Once in a lifetime harvest of your woodlot
Matt Hanna, New Zealand Tree Grower November 2012.
Forestry is a long-term crop that gives forest owners the luxury of timing the harvest. However unlike most other crops, once the harvest is complete there is no next season, just another long wait. Unless the forest owner has a significant area, over 20 hectares and with different age classes, harvesting is probably done all at once to use the cost of roads, moving machinery and resource consents.
It is often said that small woodlot owners are notoriously unlucky when it comes to getting a good return on their investment. It is remarkable that after about 28 years of waiting woodlot owners rush into a sale. Of course, these owners will also say that they find it hard to determine who to trust because they can be one-time users of contractors and have no history or relationships to rely on.
In terms of getting the fundamentals of the transaction right, nothing has changed for decades. Every vendor and forestry consultant understands the need to know what it is the grower has to sell.Without that information, it is very difficult to approximate where the wood might be marketed, the current prices, and whether the harvest roads and cartage costs justify a harvest in the coming months. Those basic financial assessments can be made with the right information.
The solution to this particular problem is to be certain about the timber for sale, and its value, and to accurately assess the costs of harvest. Assessing contractors’ past performance requires enquiry and due diligence. All of these enquiries will be helped by using a forestry consultant.
A reputable and financially sound contractor is important not only from a return basis, but also on a solvency basis. The economics of running a harvest gang are often based on slim margins over high volume. Forestry equipment has traditionally been highly leveraged in terms of lending. Servicing that debt requires high rates of use for the contractor to make a profit. If your block is difficult to access you may struggle to get a contractor, or if you do the rates are going to be high. What is even less desirable is that you may attract an under-capitalised marginal contractor.
Avoiding some of the risks
If the contractor controls both the harvesting and marketing it is not ideal, as there can be a lack of transparency and independence. An insolvent or poor paying contractor will not make for a profitable result. Resolving this solvency issue is not straightforward. Woodlot owners can insist on insurance from the contractor, but the owner needs to read the policy carefully to ensure they are in fact insured.
Protecting the value of the crop by taking a security over the logs is another method that can be used. The woodlot owner secures their own interest in the logs by requiring the harvester or marketer to give them security over the logs
and proceeds under the Personal Property Securities Act. Insurance and securities might seem heavy-handed, but few of us would trust an unknown third party with hundreds of thousands of dollars in cash. So why do people trust the same people with the asset that makes the cash?
The chain of trust and audit also extends into the harvesting itself. All harvest operations should, and mostly do, have transparent and auditable systems. Log making, log volumes, transported volumes, sale volumes and prices should all be transparent and able to be recorded accurately.
There are several ways that sellers try and limit the risk in selling their timber, rather than harvest the wood themselves. The first is the outright or lump sum sale, the other is a per tonne stumpage sale.
Lump sum sale
Selling your woodlot as a whole and obtaining a cash lump sum, whether by tender or open sale, can be an attractive option when there is good demand for wood. The buyer pays the purchase price up-front, and the seller grants the buyer a forestry right over the area of trees sold for a limited period of time. The terms of the forestry right needs to include protections for waahi tapu, roading, fences, stock, compliance with the resource consent, fire, health and safety and insurance.
The land remains the property of the woodlot owner, and as many of the statutory obligations flow back to the landowner, there needs to be adequate protection for any breaches by the forestry right-holder. It is, for example, wise to obtain a bond for the performance of the resource consent conditions. It can also be important to ensure that the small details are covered.
Those items that you might think go without saying such as closing gates, repairing fences, not starting fires or using spark arrestors, can become the molehill which becomes the mountain. Damage to neighbouring properties or relationships can have a long-lasting and negative effect. These disputes can be detrimental to the typical give and take rural attitude, especially when you want to do the taking by gaining access.
Per tonne stumpage sale
Stumpage sales based on a net per tonne return to the woodlot owner are another way of managing the price risk. The harvester takes that risk,and the woodlot owner only risks the volume being less than they expected. A per tonne net stumpage rate is attractive to a harvester who knows that they can make a good margin on the wood.
This form of sale needs to be documented by a contract that covers the risks, and because the harvester is also the buyer, the woodlot owner needs protection from non-payment. Payments are usually made monthly, but non-payment in one month can involve reasonable volumes left unpaid. Issuing proceedings against a contractor who has gone into liquidation does not usually positively affect the cash flow of the woodlot owner.
A benefit of stumpage sale is that the harvester bears all the risk in the costs, such as roading. This can often be much higher than was originally budgeted for.
Complexity of documents
Over the last 30 years there have been many formal and informal forestry rights and joint ventures. The whole commercial landscape has changed dramatically in that time. If you were to look back 30 years at how contracts were documented, most probably the terms would be far simpler and less prescriptive. On the outer reaches of simpler is not at all and after 28 years of waiting, with several changes of family members, spouses and good friends later, the crystal clear vision of 1990 may look a little hazy.
For joint ventures which are waiting for harvest it might be very worthwhile dusting them off and consider the practical issues which the forest faces in the future to determine whether everything is still clear. Arranging consultants, marketers, contractors and consents by mutual agreement is important to a well-organised and acceptable rate of return. A well-documented harvesting agreement should resolve outstanding problems and clarify who is expected to pay for what.
The concerns for woodlot and forest owners on sale are similar, but because of the small scale of many woodlots, making mistakes in relation to who is contracted, and on what terms, can have a far more significant effect than for larger forest owners. These larger owners have a greater resource and timeframe to correct and average out their mistakes.
To their advantage, owners of larger forest now have very good information on what they own, what it costs to harvest, and the price that they expect to be paid. The challenge for small-scale woodlot owners is to become as well-informed about what their wood is really worth. But they have to spread the cost of that due diligence and infrastructure over a much smaller resource.
Matt Hanna is a commercial lawyer with Lewis’ Lawyers in Cambridge.