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Millions of Acres of U.S. Forest, Timberland Go on the Block
¡¾2002.07.12¡¿

Millions of Acres of U.S. Forest, Timberland Go on the Block Amid Forest Products Company Mergers, According to a UGA Study

From University of Georgia Monday, April 01, 2002

ATHENS, GA. ?Vast tracts of U.S. forest and timberland are changing hands amid the mergers and consolidations in the forest products industry. A study by researchers at the University of Georgia's Center for Forest Business shows more than 14 million acres have been sold in the past five years, 6 million in the Southeast, as companies seek to lessen their tax burdens and focus on core businesses.

"Returns in the forest products industry are down, making companies really take a look at their reasons for owning and paying taxes on income generated from timberland," said Mike Clutter, professor of forest finance in UGA's Warnell School of Forest Resources. Clutter, who worked in the forest industry for many years as a financial analyst, joined the UGA faculty last year as Hargreaves Distinguished Professor of Forest Finance.

New corporate tax laws favor tax-exempt entities, such as timberland investment organizations and real estate investment trusts, not the "large C" corporations that have historically held industrial timberland. Clutter said the changes have forced many C-corps, which include most of the large, publicly owned forest products companies, to question long-held beliefs that they need to own land as a kind of insurance policy to ensure an affordable source of raw materials for their manufacturing facilities.

"Most mills, particularly in the South, get only about 15 to 25 percent of their raw materials from internal sources," said Clutter. "The traditional view of a vertically integrated forest products company is being replaced in many instances by a recognition that timberland has its own risk and return characteristics."

Regardless of management philosophy, most forest products companies now recognize the importance of timberland as a separate investment class. Clutter's study shows that in the forest product company mergers and takeovers, more than 70 percent of the deals reduced taxes for the acquiring companies, which increased profits for their investors.

"Moving timberlands into a tax-efficient structure can add significantly to the profitability of the timberland base," said Clutter, "but it also raises a number of societal questions about who will own U.S. timberland in the future."

Clutter says chances are good that it won't be the C-corps that have historically owned and managed their own company lands, but pension fund investors, university endowments and other tax-advantaged entities. Even private, non-industrial private landowners will be affected, especially those who inherit land, because many choose to sell it rather than manage it as timberland.

"I think we will see many of the large timberland consulting firms continue to grow as they manage more acres for timberland investment management organizations," said Clutter. "This will certainly have an impact on future foresters, many of whom will go to work for these firms rather than traditional forest products companies. There has always been a connection between traditional forest products companies and the timberland they managed. But the new tax structures mean we'll see more and more land owned by those most removed from it."