James I. Alfriend Consulting Foresters, LLC

Another year is rapidly ending and I am truly thankful for the opportunity of 2016. The year has been full, busy, and yet thankfully abundant. The Christmas season is special for the right reasons, and I trust this greeting finds you in good spirts as we slow down and reflect on our many blessings. We all acknowledge the good fortune we have as citizens of our great country, the principles upon which it was founded, and what it stands for today. Our democratic process will provide for new leaders of our country in 2016, and I trust we will put in place principled, strong, and patriotic leaders.

Markets for trees were active during the year. Hardwood sawtimber prices continue to be strong, with Battle Lumber Company in Wadley, Beasley Forest Products in Hazlehurst, and The Timbermen, Inc. in Camak providing major markets. We have seen positive movement in pine pulpwood prices, especially with wet periods causing inventory declines at mills. Pine sawtimber and chip-n-saw markets have been predictable with good demand from suppliers/loggers and mills. The total harvest sales we have assisted with have been successful from a price standpoint. At the same time, older mature trees are being replaced with young, vigorous, and genetically improved seedlings maintaining full productivity.

Housing starts, multi and single family, remain at the one million level. Multi-family starts are strong, reflecting demand for rental units. Home ownership is at a 50 year low, or 63.3%. During the past twelve months, 1.5 million new households were formed, and first-time homebuyers represented 32% of the market, up from 27% in 2014. This is a positive trend.

There is a current lack of supply for new homes, as the average price is $296,900, with the average cost of an existing home at $221,900, up 31% over the last five years. Affordability and financing of a new home are a challenge. Many potential home buyers are opting for apartments in metro areas that are closer to work and convenient for downtown shopping and social opportunities. I am of the opinion we are experiencing a demographic change, as Millennials are delaying major life decisions such as marriage, home ownership, and children.

From the Pew Research Center, the following profiles three generations:

Millennials............Born 1981-1997.........18 to 34 years old....... 75.3 million
Generation X....... Born 1965-1980........ 35 to 50 years old....... 66.0 million
Baby Boomers..... Born 1946-1964........ 51 to 69 years old....... 74.9 million

Both the Millennials and Generation X populations have experienced the "Great Recession" that began in 2008 and, for many people, continues. In addition, the college graduate carries an average of $30,000 in student debt and may have experienced their parent's loss of a home through foreclosure. To these two younger generations, home ownership is not the major goal of new families. Currently, new households are renting an average of six years before buying their first home. In 1970, the rental term was 2.6 years.

Locally, the Grovetown area of Columbia County is experiencing major growth, resulting from expansion of operations at Fort Gordon. Our American population continues to struggle with slow wage growth and uncertainty over corporate employment. As our economy continues its slow growth cycle, these potential homebuyers will participate, especially with 30 year mortgages around 4% or less.

Our forests are dynamic in that growth and development of the stand is continuous. Not only are we adding annual biological growth, we also experience tree failures within our pine stands. Causes of failures are often obvious from lightning strikes, stem/top breakage from wind or ice, or a damaged root system. As a result of undetermined failures, the term "Southern Pine Decline" emerged. The importance of the forest industry, not only in Georgia but throughout the Southeast, prompted the UGA Warnell Forestry School to initiate a research effort to quantify tree failures in Georgia.

Information from the Forest Inventory and Analysis Program that measures 5,396 permanent growth plots across our state was utilized in this study. Three years were spent on gathered data, as well as sampling and measuring more than 1,200 individual trees that were analyzed for soil nutrients, root samples, and any fungi that may be present. The good news is there is no major decline in health of our Georgia pine forests. There are "environmental factors that do affect tree health as site, soil conditions, drought, insects, pathogens, and natural aging of trees". As part of the report, "land managers should not panic and should keep on doing what they have been doing, as far as standard management practices". From Joyce Kilmer - "I think that I shall never see a poem lovely as a tree".

Pine trees on your land are attached to Mother Earth as they grow and develop. Once the tree is cut, it loses its local identity and becomes part of a regional, national, and international economy. We can nurture and care for the tree until it is ready to be harvested. Then, it is subject to economic forces that we have no control over. Markets for our trees are dynamic and have been active during 2015, with positive price movements for small diameter trees as pulpwood, small logs, and chip-n-saw products. I am focusing on pine products, as they represent the majority of fiber produced in our area. The following is a brief summary of the products we produce on your timberland:

Pine Sawtimber........ 14" Butt Diameter...... 8" Top.......................... $25 to $30 per ton...... 22 to 30 years
Pine Chip-n-saw....... 10" Butt Diameter..... 6" Top........................... $16 to. $20 per ton......18 to 21 years
Small Logs................... 7" Butt Diameter..... 4" Top (25' length)...... $12 to $15 per ton.......15 to 17 years
Pine Pulpwood .................................................2" Top (20' length)....... $6 to $12 per ton........15 to 17 years

At age 15, the primary product is pine pulpwood. Dominant and co-dominant trees will have grown into the small log product and a small volume of pine chip-n-saw. First thinnings remove a high percentage of pine pulpwood with some small logs. At the age of 20 to 22 years, a second thinning can be considered, with continued removal of pulpwood trees plus a small volume of small log and chip-n-saw products. After the second thinning, tree count per acre will be 125 to 150 trees that are high quality, dominant and co-dominant trees. From a forest management position, first and second thinnings are management driven in order to keep the stand healthy and vigorous, allowing growth into the higher value products. After the second thinning, third thinnings and harvest cuts are market driven, and the rotation can be extended beyond the 30 year range, as loblolly is quite resilient when it is growing on a strong site index.

Pine sawtimber represents the value product in a rotation. Over the years, many of our naturally established stands of pine have been harvested and replaced with pine plantations that maximize the productivity potential of land, representing good stewardship and forest management. I am of the opinion, from a pure return on investment from timber growth, we are looking at shorter rotations in the 25 year range. This is being influenced by remanufactured wood products through cross lamination of 2 x 4's and 2 x 6 material into wide boards that can be used as floor joists, ceilings joists, and caps in home construction. There is also increased demand for pine pulpwood at traditional fiber markets and the growing wood pellet market. Through genetic improvements of seedlings, our trees now grow faster with increased volume and quality.

Fortunately, existing markets continue to be receptive for the quality large diameter timber that is currently in inventory. From an investment and return standpoint, the shorter the rotation, the higher the return. I am confident in relating to you that your land and timber investment is earning 10% to 12% per year through annual biological growth, movement from lower value to higher value products, and land appreciation. I quote from Moliere, "Trees that are slow to grow bear the best fruit".

I would be remiss in not addressing the intangibles of a timber investment, which are recreational, hunting, being able to physically walk and see the investment, environmental attributes, wildlife habitat, protection of running water, and the positive impact a land and timber investment has on net worth. Tax laws relative to land and timber continue to be beneficial, with capital gain treatment of income and the opportunity to sell either land or timber utilizing a tax deferred exchange into other land.

Land values for our timberland are showing some positive movement with many factors involved. Agricultural land is experiencing value pressure as a result of a three year decline in cotton, peanut, corn, dairy products, and pork prices. The U.S. Department of Agriculture predicts farm income will decline 36% during 2015 to its lowest level in the past nine years. With diminished income, agricultural operators are not buying new equipment, and Deere & Company is anticipating its worst sales year since 2009.

Softer farm land values across the U.S. are creating buying opportunities. In the Wall Street Journal, August 5, 2015, an article covered pension fund investments in farm land, "Investors are betting farm land will yield good long term returns as global food demand rises with growing populations. Another attraction is these are assets that are producing an essential need for society". Locally, on August 10, 2015, Jeremy Grantham and his investment firm, GMO, in Boston, purchased 900 acres of Burke County farm land. This is irrigated land, and the new buyer intends to rent the land to local operators.

In our agricultural areas, farmers have had a difficult harvesting season with constant overcast and wet weather precluding the harvest of peanuts, cotton, and soybeans. With continued rains and wet field conditions, the quality of the crop diminishes, as well as its value.

On November 9, 2015, it was announced that Weyerhaeuser and Plum Creek will be merging, "creating the world's premier timberland and forest products company". Plum Creek brought eight million acres into the merger, with five million owned by Weyerhaeuser. This merger has been approved by both boards and is expected to close in April 2016, barring any required regulatory approvals.

Conservation Use Covenants for Ad Valorem taxes are tremendously beneficial in minimizing annual property taxes. County tax assessors are looking carefully at small acreage covenants that are a minimum of ten acres to ensure they are utilized for agricultural, forestry, or wildlife purposes. It is recommended that landowners document activities that relate to the above uses in order to demonstrate compliance. This can be as simple as flagging your property lines, locating and knowing where your corners are, planting wildlife food plots or mast/fruit bearing trees, maintaining walking trails/access roads by mowing, and controlling undergrowth.