Evaluating Landowner Assistance Programs and Other Wood Procurement Options

A major activity of forest industry is supplying their mills with wood. There are four options for wood procurement:fee land, lease land, landowner assistance programs, and open market. The task of the corporate planner is to allocate the limited budget among these options in such a way that the needed volumes of wood are procured at the least cost. A methodology has been developed to aid in this capital budgeting process and has been incorporated in an easy-to-use computer program. • Millions of acres of timberland are owned and managed by the forest industry, but most companies are far from being self-sufficient in supplying their own wood needs. Therefore, a major activity of these companies is supplying their mills with needed wood. The cost of the wood may be reduced by guaranteeing that the needed volume will be available at the appropriate time, in close proximity to the mill, and on sites that are relatively inexpensive to log. This can be accomplished by four wood procurement strategies: (1) purchasing fee land for timber harvest; (2) leasing land for timber harvest; (3) assisting private nonindustrial forest (NIPF) landowners to increase timber production on their lands; and (4) buying wood on the open market. This includes: (a) purchases made by company procurement foresters, (b) wood purchased under contracts with wood dealers, (c) "gatewood" purchases from anybody who drives up with a truckload of wood, and (d) chip purchases (including mill residue and whole tree). • The authors acknowledge the technical and financial assistance of Alabama River Woodlands, Inc., Monroeville, Alabama, Union Camp Corporation, Savannah, Georgia and the Southeastern Forest Experiment Station, USDA Forest Service, Asheville, North Carolina in the research and development related to this project. Paper No. 8914 of the Journal Series of the North Carolina Agricultural Research Service, Raleigh, North Carolina 27650. Because of the high cost of land acquisition and forest management, many companies are looking at alternatives to fee land acquisition as a source of wood. Although the success of leasing land varies from company to company, it is an alternative for ensuring supply. Open-market procurement is a common method of obtaining wood, but neither the available quantity nor the price can be predicted into the long-term future. Assisting private landowners with various forest management activities has been initiated by many firms in the forest industry throughout the Southeast. This may be done under a formal contract (requiring that the company be given first refusal rights for the timber), or it may be as simple as a handshake and a hope by the forester that one day his company will have the opportunity to buy the timber. The difficult job for the corporate planner arises when the company allocates its budget for wood supply. Which combination of alternative opportunities should be chosen? How much should be invested? Will these investments ensure that the mill will be supplied to capacity? Are these investments the most cost-effective means of procuring the needed quantities of wood? We outline here a methodology of capital budgeting for the purpose of evaluating investment opportunities in landowner assistance programs and determining the optimum allocation of capital for wood procurement, and, further, preview a computer program which uses this method. COSTS AND PROBABILITIES