale Contracts

Summary

Five Questions for the Audience

Show of Hands How many of you know how much your timber

is worth?

How many of you know how to scale and grade standing trees?

How many of you feel comfortable selecting, marking, marketing, administering, and monitoring your own timber sale?

Show of Hands

How many of you have sold timber before?

How many of you utilized the services of a professional forester in order to assist you in the marketing and administration of your timber sale?

What is Timber Marketing?

© John S. Pritchett

Selling Timber The vast majority of woodland owners are at a

huge disadvantage when selling timber because…

1. Most owners don’t sell timber very often and most owners

simply do not know how to value their standing timber, and

2. Loggers and timber buyers are “in” the business of buying timber at the lowest possible price in order to increase their own profit margins! NOTE: this doesn’t make them crooks; rather, it makes them

business savvy!

Marketing Your Timber Timber Marketing is the use of common-sense

business practices and basic economic principles…

Used to advertise your standing timber (i.e., stumpage) to multiple timber buyers…

In order to maximize financial returns, while simultaneously maintaining a high-quality residual woodland for future timber sales!

Marketing vs. Selling Timber marketing is best practiced through the

expertise and advice of a respected and trusted professional forester!

Marketing leverages competition and supply/demand for your standing timber

Selling your timber directly to the first logger who

knocks on your door violates basic marketing principles and competition

Spot Markets

Timber marketing is NOT based on the average price paid for timber!

The timber marketing process “spots” the maximum amount a timber buyer is willing to pay for a particular lot/tract of timber at a particular time and place!

Source: The Woodland Steward, Vol. 21, #2, Summer 2012

Spot Markets High bids frequently reflect

Desirable species mix & high-quality sawlog/veneer logs

Urgent need to fulfill existing contracts & Special orders

Local competition for quality logs and volume

Low log inventories at the mill

Poor logging conditions or other special market/weather

conditions

Source: The Woodland Steward, Vol. 21, #2, Summer 2012

Absence of Competition

In the absence of competition (i.e., no timber marketing), the value of your timber is solely dictated by your one-on-one negotiations with a single timber buyer So, you need to ask yourself, “Do you really

want to horse-trade with an expert who buys and sells trees and logs for a living?”

The “Timber Marketing” Effect

$35,522 more than the lowest bid, or a 161% increase over lowest bid!

Source: Robert Petrzelka & Gretchen Cline, Geode Forestry; Swedesburg, IA

Timber Marketing Effect

[$13,989] [$6,736] [$4,100] [$9,520] [$7,300] [$8,940] [$9,150]

Sale Conveyance Methods • Timber can be sold in a variety of ways:

• Sealed-bid, lump sum stumpage (most hardwood sales)

• Lump sum stumpage

• “Shares” or Percentages (low-value sales)

• Frequently leads to high-grading

• Pay-as-Cut (amount paid per unit of product cut)

• Mill Scale / Mill Tally

Sealed-Bid, Lump Sum Method

Trees are selected, marked, and tallied by you and your consultant

Timber sale is advertised to multiple buyers Buyers are mailed prospectus/announcement Buyers submit sealed-bid on bid opening date

Owner accepts or rejects submitted “sealed” bids

Landowner’s contract is signed / executed

Payment received in-full prior to harvesting

Source: web.extension.illinois.edu/forestry/il_timber_prices/index.html

Understanding Prices • Stumpage – the value of standing timber; value to

the landowner.

• F.O.B. – the value of logs/trees delivered to a mill or yard; accounts for logger profit, logging, and hauling costs.

• Lumber – the value of mill-sawn lumber; lumber prices can be green or kiln dried.

Professional Consulting Foresters

Consulting Foresters Step #1: Seek the advice and expertise of a

professional consulting forester

A professional forester is an individual with a forestry degree accredited from the Society of American Foresters™

Must be an “Independent” consultant Work solely for woodland owners No conflict of interest, such as business

affiliations, ties, or contracts with loggers, buyers, log yards, or sawmills

Consulting Foresters Step #2: Ask the consulting forester for a

letter that outlines their…

Scope of Professional Services

Fee structure for services

References of past clients

Consulting Services & Fees

Consulting Forester Services Properly select, tally, and mark trees for harvest

Confirm and mark property boundaries Assemble timber sale prospectus (announcement)

Advertise timber sale on behalf of owner

Establish timber basis for landowner

Administer timber sale contract

Monitor timber harvest operation (stump counts, BMPs, etc.)

Close-out Timber Harvest

[Marking a low-fork sugar maple]

© Jay C. Hayek

Paint at Ground-level Paint the Bole / Stem

[Marking an off-site, broken-top black walnut for harvest]

© Jay C. Hayek

© Jay C. Hayek

[Well-marked Boundary Line]

© Jay C. Hayek

Consultant Fees Most Consulting Foresters Charge: 6-12% commission based on winning bid Commission needs to be commensurate with services

offered

Ex: Does their commission include periodic monitoring of the logging operation, stump counts, and harvest close-out?

Alternatively, some consultants charge: Flat rate $/acre $/hour

Owner/Forester Agreement

Get everything in writing

Scope of services, timeframe, deliverables, expectations, and fees

Sign a contract with your consultant outlining services, deliverables, and fees

Be an Active Participant • Foresters enjoy it when landowners accompany them to

the woods • Allows the forester to explain the subtle differences

associated with marking/leaving certain trees, grading defects, and determining product classes

• Remember, this is YOUR woodland and YOU need to be

confortable that your forester is listening to your short- and long-term objectives • Financial goals • Residual stand quality, hunting, and recreation • Future timber sales

Keys to a Successful Sale 1. Get a professional forester involved

2. Select, mark, and tally only those trees ready for sale

3. Establish and mark your property boundaries

• Notify your adjacent neighbor(s)

4. Advertise your sale

5. Award winning bid

6. Develop and execute a legal timber sale contract

7. Monitor the logging operation

Where to Find a Consulting Forester?

Find a Consulting Forester • Illinois Consulting Foresters

• http://web.extension.illinois.edu/forestry/pdf/tfb-nres-202.pdf

• Iowa Consulting Foresters

• http://www.extension.iastate.edu/forestry/publications/PDF_files/F-361.pdf

• Wisconsin Consulting Foresters

• http://dnr.wi.gov/files/pdf/pubs/fr/fr0021.pdf

Timber Sale Contracts

© Photolink/Getty Images

Rule #1: Avoid ‘Handshake’ Agreements

Don’t rush, or be pressured, into an immediate decision to sell your timber!

Timber Sale Contracts

• A well-written timber sale contract is an absolute necessity when selling timber!

• According to the IRS, the sale of timber is both a reportable and taxable financial transaction!

Elements of a Contract • Name and Address of Buyer and Seller • Buyer’s License Number • Location and Legal Description of Property • Exact number of trees marked/designated for sale • Approx. volume of timber being sold • Color of paint used to indicate designated sale trees • Payment amount & Method/terms of payment • Log landings, skid trails, forestry BMPs • Penalties, liabilities, damages, insurance, etc. • Contract duration; Contract extension options • Clause for arbitration • Signatures and witnesses

Source: Iowa State University Extension Forestry

Timber Tax

Deductible Expenses • All ordinary and necessary expenditures associated

with growing timber, held with the intention and reasonable expectation of producing income, can be recovered in one of three basic ways: • Deduct from sale proceeds:

• Expenditures associated with a timber sale or other form

of disposal are deducted from any proceeds received.

Direct Source: National Timber Tax (www.TimberTax.org)

Deductible Expenses • To be deductible the expenses must be ordinary

and necessary for the proper management of the timber for timber production

• Only the net gain from a timber sale, after deducting timber depletion and sale expenses, is taxed

Direct Source: National Timber Tax (www.TimberTax.org)

Timber Sale Expenses • Legitimate Timber Sale Expenses Include:

• Consulting forester fees/expenses

• Property boundary or survey fees

• Advertising your timber sale • Fees paid to appraisers, attorneys, and other advisors

directly related to sale activities also may be included

Source: Federal Income Tax on Timber: A Quick Guide for Woodland Owners, 4th ed., 2012

Timber Sale Expenses

Source: http://www.na.fs.fed.us/pubs/stewardship/tax-timber/tax-timber-2012.pdf

National Timber Tax • Your one-stop destination for all timber tax related

questions and answers:

• Woodland owners • Foresters • Farm Managers • Accountants • Attorneys

• www.TimberTax.org

www.TimberTax.org

Summary

Summary

• Foresters promote “timber marketing” because it levels the playing field for woodland owners,

• It promotes competition and basic supply/demand economics, and

• It translates into greater financial revenues now and into the future for the woodland owner!

Summary • The vast majority of loggers and timber buyers – just

like most everyone else – are honest, hardworking, tax-paying citizens. There in this business to make a living and to pay their bills…

• EVERYONE WINS when loggers, timber buyers, foresters, and woodland owners work together to promote good forestry, low-impact harvesting, and sound silviculture!

Summary • Even the most respectable and honest loggers and timber

buyers are not ethically bound to pay landowners fair market value or more for their timber…

• THIS IS EXACTLY WHY WOODLAND OWNERS NEED TO

MARKET THEIR TIMBER TO MULTIPLE BUYERS!

• Is a car salesman ethically bound to sell you a new or pre-owned vehicle at the lowest possible price? • Is the salesman a crook if you overpaid for a new/used car, or • Are you simply guilty of being an uniformed consumer?

Questions?

Jay C. Hayek, Extension Forestry Specialist W-521 Turner Hall (MC-047) 1102 S. Goodwin Ave Urbana, IL 61801 Email: jhayek@illinois.edu

Timber Basis • What is my basis? - The original basis of property is

usually its cost, along with any other expenditures incurred to acquire the property. The cost is the amount you pay in cash, debt obligations, or in other property.

• The basis is used to calculate the depletion unit needed to determine the taxable gain (loss) when you sell timber on the stump, cut timber, or dispose of it involuntarily, such as by a casualty, theft, or condemnation.

Source: www.timbertax.org/getstarted/basis/

Timber Basis

Source: www.extension.purdue.edu/extmedia/FNR/FNR_FAQ_3.pdf

Timber Basis • Purchased land, timber, and a building for

$200,000

Building

Bare Land

Timber

Totals