- For some producers, having a timber sale in their farm woodland may be an option for generating some additional cash flow. While timber harvesting is a good source of income, it is vitally important that harvesting be done wisely in order for it to produce a sustainable cash flow.
The extreme weather and temperature ranges across Michigan over the past several weeks have caused havoc with many fruit and other perennial agricultural crops – causing widespread damage. If the initial damage estimates prove to be true, then some fruit and agricultural producers that sustain heavy losses may be looking for alternative sources of income to offset losses and pay for their fixed costs of production in 2012.
For some producers, having a timber sale in their farm woodland may be an option for generating some additional cash flow. While timber harvesting is a good source of income, it is vitally important that harvesting be done wisely in order for it to produce a sustainable cash flow. Therefore, fruit and agricultural producers need to proceed with caution to be sure that a timber sale is handled properly to maximize income and prevent an undue amount of damage that can adversely affect the future value of the woodland.
(For more, see: US timber industry takes major hit after housing collapse)
The best way to get started is to take a little time to learn more about the value of your timber before allowing any trees to be cut. A few telephone calls might be all it takes for you to avoid a costly mistake. In general, current timber markets are essentially following our domestic economy and are slowly rebounding. As consumers begin to spend more on durable goods (such as kitchen cabinets or furniture) and as the housing market begins to recovers, timber markets and lumber prices have begun to slowly rise as well. However, the biggest mistake most uninformed landowners make is to allow a logger to just pay for all the best trees and leave behind the poor quality trees for the landowner as a basis for future growth. This is not considered good timber management from a professional forestry point-of-view.
When arranging for a timber sale, it is best to use a sealed bid, competitive type of sale. This is where timber buyers in the area are notified of a landowner’s intention to sell. Then a period of time is allowed for those buyers to inspect the trees marked for sale within the woods after which timber buyers will submit sealed bids as to what they are willing to pay for the timber. A competitive, sealed bid approach is the best way a farmer can ensure getting fair market value for his/her timber.
Once a successful bidder has been chosen (based upon bid price and reputation), the next step is to enter into a written timber sale contract with the logging contractor. For the farm manager, a well-written sales contract spells out how, when and what will be done: when the contract ends; how and when payment is to be made; dismisses the farmer from any liability should anyone get hurt logging; and other important details. Do not depend upon verbal agreements about any key elements of a timber sale – get it all written down.
After a contract is signed, it may take several months until the logger actually begins the harvest. From the start of the harvest operation, the farmer or his agent (i.e. a consulting forester) should periodically inspect the harvest site to be sure everything is going according to the terms of the contract.
When the timber sale is complete, all expenses for managing timber as well as the income generated from a timber sale should be recorded in the bookkeeping system that a farmer uses for his or her fruit or agricultural operation. For income tax purposes, revenue from timber sales can qualify for long-term capital gains, depletion allowance and other special income tax treatments, and should not just be reported as ordinary income.
For those producers looking for assistance in conducting a timber sale, they can use the services of a private consulting forester. Consulting foresters are independent professionals who are self-employed and do not work for a logging or sawmill business. Instead, they contract with landowners to conduct a timber sale and get paid on a commission basis (which is also an income tax deduction). Just as with any other professional, ask for a forester’s credentials and references.
Another concise but useful publication is the MSU Extension Forestry Fact Sheet “Getting the Most from Your Farm Woodland,” which is available for on-line, free of charge.