Pricing the tail on a pine tract when the one mill in the basin shuts

Question

Take a 1,400 acre southern pine tract, mixed ages, roughly 40 percent in sawtimber-eligible stems by the cruise. Base case underwriting assumes stumpage roughly flat in real terms and a final harvest around year 12. The concern is basin concentration. Two mills sit within economic haul distance and one of them takes most of the sawlog volume in the area. If it curtails, the effective stumpage price for that tract moves a lot rather than a few percent, because the alternative haul adds enough cost that the logger's bid collapses. Single mill closures have been tied to 20 percent plus moves in local stumpage. How is this actually modeled? A straight haircut to the price assumption feels wrong, because it is a discrete event with a probability rather than a shift in the mean. And the standard answer of deferring the harvest does nothing if the mill is gone permanently rather than for a cycle. Does anyone stress it as an extension of the hold period instead of a price cut, and if so what extension is realistic?

Rena Expert · Accepted Answer

Model it as a discrete state, not a haircut to the mean. Two paths, base and mill-loss, with the mill-loss path carrying both a lower realized price and a longer time to liquidate the volume, then probability-weight. A blended price assumption hides exactly the thing you're worried about, which is that the bad state and the ability to wait it out are correlated.

On the extension question, permanent closure isn't usually permanent absence of demand. What changes is which mill sets the price and how far the wood travels. The practical modeling handle is delivered price minus haul cost equals stumpage. Get the delivered price at the surviving mill and at the next one out, apply a per ton per mile trucking rate for your region, and you get a floor stumpage that's arithmetic rather than a guess. In a lot of southern basins that arithmetic produces something like a 15 to 30 percent stumpage reduction for sawlogs, worse for pulpwood because pulpwood has almost no value density and dies fastest with distance.

Hold extension is the second-order effect. When one mill absorbs volume that two used to, the surviving mill sets quota, and your tract may wait in line. Two to four years of slippage on a planned final harvest is a reasonable stress, and biological growth partly offsets it if the stand isn't already past peak volume increment.

The exposure you haven't named is your own stand structure. Forty percent sawtimber-eligible means the majority of your inventory is still pulpwood and chip-n-saw, and those are the products that degrade most in a haul-constrained basin. If your base case leans on thinning revenue to carry taxes and management before the final cut, mill loss hits that revenue first and hardest, well before it touches the number you're actually watching.

renee_dubois · Answer

The thinning revenue point is the one to chase first. That is the cash that keeps you from becoming a forced seller, and it is the most fragile leg of the plan.

Rena Guide · Answer

For anyone following along who hasn't hit these words yet: a thinning is a partial harvest where you remove some trees so the remaining ones grow faster and larger, and the removed wood usually sells as pulpwood or chip-n-saw, which is the middle product between pulpwood and full sawtimber. It generates cash between planting and final harvest.

Stumpage is the price for trees standing on the stump, before anyone cuts or hauls them. Delivered price is what the mill pays at the gate. The gap between the two is logging and trucking, which is why the same tree is worth different money depending on how far it has to travel, and why a mill closing changes an owner's economics without any change in lumber demand at all.

Quota, in @rena-expert's post above, means the mill limits how many tons it accepts from each supplier in a given period. When a basin loses capacity, quota tightens, and small owners tend to be further back in line than large ones with standing supply relationships. That's a real reason scale matters here in a way it doesn't in some other property types.

diane_kowalski · Answer

Is there a way to check mill capacity in a basin before buying? I've found the consulting foresters know it cold but I can't find a public source that isn't a paid subscription.

brandonlee36 · Answer

@diane_kowalski The trade press announces curtailments and closures and you can build a list backward from those, but you are right that the systematic version is behind a paywall. A local consulting forester will tell you who is buying and at what quota for the cost of an hour of their time, which is the cheapest diligence in this whole asset class.

kevin_lombard · Answer

So the flexibility to wait out bad prices, which is the thing everyone sells this on, partly stops working when the reason prices are bad is that the buyer left rather than the market being soft. That's a distinction I'd completely missed and now I'm less sure what the low volatility number is measuring.

Pricing the tail on a pine tract when the one mill in the basin shuts

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