An Alternative to a Stumpage Sale
January 9, 2019 in AFM News
In 2001, Marjorie and Alan Warner acquired their 151-acre woodlot in Blue Hill, Maine, in hopes to one-day build a cabin on the property. As Connecticut residents, the Warners enjoy spending time in Maine in the summer and fall visiting with friends and family. Through the years, the Warners have made improvements to their property including the construction of a campsite for their camper and hiking trails that access different areas of the woodlot.
The Warners, who are members of Maine Woodland Owners, recently had their property certified as a Tree Farm and enrolled in the State’s Tree Growth Tax Program. Through the years, the Warners have had contact with a number of foresters and logging contractors regarding the management of their woodlot.
A few years ago, after an especially severe windstorm, the Warners noticed many blown down trees on their trails and decided it was time to consider a timber harvest to improve the health and aesthetics of their property. The Warners spoke with a few foresters and logging contractors about harvesting timber including one logger who questioned if a forester’s services justified the cost saying to the Warners, “You could work with a forester, but why would you? The forester will just cost you money.” Before signing the contract with the logging contractor, the Warners had one more discussion with their forester, Steve MacDonald of American Forest Management, to discuss options and to learn why some landowners choose to work with a consulting forester. MacDonald explained the value of a consulting forester’s services including representation to make sure that the landowner receives fair treatment and oversight to ensure the harvest meets the landowner’s objectives.
During their discussion, MacDonald also shared an alternative to a stumpage sale -- a direct sale that is typically more profitable for the landowner. With a stumpage sale, the buyer takes ownership of the timber from the landowner when the trees are harvested. Stumpage rates are proposed by the buyer (typically a logging contractor, forester, or mill) and stumpage paid to the landowner in exchange for the right to harvest their timber. The buyer delivers the timber to the market of their choice. Stumpage rates calculated by determining the mill delivered rate for a product, subtracting costs associated with the harvest, and subtracting a profit the buyer would like to make. The remaining value per unit is the stumpage rate paid to the landowner. Cost considerations when calculating stumpage rates include harvesting, trucking to the market, road construction, close out, administrative costs, and sometimes, forester fees. These are all costs a buyer must cover when agreeing to pay a landowner stumpage. A buyer presents a landowner with stumpage rates per unit of measure paid for individual products removed from their property. It is the burden of the landowner or their forester to have a discussion with the buyer regarding the costs associated with the harvest, how the stumpage rates were calculated, and if they are fair based on the current market. Often a landowner simply does not have the market and operational knowledge to question stumpage rates and they make their decision based on trust. Others obtain stumpage rate quotes from a number of buyers for comparison. Stumpage sales are a legitimate option and the most common way landowners are compensated for timber harvests in Maine. In order to ensure a landowner is treated fairly when entering into a stumpage sale, it is important to have an accurate estimate of the wood volume on his/her property, the road and close out costs for the harvest, and knowledge of the current market.
The danger in not having this information is that stumpage rates are often based on the worst-case scenario and will favor the buyer. This is not always the case, but there is a risk associated with stumpage rates in that buyers are generally looking after their own interests. The risk is that a buyer may over-estimate harvest costs, under-estimate the total volume of wood on the property and under- estimate the delivered price they will receive for the products at the market.
This type of estimation can play out to the landowner’s disadvantage. For example, a buyer conservatively estimates there are 1,000 cords of wood planned for harvest on the property and it will cost $1,000 to upgrade an old road to implement the harvest. The buyer thus decreases stumpage values to the landowner by $1 per cord to pay for the cost of the road. If the harvest generated more volume than estimated such as 1,200 cords, the landowner in effect paid $1,200 for the road when it only costs $1,000. If the true cost of the road is less than estimated, for example $700, landowner revenue would be $500 less due to reduced stumpage rates. When spread over estimated harvest volumes, the multiple variables and costs associated with a timber harvest add tremendous financial risk to landowners with the potential of reduced revenue.
An alternative to a stumpage sale is a direct sale where a forester or management company sells wood on the landowner’s behalf directly to the market and administers rates that are paid to a logging contractor to harvest and deliver forest products to specified markets. The logging rates are adjusted by the forester based on the terrain, type of harvest, equipment used, and distance to the mill. The unit logging rate covers cutting, skidding, loading and hauling the timber to market. Any other costs associated with the harvest are kept separate from the logging costs including road work, plowing, and close out costs and are paid by the landowner with the timber revenue generated from the harvest. The forester or management company receives a commission for overseeing the harvest and administering the direct sale based on a percentage of the net timber revenue realized by the landowner. Net timber revenue is the value of the delivered product less the cost of logging. The forester involved oversees the entire harvest and negotiates logging costs and other associated costs of the harvest on the landowner’s behalf.
The advantage to the landowner when choosing a direct sale is having a forester working on the landowner’s behalf examining and negotiating all logging and other expenses associated with the harvest to ensure they are legitimate. A direct sale also removes any market speculation that could lower stumpage rates in fear of a drop in price that may never occur. While it is possible for market prices to change during a harvesting operation, it is not in the landowner’s best interest to have stumpage rates adjusted in anticipation of a potential drop in market price. In a direct sale, an increase in market price will result in a direct increase in income to the landowner, which is not the case in a stumpage sale scenario.
After talking with MacDonald, the Warners decided to proceed with a direct sale administered by American Forest Management on their behalf. With the harvest planned during the winter months when they were in Connecticut, the Warners liked the idea of having a consulting forester working on their behalf to oversee the harvest in their absence.
Following the harvest, the timber revenue the Warners generated through the direct sale was compared with the stumpage they would have received had they accepted the proposed stumpage rates from the logging contractor. After deducting road costs, plowing costs, and AFM’s commission from the direct sale, the Warners received more than two times the income with the direct sale compared to the stumpage income they would have received. Generating income from a timber harvest was not the main objective for the Warners: however, ensuring they were treated fairly and generating income that could be used to make further improvements to their property was important to them. After the harvest, Margie Warner shared, “The additional income generated through the direct sale, was the catalyst in being able to begin the construction of a cabin on our property.”