One of my favorite forestry blogs, is the Forisk Blog by Forisk Consulting. I recently read a technology related article on their site called “Timberland Investments and the Strategic Role of Technology” by Dr. Brooks Mendell. If you haven’t read this article, then pause here and go check it out. This post will include some additional thoughts and reflections about the current state of technology of forest management, starting with the information presented in the Forisk article.
Background on the Article
My primary takeaway from the Forisk article is that through technology improvements in the supply-chain, we’ve increased our output and utilization, thereby lowering the per-unit-value of our timber, while also establishing barriers to entry and competition from substitute goods. Due to technology improvements, we are growing and producing more wood, but requiring less. I have to admit, that is an uncomfortable point for someone who is on the growing side of the business. It seems to me that we need to thoughtfully consider how we will continue to extract value in a commodity based market.
Further, the article emphasizes that,“While falling or flat timber prices get the headlines, cash flow per acre dictates the investment returns. Price times volume – ‘P times Q,’ says the Professor – drive these cash flows, and volume, along with improved grade yields from the woods, continue to increase. Thanks to technology.“
I’m not entirely clear what the context for the use of “technology” in the previous sentence. I understand it as a general term, including physical hardware and software, as well as improvements in our knowledge or applied methodologies (e.g.; Manufacturing, Genetics and Silviculture) within the supply-chain.
I believe this raises a valid point; that increases in quantity or quality produced (Q), should be able to offset the difference in flat or falling prices (P), therefore continuing to justify investments in our industry. Although, as an investor or landowner concerned with growing trees, I’d be more confident in the investment if I knew the long-term price trend was increasing, not flat or falling. However, the main point, I believe, is that technology has helped derive cash flows even in times of flat or falling prices.
Additional Thoughts About Technology and Timber Investments
In my experience, landowners have little influence over the stumpage price paid for their timber. Although, landowners do have some influence over the quantity and quality, assuming investments in Silviculture and Genetics pay off. But, I fear we often overlook an important part of the profit equation, specifically the cost.
By cost, I am including some necessary amount of expenditure that is needed to continue to grow trees of a certain size and quality, which is likely different for each landowner. In other words, I’m not proposing minimizing cost, rather that cost is considered against the objectives of the investment.
What about management efficiency? How do we measure our cost in terms of efficiencies related to the day-to-day management of timberland? This type of cost is difficult to monetize.
We know manufacturing is more efficient now as a result of technology. Improved tree Genetics and Silviculture are more efficient by matching inputs and genetic traits with investment strategies. Timberland investors and management companies use cutting-edge software for projections, analysis, growth and yield modeling, finance and accounting functions. But, I believe we continue to overlook some long overdue technology improvements in the field. Specifically, technology for loggers, foresters, and service contractors. How do we empower these folks to embrace technology for purposes of data collection, monitoring harvest and silviculture activities, and improved decision making? To me this seems like the most undervalued part of the supply-chain.
The Forisk article makes some very relevant points that support the technological improvements within the forest products supply-chain. As indicated in the article, this is somewhat of a “double-edged broad sword” where our efficiencies “effectively lower the per-unit value of trees“, while creating “barriers to entry from non-wood sources“. This is a great example where technology can help improve cash flows, and strengthen our industry, even in a downward turning market. However, it’s important that we also recognize the technology investments that are needed to help foresters, loggers and service contractors make better informed decisions at the resource level.
Source: Mendell, B. [July 13, 2017]. Timberland investments and the strategic role of technology. Blog post found at: https://forisk.com/blog/2017/07/13/timberland-investments-strategic-role-technology-2/