In forestry, are there stranded assets?

[livemusic]

I know oil and gas but I don't know forestry. In oil and gas, circa 2021 and beyond, the term "stranded assets" has surfaced as a long-term threat. This is primarily due to the perceived threat that renewable energy has to oil/gas -- fossil fuels. (Coal also being a fossil fuel but coal is not part of the oil/gas industry.) A roller coaster industry the oil biz is and it's comprised of eternal optimists. After a crash, it's "Oh, it'll be back, it always is." Well, between 1986 and about 2003, it wasn't. That is 17 years and it was a brutal crash that decimated the industry. And then shale gas was "invented" and, later, shale oil. Game changers. It boomed again.

Someday (decades or centuries), it's possible that it won't come back. Ever. That is the threat. Some people accept that, some don't. Most in the oil biz do not. Yet. We'll see. I know some awfully smart and well-heeled oilmen worried. If renewables make it, it could be devastating to oil/gas demand. Which lowers the price of your product, oil and gas. With such price destruction, the value of existing assets -- oil/gas leases, oil/gas fields plummets along with price. Your assets are devalued. If finding or operating costs are too high, the dollar speaks, and those assets can become stranded, never being produced, never reaching market. They COULD become worthless.

So, what about forestry? I see all kinds of things mentioned as very serious problems. Two being mill shutdowns and also trucking. Do stranded assets exist yet in forestry or do you perceive that this could become a possibility? For instance, if a mill served a region for decades, and it's shut down, and trucking is not available to get logs from area forests to another mill, those forest lands could become stranded assets. No market! Ugh! Or, if trucking just doesn't dollar up for a locale... sure, you COULD truck the logs to another mill, but it doesn't dollar up. Or you can't find drivers. (Lack of drivers seems more of a larger-scale problem.)

Of course, another threat to trees, in general, is a substitute. What would that be? Plastics? That's oil/gas. If that were to happen, all/most forests could become stranded assets. And oil/gas would survive.

Of course, we could get even gloomier. That this world as we know it is too high-flying, that a great reset must occur, and that humanity must survive with less. I also know some very smart oilmen (not many) that think this is the case, that a reset will occur and on the other side are much simpler lifestyles, which means demand destruction for oil/gas. If that occurs, same would occur to forestry. But mainly, I am curious if stranded assets ever occur now in forestry, or if you think they could happen in the future OTHER THAN from a global reset... stranded assets occurring due to problems within the timber industry. But all comments on this forum, even globally gloomy, are interesting!

[Nebraska]

If I were  a "well heeled" oil man I would be trying to explore ways to get some of my money out of oil and into developing  ways to make clean manufacturing of solar panels here in North America, wind turbines that don't fall apart after 20 years,  and ways to use the power of the oceans to generate electricity.  Rest of what I might say about that doesn't belong here.

Granted that has nothing to do with stranded assets in forestry.   With segments of our governments fixated on short term carbon storage. I can't guess on how that will play out.

[PoginyHill]

Never heard the term "stranded" assets before. But like any asset it's value can change. As I understand your description, a stranded asset is one where its market value is equal to or less than the cost to get it to market. So if crude has a market value of $40/bbl, but costs $45 to get it to market, it has no net value in the ground.
Same with forests. If the value of timber is $300/mbf and logging/trucking cost $200/mbf, then the asset (stumpage) is worth $100/mbf. If the market value drops to $200 or the cost to get it to market increases to $300, then the net value of the asset (logs standing in the forest) is zero.

That happens from time to time and depends on the specific forest and the specific markets (pulp, sawlogs, chips, firewood, etc...). When the cost to get wood out exceeds it's market value, owners will not cut. The forest will sit there, "stranded" in a sense.

[nativewolf]

I know oil and gas but I don't know forestry. In oil and gas, circa 2021 and beyond, the term "stranded assets" has surfaced as a long-term threat. This is primarily due to the perceived threat that renewable energy has to oil/gas -- fossil fuels. (Coal also being a fossil fuel but coal is not part of the oil/gas industry.) A roller coaster industry the oil biz is and it's comprised of eternal optimists. After a crash, it's "Oh, it'll be back, it always is." Well, between 1986 and about 2003, it wasn't. That is 17 years and it was a brutal crash that decimated the industry. And then shale gas was "invented" and, later, shale oil. Game changers. It boomed again.

Someday (decades or centuries), it's possible that it won't come back. Ever. That is the threat. Some people accept that, some don't. Most in the oil biz do not. Yet. We'll see. I know some awfully smart and well-heeled oilmen worried. If renewables make it, it could be devastating to oil/gas demand. Which lowers the price of your product, oil and gas. With such price destruction, the value of existing assets -- oil/gas leases, oil/gas fields plummets along with price. Your assets are devalued. If finding or operating costs are too high, the dollar speaks, and those assets can become stranded, never being produced, never reaching market. They COULD become worthless.

So, what about forestry? I see all kinds of things mentioned as very serious problems. Two being mill shutdowns and also trucking. Do stranded assets exist yet in forestry or do you perceive that this could become a possibility? For instance, if a mill served a region for decades, and it's shut down, and trucking is not available to get logs from area forests to another mill, those forest lands could become stranded assets. No market! Ugh! Or, if trucking just doesn't dollar up for a locale... sure, you COULD truck the logs to another mill, but it doesn't dollar up. Or you can't find drivers. (Lack of drivers seems more of a larger-scale problem.)

Of course, another threat to trees, in general, is a substitute. What would that be? Plastics? That's oil/gas. If that were to happen, all/most forests could become stranded assets. And oil/gas would survive.

Of course, we could get even gloomier. That this world as we know it is too high-flying, that a great reset must occur, and that humanity must survive with less. I also know some very smart oilmen (not many) that think this is the case, that a reset will occur and on the other side are much simpler lifestyles, which means demand destruction for oil/gas. If that occurs, same would occur to forestry. But mainly, I am curious if stranded assets ever occur now in forestry, or if you think they could happen in the future OTHER THAN from a global reset... stranded assets occurring due to problems within the timber industry. But all comments on this forum, even globally gloomy, are interesting!

This is a great question.  Really a great question.  
Absolutely on the Oil and Gas side of things, the smartest guy I know in PA holds a ton of oil and gas land and he's planned for it to be much less valuable in 20 years.  Their strategy is to frack everything today.  The issues with oil and gas is the cost and infrastructure to extract and distribute and refine the products into anything useful.  As that demand decreases the per unit costs increases, this creates as self fulfilling sort of problem in that the more expensive the output the more incentive to change.  But then something funny happens in substitution economics- at some point the price collapses and oil and gas will become cheap again because demand is just not there at almost any price.  Saudi Arabias costs to produce a barrel of oil is $5.  They'll pump down to that costs.  That will strand almost anything in the USA but that's looking a long way out in the future.  Airplanes, ships and what have you will be using petro for a long time to come.  Anyway, going to see stranded oil and gas for sure.  At less than $100/barrel a lot of fracking sites are stranded.  
Will forests be stranded?  They provide a lot of benefits:  just existence- people like woods, hunting, carbon storage, clean water, lumber, etc.  There is no way that I can see the forest being stranded in the same way that oil and gas assets are stranded.  People buy forest land all the time and have no plans to ever harvest.  At $70/barrel the $100 barrel deep in the ground has no value to anyone.  You can speculate and believe the price goes up but your accountants would still say it is stranded and book it as a loss.  When OPEC and the Frackers were banging it out a few years ago my friends accountants wanted to value all of one tract as a loss (it would have impacted his borrowing costs); he dragged it out long enough for pricing to change again but if it had stayed low he'd have had an issue.  


I don't believe that the recent mill closure outside Chattanooga TN will change the value of the timberland in that area too much.  Not if all the pulp mills in TN closed.  Just me but I think the value is derived from a market other than pulp.  

[PoginyHill]

I addressed the pure economics of a forest. @nativewolf points out the "value" of a forest is not only in the products it can provide for income. So in that sense, the two (oil/gas and forests) are completely different. Great discussion!
A plot of land will always have some value, whether its products can be extracted or not.

[wisconsitom]

Two points, both tangential to this topic;  The petroleum industry has its eyes set on one thing and one thing only......plastics.  It has been said that the world has not yet seen plastics.  There are plans to ramp up the production of poly this and that exponentially.  Put that in your pipe and smoke it.

Then, on a happier note, a Swedish forest products firm is apparently going to get the Escanaba (MI) pulp mill going again.  They are also involved with the Verso mill in Wisconsin Rapids, but the thinking there is likely that mill will not be reopened.  Still, the Escanaba option could be huge for this area's low-grade market.

More generally, I immediately thought of all the non-tangible aspects of forest lands, that whereas a rusting oil derrick somewhere, even if in an area that could be tapped for hydrocarbons again, is not providing any value anymore than the oil or gas in the ground, an unmarketable tract of forest can and usually does still offer many benefits.

[livemusic]

If I were  a "well heeled" oil man I would be trying to explore ways to get some of my money out of oil and into developing  ways to make clean manufacturing of solar panels here in North America, wind turbines that don't fall apart after 20 years,  and ways to use the power of the oceans to generate electricity.  Rest of what I might say about that doesn't belong here.

Granted that has nothing to do with stranded assets in forestry.   With segments of our governments fixated on short term carbon storage. I can't guess on how that will play out.

Actually, a few of the "well-heeled" oilmen I know are doing just this, sinking megabucks into solar, wind and carbon capture deals. These are not small-change, it's very expensive developments. They are, obviously, concerned. But they are the anomaly in this super-confident oilbiz. Which doesn't make sense due to the cyclical and brutal nature of the industry. It just seems to attract this type of person. I don't mean the worker bees, I mean the movers and shakers, the exploration and production guys.

[mike_belben]

The first difference to consider is the lowest cost of entry.  A man can saw a tree with a misery whip and a donkey if he has to because it is a surface resource.

Poor people dont have economics degrees, if they decide they need that tree they dedicate the week to it if they have to.

Petroleum products are subsurface.  The initial investment to punch the first subsurface hole is very high.  There were a lot of wildcatters in tenneessee (which overlays lots of small hydrocarbon pockets and coal seams) until the crash.  The old truck mount drill rigs have been sold off, scrapped off or rusted solid since.  

generally the cost for petroleum exploration is large enough that the person or his financiers who all have other options with the money, start calculating ROI and opportunity cost that the simple guy whipping his mule is unburdened by.  A deer hunter walking through woods he dont own can explore forestry resources at his liesure for free. So the cost to enter is polar opposite meaning more players will always enter the wood market.

In my region the only thing that locks timber out of the market is a steep clay bluff and a lack of skyline equipment.  Its easier to move on to the next parcel than to arrange oversize load trucking from oregon so we dont have yarders and towers and such. Those trees are topographically and economically protected until i find a cheap way to get them out.  

[Southside]

Ibedrola - look closely at your electric bill for thier name - owned by middle east oil ultimately, has been huge in alternatives for a long time now.  They are big, really big, as a result they have plenty of grant writers and political connections, so they are selected for all kinds of projects. 

Does anyone actually believe that middle east oil cares one bit about clean air and water in the US?  They are energy companies, not oil companies, and will leverage their profits into whatever flavor is paying.   

No different than what is happening with legal dope these days.  Bad news for the hippies who think their decades of clandestine growing experience is going to finially pay off in a big way.  Sorry - big tobacco is taking it over for the same reasons as above.  

[livemusic]

Those above who mentioned the intrinsic values of woodlands other than marketing the trees... yes, but this doesn't do anything much for those in the logging industry.

But, right you are about the other values. Around here, as far as private lands go, sky high land prices, ever-escalating are, IMO, due to individuals buying lands who are not as dependent on harvests as those whose sole reason in buying a tract is for profit. These individuals, I'd say the majority, do sell timber. Some don't. Like me. I only have 57 acres but I like growing them, not cutting them. Profit isn't my motive. Although, I do sell some firewood. But that is mostly blowdowns and a few thinned trees here and there. These other private landowners, a large percentage of them buy for hunting. I tell ya, hunting is big business. These people pay for land whatever it takes. It's amazing how much land is bought for hunting and that there seems to be an endless supply of well-heeled buyers. Same for farmland. I was raised on a farm and it is tough to pay what farmland sells for here if profit is the goal. Many tracts sell to hobby players. These people can come up with $100,000 to $1,000,000 or so and it's just kind of a place to go play. Nothing wrong with that, I get it, for sure, but it certainly is a different motive from someone like my dad buying land way back when.

BTW, I thought of an example of another type of stranded asset... a small tract that no logger will touch because he will not mess with it, too small, he won't move his equipment for such. That didn't use to happen around here because there were lots of mom and pop operations with a single pulpwood truck and a chainsaw. It seems that small landowners here are screwed these days. I had a logger friend, former classmate stop by a year ago. He talked with me about him thinking of cranking up again (he's retired) to do small tracts. FWIW, he decided not to do it.

[wisconsitom]

Boehner buds for sure!

[mudfarmer]

Here in NY there is 2.6mil (and growing) acres of "Forever Wild" constitutionally protected land that in theory will never get cut. Is it stranded? Millions of people show up every year to walk around in it, to the point that it has become a problem and the state is trying to figure out how to deal with the heavy foot traffic.

Lots of folks complain about all the wood that will fall over and die but I can tell you that you won't see trees like those on almost any private land here and it IS nice to walk around in  

[stavebuyer]

Land is not a bad place to park money in an inflationary economy. Take farmland that does not "pencil out" at $10 beans($10 being just a round number). What does pencil is "Joe Mega Farmer" borrows with a government loan at 3.5% and makes an interest payment and low behold the next year the farm next door is selling 20% more per acre than he paid for his farm a year ago. He borrowed a million at 3.5% and gained 16.5% on million he never even had. Selling price of beans is chump change. Bernie Madoff games until somebody calls the note and then it turns ugly.

[chevytaHOE5674]

Then, on a happier note, a Swedish forest products firm is apparently going to get the Escanaba (MI) pulp mill going again.  They are also involved with the Verso mill in Wisconsin Rapids, but the thinking there is likely that mill will not be reopened.  Still, the Escanaba option could be huge for this area's low-grade market.

They are buying Verso Corp. Verso currently operates a paper mill in Escanaba so the Swedish firm won't really be "getting it going again" as the mill is currently open and buying wood. The hope is the change in output product will have a more stable demand into the future.

[SwampDonkey]

Sometime those foreigners just export raw wood to. They tear down the mill or make agreements that it will never be operated by competition. That's what happened in parts of New Brunswick. Exporting raw wood was against the Crown Lands and Forest Act. They took that clause out with the stroke of a pen.

[WDH]

I believe that the future of humankind is inextricably linked to plants.  All types of green plants.  Without green plants, unless a miracle happens, humankind is doomed to extinction.  Trees are very important plants.  I don't see plants as stranded assets.  We have to eat.  The food chain depends on plants.  

Very many products we need to survive derive from plants.  They are a necessity.  Oil makes life more comfortable and easy.  We could live without it.  Try living without plants.  Trees are important plants.  We need them now and will need them even more in the future.  Technology will change.  So will harvesting.  But plants create the atmosphere we need to breathe and the food we need to eat.  They are the most important natural assets on earth for humankind.  Trees are very important plants.  Maybe one day life on Earth will be dominated by Ents. 

[AndrewM]

Those trees are topographically and economically protected until i find a cheap way to get them out.  

As has been pointed out, when the combined harvesting cost and transport costs exceed the delivered gate value of the timber- that stumpage can be stranded asset. Could be a cliff, river/stream crossing and the alternative of skyline or heli logging is too costly. 
There also is the case of the land itself that's become a stranded asset. If reforestation has not been provided for, or the remaining stock of trees is too poor for a financially viable harvest- dump the land for wildlife / recreation / development value. Usually that happens to marginal sites anyways- sandy, rocky, southern aspects, etc. 
Michigan in the 1920's had so much tax reverted land that they commissioned the land economic survey that assessed the property values, productive yields, landowner intents, and resulted in the identification of cutover Forest/unsuitable agricultural lands that would be better kept in forest- and when the tax reverted parcels coincided with this poor age value- they were retained by the state /feds for state and National forests. That broke the cycle of land speculation, exploitative cutting, poor agricultural production and practices, and tightened up the markets to buoy remaining private land values

[mike_belben]

Land is not a bad place to park money in an inflationary economy. Take farmland that does not "pencil out" at $10 beans($10 being just a round number). What does pencil is "Joe Mega Farmer" borrows with a government loan at 3.5% and makes an interest payment and low behold the next year the farm next door is selling 20% more per acre than he paid for his farm a year ago. He borrowed a million at 3.5% and gained 16.5% on million he never even had. Selling price of beans is chump change. Bernie Madoff games until somebody calls the note and then it turns ugly.

That is precisely it. Its taking out a short position against the currency on margin. 

Borrow the currency cheap, immediately convert it into asset that collects rents with minimal maintenance to cover the note, then sell in a few years and pocket the gain caused by inflation.  In 7 years a million isnt a million anymore so your debt "shrinks" every single year that you can put off repaying it, while your asset rises. 

This is precisely why the solar farms are near the banks and not near the sun.  Those smart money people who understand currency are close to the bank.

Rising rates will turn it off like a faucet and make the margin calls start. 

[longtime lurker]

Forest areas go out of production, it happens.
Without enough forest area mills starve for logs and then shut down . 
Give it 40 years and the trees grow, the forest area becomes sufficient to support harvest operations...
and lo and behold a sawmill starts up.

Oil and gas are finite resources, trees are a renewable. Production areas might become exhausted but thats only ever temporary in nature assuming the actual area of forest isn't reduced.

[kantuckid]

Two points, both tangential to this topic;  The petroleum industry has its eyes set on one thing and one thing only......plastics.  It has been said that the world has not yet seen plastics.  There are plans to ramp up the production of poly this and that exponentially.  Put that in your pipe and smoke it.

Then, on a happier note, a Swedish forest products firm is apparently going to get the Escanaba (MI) pulp mill going again.  They are also involved with the Verso mill in Wisconsin Rapids, but the thinking there is likely that mill will not be reopened.  Still, the Escanaba option could be huge for this area's low-grade market.

More generally, I immediately thought of all the non-tangible aspects of forest lands, that whereas a rusting oil derrick somewhere, even if in an area that could be tapped for hydrocarbons again, is not providing any value anymore than the oil or gas in the ground, an unmarketable tract of forest can and usually does still offer many benefits.

One of our sons is the CEO of a plant-based plastics startup company. His partners are in the Netherlands and USA. It's a known, tested process and he spends much time searching location info from his TN base home office situ. Some serious people are involved. He's recently met with LEGO folks talking plastics. One side of the refinery chain from fossil petro is our current source of plastics. Wind, solar, so forth don't give us plastics so it's novel and perhaps one answer to our petro dependencies. Interesting stuff it is. I think they use plants such as sugar cane? But don't ask me questions as it's out of my league. ;D 
I'm re-doing a stairway in his 1930's home which is more down my line... :D
As to stranded forests-that's an easy answer: I live in and around lots of stranded forest (Danie Boone NF in E KY) meaning our immense national forests. They used to be a common logging spot hereabouts, but not lately. 58% of my county is NF which is similar to the area running from OH line down to TN line. Not likely to change what with politics leaning as they are. 
Today I saw a FB advertisement for non-tree based paper products delivered to your home. Bamboo is the source.
 Honestly, if more people used less (wasted less?) paper towels and TP maybe we wouldn't be looking at Asian Bamboo? ->"There goes another pulp plant-poof"!!!
 We see people often with huge grocery carts of paper products and btld water and very little actual food. I doubt they all have a food business. Food's mostly why we go to a grocery-ha! Then you have the plethora of pet lovers who feed them hot dogs and bologna-I've seen carts full of people food for pets in last few years! I love dogs, had a bunch, but what gives? 
 
 

[mike_belben]

Around here landlocked parcels and rapidly changing hands is one way a timber tract can get stranded.  When some transplants buy the only parcel that has an access trail up out of the steep bottom of the timber tracts deep behind it that never had a legal ROW stuck on the deed, and doesnt want those noisy skidders interrupting their peaceful retirement.  Old time rural tennesseans mostly all worked the land somehow, and it was a social standard to work things out with your neighbor.  'Sure you can use that road' sort of agreements.

That is fading with the influx of other types.

[kantuckid]

Those same old timers also divvied out the land when the owner died, often ignoring females vs male heirs. They typically chopped up the boundary into less useable plots as well. NE states often have more land protective laws than KY.
 A neighbor of mine, she was bragging after her daddy died a few years back about how he'd "thought of the girls too" when he divided the old home place into eleven parcels! having included her and her sister's, same as the boys. When sverely divided small boundarys soon become worthless and unmanageable as a healthy forest. 
Another common tie up around here is heirs not agreeing to sell and the old home place turns into a dilapidated museum of sorts. In Ky they all have to agree. This nearly happened with my wife's Mom's place this year. Two of 5 sisters, who had zero interest in living in the old family home, objected to it's sale. My BIL, the executor, ask if they were gonna pay the taxes & utilities starting now, not later. Over time they relented and now some don't speak at all, do holidyas together, etc.. They finally came around albeit grudgingly. 
Across the road from that place sits a large boundary of the many my Wife's granny gave to each of her kids. It's got one abandoned home, all grown up, another that the son living in pays no rent to his siblings nor can they or anyone else use the property.
 On, and on and on, this happens around here. Not far from me is 800 acres that is "cared for" by a local guy who's also a forester too.  He says they don't actually use the land in any productive way- he's more so like a watchdog of sorts. 
When I came here from KS I was astounded by the number of root diggers and hunters who took free use of land owned by others. In KS we asked before we hunted or trespassed, it was that simple and been that way a very long time. As the doctors & lawyers bought up hunting leases, land placed in conservation for public use mattered more to the average joe hunter. 
I currently have 5 deer stands on our land that belong to "somebody" that I don't even know. Last year I posted the place again with attention to the areas near these steel stands. Soon I'll take them down and sell on FB.  Given that I'm building near that area I don't want gunshots near the cabin site. I "get it" to use these woods to squirrel or deer hunt but asking should matter. Being deer season doesn't negate my right to take a hike and not get shot? Or my grandkids.

[wisconsitom]

I wear blaze orange even if I'm not hunting, when up at the place working on something or other, during gun deer.  At least a hat.

[twar]

If you are able to access it, read the article in today's Washington Post:

https://www.washingtonpost.com/climate-environment/interactive/2021/tongass-national-forest-old-growth-tree-climate/

It discusses how much a tree is worth and to whom.

[kantuckid]

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