é ios: Aeok- i. Uonoetire | [Page Issued November 12, 1914. U.5. DEPARTMENT OF AGRICULTURE, FOREST SERVICE. HENRY S, GRAVES, Forester. INSTRUCTIONS FOR APPRAISING STUMPAGE ON NATIONAL FORESTS. WASHINGTON: GOVERNMENT PRINTING OFFICE. 1914. Issued November 12, 1914. U. S. DEPARTMENT OF AGRICULTURE, FOREST SERVICE. HENRY S. GRAVES, Forester. INSTRUCTIONS FOR APPRAISING STUMPAGE ON NATIONAL FORESTS. WASHINGTON: @OVERNMENT PRINTING OFFICE. 1914. DP OFD. DEG “6 1914 CONTENTS. Mein troduction tocco ms 5.5 ese sous -/ cece ecawiseseiaiacss 5. Seaside shure tsps eh: Purpose) and suselOl MNStrUCtLONGs-seecci- << nines aes sicis ce esee ence hese 6: DEANIGCATCILOLMSktseeseere clas. scm series (sins = sas icisisini = mas ccieie ay netols eee etaians We Dreciatio mints sete raislateralscisisis ai iie. aie sien ya cies iste a slesecteie see sieeniees Residualiandswrecking/ Values =P, -21-\set-eeeeeeel 40 Application of return for personal services..............-..---.------ 42 Application of the overturn méthod.............--.----------------- 42 Distribution of profit and depreciation in mixed stands.......:....-.----- 44 Proratedonsquantitysoiitimberss- 5... sc\sin22seeeee ee eeeeeeeeeee= 44 Proratedonmetivalueioiitimbers=---s-ces-sec eee eee eee neat 44 Stumpageprice....2...2sscecapmns ccm c ater h ee Seether ere reas tle 46 Howjobtained|insmixedtstandssssereeeeeeeease see ease eeeeeeeese 46 Plat rates notidesirables, 2. 22 2s.cevae ci wines eee awisise sine scieivioeee asi 46 CONTENTS. 5 Principles underlying stumpage appraisals—Continued. Stumpage price—Continued. Page. (Wseroigminimimerstum pare\rates. (atten (e's o- ==) i siete a wisn 46 Mistribution: of loss/on, Inferior species’ caso s.de 2c. < s oec ccs osecics s-e 46 m@radesvaluation: ofinfertoriepecles’ i ese seemise ic < == -.= cle 3 a eee 46 Stumpace pricesifor special productay see. a-cjeseseite ci clos 2 ois ee 47 ZA praisals ion emialll salesee yee «1a sense ele eaters ae teil alae aiaiale ae she 47 Smallloperationssirer lan... ames sie ce emeciccca es ocieiieccicece ce 47 Appraisals based on methods in use and prices actually obtained..... 47 iberalsprofitsire quired opessstsyoisiotess ote) ate ale eistalolats a= sielfo sis aersielo)aisie aiaisse 47 Small operations competing in general markets..............-------- 47 nehedulesiomprices|for small lesaleg sist reyes eateries ieiale spaistniele were of species. ia the chance, ; z | 30 | Western white pine.. SQ SARI HEI HOC RO COC EOE COE wht $21.00 | $6.30 5 | Yellow pine...... z 17.00 | ~85 12) Darch=t snes. ei 13.00 | 1.56 187 || DOUBIASMITe co es heme acte a ee Be ans fa eee sao 13.00 | 2.34 3 | Engelmann spruce..... oe sErtSse Saas spe 15.00 | 45 254 | SWihitedines. Sees esacee S500 BES See oREOE e — 12.50 | 3.125 a Weesternired cedar. sic. < o- fee voce cc cacsecsceesmeaesdessenees dnesissees 12.00 84 100 Averagefor, the Chance. << <\n cs wawie sie ciclwatinwreticine s ones deninnn| Seadalciets eee 15. 465 Lumber Prices Prevailing in Producing Regions. The effort should be to obtain average lumber prices, by grades, holding for the pro- ducing region, or manufacturing district in which the chance is located. Such a region ordinarily includes all the mills (1) manufacturing timber of similar species and generally similar quality, and (2) subject to the same market conditions as repre- sented by freight rates to main consuming points and competition with other manu- facturing districts. The more mills from which price data are obtained the better. The aim will be to obtain grade prices or prices by species which are general averages rather than individual rates applicable to a single mill. Lumber Prices During Normal Market Conditions. Lumber prices holding for brief periods are not reliable. If obtained during a year of depression or temporary inflation they are unfair either to the Government or the operator, As far as practicable, the prices used should represent normal conditions in the lumber market. This can be done most practicably by averaging the prices received during a period of two years, or even longer if repeated fluctuations have occurred. As a general rule no prices should be used which do not represent the average lumber market during at least one year. The appraiser should furthermore study the data on prices for as long a period as authentic records are available and ascertain as far as he can the broad market ten- dencies indicated. Ifastraight average does not meet his judgment of a normal price in line with the movements of the market, he should recommend other rates which in his belief should be used. State of Manufacture and Shipment. ‘ Prices should be taken as a rule on lumber ready for shipment, commonly f. o. b. cars at the mill or nearest common carrier shipping point. Inthe case of plants which finish a portion of their product, the prices of the respective grades in the proportion and state of finish at which they are shipped may be used, Intensive forms of manu- APPRAISING STUMPAGE ON NATIONAL FORESTS. 35 facture, as boxes, sash and door, etc., should be disregarded and prices reckoned on the lumber itself, preferably in rough form, at the most convenient point in the whole pro- cess, Lumber freights over common-carrier roads should be eliminated from price and cost estimates as far as practicable. Net returns at the mill or its nearest common- carrier shipping point is the standard basis for appraisals. Value of By-products. The sale value of lath, slabwood, and other by-products which are usually manu- factured and have an established market should be taken into account in computing the total return for each thousand feet, log scale. This may be done by adding the milling cost on such products per thousand feet log scale to the other milling charges and similarly their sale value to the lumber selling price computed on log scale. The same result will be closely approximated by adding the profit on by-products per M feet log scale to the average lumber selling price. Prices of Other Products than Lumber. When timber is sold as railroad ties, shingles, telephone poles, etc., the selling prices of these products as they pass from the hands of the purchaser will be ascertained and used in the calculation in the same manner as the selling price of lumber. Where products like cedar poles are handled by distributors, without manufacture, f. 0. b. prices at main shipping points will be the ordinary basis taken. Use of Log Prices as a Check. The price of saw logs will not be used,’however, as a basis for stumpage appraisals. For this purpose the lumber market is taken by the Service as determining the value of saw timber. In sales to loggers appraisals should be based on lumber selling prices and all costs from stump to market reckoned as in sales to purchasers who operate mills. Log prices, however, serve as an excellent check insuch sales. They should be ascer- tained and considered by the appraiser in fixing the price of the stumpage. The report should indicate how far it will be practicable for loggers to purchase stumpage ona lumber market appraisal and what prices would be equitable if the log market were the basis taken. PROFIT. What Profit is. Profit is the amount which may be taken out of the business over and above depre- ciation charges, while still leaving its working capital intact. It is usually figured asa percentage, returned each year, of the total investment in the enterprise. It is most clearly represented, however, by a sum per thousand feet or a total sum on the year’s cut. The cash balance at the end of a year’s operation consists of three parts: (1) an amount set aside for depreciation, which pays back some portion of the original invest- ment, (2) working capital, or the portion of it available as money, and (3) profit, or the surplus over the other two sums. The preliminary work in stumpage appraisals results in two figures: (1) the sum of operating costs and depreciation of fixed investments, and (2) the average selling price of the product. The difference between the two is made up of profit and stempage price. The final problem is to divide this amount fairly between profit and stuinpage. Profit Margin in Stumpage Appraisals. No profit is guaranteed by the Iorest Service. It is necessary, therefore, not only to appraise on the basis of a fair net return to the operator, but to include an additional amount to protect the net profit and insure its realization. What the appraiser really estimates, therefore, is a profit margin made up of these two parts. An equitable profit, or profit margin, based upon ordinary management and average luck, is essential in every stumpage appraisal. Its aim will be, however, to insure a fair industria! return to the operator, proportioned to the risks and commercial standing of the business, not the speculative or unearned reward of the shrewd investor. 36 APPRAISING STUMPAGE ON NATIONAL FORESTS. Elements in Profit. Profit in timber operations involves three general elements: (1) interest on capital invested, (2) reward for the personal energy and ability of the operator, and (3) allow- ance for risks to which the business is subject. Interest on Investment. Interest on invested capital at prevailing commercial rates is often treated as a cost rather than profit. Itis, however, a return from the operation, and in National Forest appraisals will be classed with other returns as an element of profit. Capital industrially employed in National Forest operations is entitled to a return onits own account, regardless of any other elements of profit, of at least 6 percent. In nearly all business return on invested capital is the most clearly established and con- trolling basis of profit. This is particularly true of the larger and more permanent enterprises whose processes are standardized and whose organization is developed along permanent and stable lines. Reward for Personal Effort. The second element, reward for personal initative and capacity, is much more variable. In large operations, business ability and skillful management are in the main furnished by employees, paid by salaries, and accounted for in costs of production. The personal element does not enter largely into profit, although usually evident in the organization and beginning of an enterprise,and not infrequently recognized in going operations by stock bonuses or profit sharing. It is of special importance in lumbering as compared with other industries on account of the lack of standardized processes and the knowledge of many different commercial and technical branches which is required. In the smaller enterprises, of a more temporary character and less stable organization, individual energy and initiative are much more important factors in the conduct of the business. The capital invested is often relatively small and profit may be largely a reward for personal effort. The weight to be given this element in Forest Service appraisals will necessarily vary in accordance with the character of the chance. It will be greater in small, short-lived operations than in large sales of long duration. It should be slight in appraisals of timber available to well-established, going plants. On the other hand, it must be relatively great in the case of new enterprises with an organization to create and markets to develop, particularly if special conditions must be met which require exceptional experience, business capacity, or other personal qualifications on the part of the buyer. Business Risks. The third element of profit, a return covering business risks, is required in lumbering to a greater degree than in most other industries. This risk consists (1) in the double chance ofa decline in the umber market and an increase in operating costs, which the course of lumbering history shows to be great, and (2) in possible losses and accidents which are inherent in a business dealing with rugged physical conditions, but can not be accurately foreseen or reckoned in cost estimates. While the physical risk to invest- ments beyond the limits of insurance are not ordinarily great, serious business losses are usually involved in their destruction or injury. The destruction of a sawmill by fire, for example, involves not only the loss of the value of the plant not covered by insurance, but also loss of custom, loss of operative force, and loss of profit through reduction in output. Particular chances are often subject to special risks. These directly affect their value aad must be taken into account in appraisals by giving proper weight to the risk elementin profit. A stream may be of such a nature as to endanger either hanging up drives indefinitely or carrying them through storage booms, Small streams which APPRAISING STUMPAGE ON NATIONAL FORESTS. 37 have never been driven are usually uncertain and risky features ofachance. Similarly the necessary location of a road, flume, or railway may subject the operation to special risk on account of frequent washouts. Risk on Fixed Investments and Working Capital. Risk is ordinarily much less on working capital than on fixed investments. The latter are not merely liable to physical damage, but become a total or partial loss if the enterprise fails. Ina peculiar way, therefore, they are involved in the hazards of the business. Working capital, which is represented at any given time by logs, lum- ber, bank account and bills receivable, is subject to loss or reduction, but is not so involved in the success of the enterprise. In case of failure, lumber and log stocks can usually be realized on and outstanding accounts collected. Hence a smaller rate of profit is sometimes figured in business practice upon working capital than upon fixed investments. The relative amount of the two may legitimately influence the general profit rate. Other Factors Affecting Risk. Inthe consideration of timber chances, operators must also take into account possible overestimates of the quality of the stumpage or the selling price of the various lumber grades and possible underestimates of necessary investments or operating costs. The size and permanency of the operation are important factors. Large investments carried for long periods, like railroads and modern office buildings, are satisfied with a lower return than smaller, less stable enterprises. Operators with established markets and transportation facilities will accept a lower return than where these features of the * business must be constructed or developed. AI1 of these are factors of risk which must be weighed by the appraiser in determining the profit margin which should be allowed. Comparison with Other Kinds of Business. The lumber business involves greater risk and uncertainty than most manufacturing enterprises, Industries characterized by permanence and physical safety of invest- ments, standardized processes and assured markets are run on a margin of profit which would be wholly inadequate for lumbering. Its general conditions are entirely different. Each operation must be adapted to the topography of its chance. New methods must often be developed and applied to peculiar local conditions. Exact- ness in estimates of investments and operating costs is practically impossible, The capital invested in fixed improvements is subject by their nature and location to a great fire risk which can not be as fully insured against as in most comparable lines of business. The work is hazardous and injuries to workmen are frequent. The hazard from unusual climatic conditions is greater than in most manufacturing indus- tries. Losses due to uncontrollable causes, such as car shortage and bad accounts, are common, As in other enterprises, the business is subject to labor troubles and break- downs. It is dependent upon unskilled labor to an exceptional degree. All of these tend to make a high profit margin necessary, Comparison with Private Operations. Operations on National Forests have:certain financial advantages when compared with private lumbering. Thesystem ofsmall payments amounts in long-time sales toa substantial saving of interest and taxes. The effect of this, however, is upon cost of production, not upon certainty of profit. Operators in National Forests, however, have some advantages over private lumber- men in the matter of risk. Owning no timber, they have a smaller total investment, and consequently less to lose if the enterprise is a failure, Since title to the timber does not pass until it is cut and scaled, they run much less risk of loss from fire. 38 APPRAISING STUMPAGE ON NATIONAL FORESTS. On the other hand, contracting to log under Government supervision necessarily involves a risk, however small, which the operator on private land avoids. Further- more, the purchaser of National Forest timber foregoes to a large extent speculative profits from increased stumpage and lumber values and from overrun, both in estimate and scale. METHODS CF RECKONING PROFIT. Investment Method. A percentage return on the capital invested, covering all of the elements discussed above, is the clearest and most satisfactory means of reckoning the profit margin. It accords with the usual business practice and conceptions and permits ready compari- son with other industries. This method of reckoning profit, known as the ‘‘investment method,”’ will be standard in the Forest Service. It should be employed uniformly in appraising the larger chances, and in appraising the smaller bodies of timber wher- ever it is applicable. Compensation for Personal Services. The investment method is seldom adapted to the smaller and shorter-lived opera- tions. The capital required in such cases, as a rule, is relatively little and inadequate as a basis for reckoning profit. Supervisory charges are usually not covered in oper- ating costs. The energy and ability of the purchaser are the main factors upon which the enterprise is conducted. Similar conditions often apply to operations cutting special products like railroad ties or mining timbers, which require comparatively little capital. The profit margin may be reckoned in such cases partly as a return on money in- vested and partly as pay for the operator’s time and enterprise. Profit is thus split up into the elements discussed above and a return provided for each in its own terms. A fair percentage, taking as a rule the same rate used in the investment method, should be allowed on such capital as may be required for improve- ments or working funds. This covers interest and risk on money invested. At the same time, the element of personal services is covered by a salary per year or month adequate for the management and direction of the business. The latter is in effect a charge for supervision, but is fixed directly in accordance with the demands of the business upon the personal time of the operator. This method will be used ordinarily where the investment method is inapplicable. Overturn Method. Another method of reckoning profit is to take a percentage of the total operating cost and depreciation, or “overturn.’’ This should be used only in cases where the investment is very small in comparison with current operating costs or is difficult to estimate, and hence affords an insufficient basis for determining profit. The method is used largely in railroad work and general contracting. If the sum of depreciation and cperating costs, for example, is $12 per thousand feet, the profit may be figured as 20 per cent cf that amount, or $2.40. The overturn method is of special value in small sales where the investment is negligible or where operating costs can be closely estimated but the capital required is uncertain or difficult to determine. Operating costs, which make up most of the overtura, are usually ascertained more readily than investments. The overturn method is thus safer for appraisers who are not expert in calculating the investment features of lumbering operations. It may also be used if desired in arriving at the profit due on logging as distinct from manufacturing where it is necessary to deal separately with the two parts of the operation. (See p. 43.) APPRAISING STUMPAGE ON NATIONAL FORESTS. 39 Checks on Profit Calculations. The rates of profit given in these instructions are necessarily tentative. Final rates can be established only by experience in studying and analyzing actual returns from many different operations. It is therefore essential to check calculations of profit by direct operating standards as far as they can be obtained. By Going Operations. - Systematic study of the profit obtained in going sales and private operations is a valuable and necessary check upon this feature of stumpage appraisals. To permit direct comparison, it should be computed in terms of per cent on investment, per cent on overturn, etc., conforming with the methods prescribed in these instructions. A frequent check of the results of former appraisals to ascertain what rates of profit are suflicient and equitable under the particular local conditions is one of the most essential parts of the appraiser’s work. By Current Bids. The profit margin indicated by current or past bids for National Forest chances in the same region, as showing the basis upon which operators are willing to buy stump- age, should be used to check appraisals under either the investment or overturn method. As the lumbering industry develops in new regions and becomes more stable, operators are willing to purchase at lower profits. This is shown by the course of stumpage values in the older manufacturing regions. The prices bid in current sales thus form the best index to the rate of prefit required by the local lumbering industry. By Money Profit Per Thousand Feet. The profit reckoned in the appraisal may be checked also as a sum in dollars and cents per thousand board feet or other unit of output. A stated profit per thousand feet is a direct and tangible figure, widely employed in the lumber business. As experience is gained, it is probable that more definite standards of profit in money per thousand feet can be established for operations of varying size and kind of output under each of the more common sets of local conditions with respect to markets, logging risks, ete. Such standards will greatly facilitate uniform appraisals. A check of the results obtained by any method of reckoning profit, from this standpoint, is therefore desirable. A profit margin of from $1.50 to $4 per thousand feet appears to cover what is legitimate and necessary in practically all classes of sales which involve both logging and manu- facture. The smaller amount may be sufficient for established operations of consid- erable size where logging and market conditions are well known, methods fully devel- oped, and no extraordinary investment or risk is involved. The larger sum may be necessary in small and irregular operations and those involving exceptional invest- ments, special difficulties in marketing the product, or unusual risks. Under average conditicns of investment and risk a profit margin of $2 to $3 per thousand feet is adequate. As the lumbering industry becomes developed and settled in any region a number oi factors, such as lower interest rates on borrowed money, .better understood logging conditions, standardized methods of manufacture, and more stable markets, tend to reduce the profit expected. Check on Profits in Small Sales. The main factors to be taken into account in checking the profit per unit f cut ere relative investment, relative risk, and amount of output. The following table will serve as a guide in checking the profit margin obtained in small sales under different sets of conditions. Higher profits are set down for the smaller operations because 1 This table is based upon profits obtained in current sales which are apparently satisfactory, not upon mathematical calculations. 40 APPRAISING STUMPAGE ON NATIONAL FORESTS. (1) their organization and methods are not so well standardized, and (2) the risk, return on money invested, and payment for the personal services of the operator must be borne by a smaller output, Risk. Investment. Small. Average. Large. Operations of 10 M daily or less. Smalki(uncer/$10;000) conc teiscictelels lacie alsieietusie $2.30 $2.65 $3.00 Average ($10,000 to $15,000) An 2.65 3.00 3.30 Large (315,000 to $20,000) 3.00 3.30 3.65 Operations of 10 to 20 M daily. Small (um der'$20;000) cs reictamcisisis s siesinla'siasice so tisieisstslelenie sateen : 2.00 | 2.25 2.50 Average ($20,000 to $30,000) .. 2.25) | 2.50 2.75 TArzO:(S30,000 TO SLO 000) =o a4 5: jurscesc.aninisloselartuuta omanemsmerooactdem acied 2.50 2475 3.00 Application of the Investment Method. Profit calculated as a percentage of the money in the business should strictly be proportioned each year to the capital invested in the operation during that period. For simplicity, however, the average investment during the life of the sale may be taken. This is not mathematically exact as to the actual amount invested during any given year, but is a fair basis for calculating profit during the operation as a whole. Frequency of Turn Not Considered. As indicated on page 29, the frequency of the turn has an important bearing upon the amount of working capital required in the business. The average annual invest- ment once determined, however, the frequency of the turn does not affect the calcu- lation of profit. The average investment is conceived as a certain sum set aside in the operation and earning annually a specified percentage of itself, whether the over- turn is once a month or once a year. Calculation Under Investment Method. The application of the mvestment method issimple. The average amount of money employed in the operation, including working capital and fixed investments, must be determined. Fixed investments may be averaged as indicated on pages 19 to 24. Working capital can usually be computed as a constant amount throughout the oper- ation. A specified percentage of this figure gives an annual sum which must be set aside as the profit margin. This sum divided by the yearly cut gives the profit per thousand board feet. The sum of profit and depreciation per thousand feet and cur- rent logging and milling costs deducted from the selling price gives the stumpage rate at which the timber should be appraised. Expressed as a formula, the calculation becomes: X=8—(Le+Me4 p+Per cent of (A+ TV). cut X represents the stumpage price, S the average selling price, Le the logging costs, Mc the manufacturing cosis, D the depreciation of fixed investments, A the average fixed investment in the operation, and W the working capital, all as amounts per thousand feet log scale. To illustrate: _ In an operation cutting 10,000,000 feet annually the estimated average investment including working capital is $235,000 and the annual depreciation $12,000. Logging costs $6 per thousand feet log scale and milling $4.50 per thousand feet, lumber APPRAISING STUMPAGE ON NATIONAL FORESTS. 41 tally. The overrun for the class of logs involved, yellow pine running 10 logs per thousand feet, is 20 per cent; and the average selling price mill run, lumber tally, is $16. The operation involves comparatively low risks, the timber being cut by an established mill with well-developed markets. A return of 15 per cent on the invest- ment is deemed equitable. The elements in the formula are thus: Selling price (1,200 feet at $16 per M).....-..--------------------+-+-+-+-- $19. 20 Morr inp costal cs-ee seacse= sae selaei-elas eee ee ceils oi-t-f= eissi- sisi $6. 00 Milling costs (1,200 feet at $4.50)........-.----+------------+ +--+ +--+ 5. 40 Depreciation ($12,000+-10,000 M)....-.-.----------+------+++-+--+-+- 1. 20 Profit (15 per cent of $235,000+-10,000 M).......-..---------------+--- 3.52 TNOATL@anna yes aS aa de Shee dabiooude Saceaenennemseraa ole beete Ene en ae 16. 12 Stumpage yporice soo ~ 2 teem o c)e wale cfeinials wie tele joins wiate wists = ses = 3. 08 Rates of Profit Under Investment Method. Yor a lumbering operation of good size, extending over a period commensurate with the life of the plant, 15 to 20 per cent on money invested is a fair margin for profit. On chances tributary to established plants which are in a position to purchase them, in regions where logging involves no extraordinary problems or unusual risks and where manufacturing conditions and markets are well developed, 15 per cent should be the general standard. If new plants must be constructed and business enterprises developed, other conditions being substantially as above, the profit margin may prop- erly be extended to 18 or 20 per cent. Ii exceptionally large investments must be made to open up new country, or the industry developed largely under new condi- tions, or if special risks like uncertain streams or extremely variable markets must be encountered, a profit margin of 22 to 25 per cent is equitable. Twenty-five per cent is the general standard in smal] sales where a return on the investment is combined with payment for personal services. Different Rates on Different Parts of the Investment. As indicated on page 37, the risk to which different parts of the investment in a lumbering operation are subject may vary within considerable limits. Practically no risk, for instance, attaches to investments in land for mill sites, Working capital is normally subject to less risk than fixed investments. Investments in main line railroads which will be maintained as common carriers after the chance is logged out differ from other fixed investments both in risk and permanence. A lower rate of profit, usually 10 or 12 per cent, should be allowed on railroads for which permanent traffic is anticipated. Otherwise no distinction will be made in the returns figured on the various parts of the total investment required. The differences in risk of mill-site investments, working capital, woods improvements, etc., and the proportion of each in the total should be considered, however, in choosing an average profit rate for the whole. Interest on Borrowed Capiial. It should be noted that these profit margins include whatever interest is payable on borrowed capital. No distinction will be drawn between bonds, notes, or other loans and capital stock or other funds advanced directly by the operator. Out of the profits earned, however, must be taken whatever is required to carry the indebtedness of the concern. Most operators after paying their annual interest charges from the proceeds of the business enter the remainder as profit earned by their own capital. In Service appraisals which treat borrowed and unborrowed funds alike the profit margin 49 APPRAISING STUMPAGE ON NATIONAL FORESTS. includes any such carrying charges on part of the capital as well as the net returns, averaged for all the money used in the business. Exceptionally high interest rates on bonds or notes is thus a factor which should be considered in fixing the profit margin. Application of Return for Personal Services. If the capital invested is inadequate as a basis for determining profit, it may be sup- plemented by a return for personal services. This method is especially applicable in small sales, which require but limited investments and depend primarily upon the personal energy and effort of the operator. Such capital as is required should return a percentage equivalent to that customarily figured for large sales in the same locality. Twenty-five per cent is a fair average figure. In addition, the appraisal should include, as a charge for superintendence, a salary of $100 to $200 per month, depend- ing upon the size of the operation, as compensation for the foremanship or personal effort of the purchaser. This method will be used ordinarily when the investment method is inapplicable. Application of the Overturn Method. Profit under this method is a percentage of the overturn, or the entire production cost of a thousand feet of timber at the date of sale, including operating charges and depreciation, but not stumpage price. The calculation may be expressed by the fol- lowing formula: X=S—(Lce+ Mc+D)—per cent of (Le+ Mc+D) or transposing X=S—(1-+per cent) times (Ze + Mc+D). Lc, Mc, and D represent logging costs, milling costs, and depreciation, all in amounts per thousand board feet log scale. X is the stumpage price and S the average selling price log scale. Per cent represents the rate of profit allowed on the overturn. Taking the operation used to illustrate the investment method, page 41, the following result is obtained from the formula: Depreciation is $1.20 as before, logging costs $6, milling costs $5.40, and selling price $19.20, all in terms of log scale. If 25 per cent on the overturn be regarded as a fair profit, the calculation becomes: X=$19.20 —$1.25 ($6-+$5.40+$1.20) X=$19.20—$15.75, or $3.45. It should be noted that the profit margin in this calculation is $3.15, as compared with $3.52 under the investment method with a rate of but 15 percent. The factors affecting comparative results under the two methods are discussed on page 43. Relation to Fixed Investments. It is apparent that fixed investments are included in this calculation of profit only to the extent of their annual depreciation. The residual portion of the fixed invest- ment or wrecking value at the end of the operation is given no place in the determina- tion of profit. Asa rule, depreciation of fixed investments forms 10 per cent or less of the total cost of production on which profit is figured. Profit by this method is thus related primarily to operating costs—that is, to the overturn of working capital. Bearing of Frequency of the Turn on Profit. Under the overturn method, the profit allowed, except the small part based upon depreciation, is realized every time the working capital expended in operating costs is turned. The frequency of the turn thus has an important bearing upon the total profits of the year earned by the working capital in the business. In the illustration cited on page 42, for example, the profit margin on each thousand feet manufactured APPRAISING STUMPAGE ON NATIONAL FORESTS. 43 is $3.15. The part of this earned by working capital, excluding depreciation of fixed investments, is $2.85. If the turn is but once a year, this profit would be earned by $11.40 of working capital, an interest rate of 25 percent. If working capital is turned twice a year, the same profit would be earned by $5.70, an interest rate of 50 per cent. If the working capital is turned every three months, or four times annually, the money actually used in the business in this form would be earning 100 per cent yearly. Divergent returns on money invested are thus obtained under the overturn method unless the per cent of profit is carefully adjusted to the frequency of the turn. With more frequent turns, lower rates should be used. From the foregoing it is clear that the overturn method is not adapted to appraisals made primarily from the standpoint of capital invested. The investment method should be used invariably under such conditions. The profit margin should be based on overturn only when the investment is too limited for this purpose, and it is more practicable to arrive at the profit on a simple basis of contract work, disregarding investment considerations altogether. Profit may thus be based upon the overturn in small operations whose make-up is such that the investment method combined with a return for personal services is not applicable; and in larger operations which require comparatively little capital, like many sales of tie, pole, or mining timber, where the overturn may be the most prac- ticable means of determining a fair profit margin proportioned to the character and risks of each chance. Different Rates on Logging and Milling. A modification of the overturn method may be used in localities where it is desirable to treat logging and manufacturing as distinct operations, each earning a profit adjusted to its peculiar conditions and risks. . In established manufacturing regions, milling is the more stable part of the business. Methods and costs are more uniform than in logging, both in the same mill from year to year and in different mills cutting the same class of timber. Risks are usually less variable than in woods operations. Logging, on the other hand, may be subject to varying combinations of topography, climate, accessibility, certain or uncertain log transportation, and the like. The range in logging costs and investments and in logging hazards may thus be much greater than in the case of milling. When such conditions exist, particularly in localities where sales are made to established mills, it may be desirable to use a uniform rate of profit on the overturn in milling, including depreciation of mill investments. This rate should be fixed in accordance with local manufacturing standards and particularly the frequency of the turn of working capital. Under average conditions, with working capital turned three or four times a year, a profit of 15 per cent on the milling overturn is sufficient. The profit on the overturn in logging, including depreciation of logging investments, may then be adjusted to the conditions and risks on each chance. This application of the overturn method may be illustrated by the operation pre- viously cited, page 41. Of the total investment required, $85,000 is used in milling and $150,000 in logging. Depreciation is similarly divided, $3,000 on the mill invest- ment and $9,000 on the logging investment, the latter including the logging railroad and rolling stock. Fifteen per cent profit, the standard for the region, will be allowed on the milling overturn and 25 per cent on the logging overturn, the chance involving average hazards. The formula is as follows: X=S—(Le+LD-+per cent [Lce+LD])—(Me+ MD-+per cent [ Mc+ MD}) That is, the stumpage price is the selling price less the sum of logging costs, depre- ciation on logging investments and logging profit, which is a per cent of logging costs and depreciation; less also the sum of milling costs, depreciation on mill investments, and the milling profit, which is a per cent of milling c osts and depreciation. 44 APPRAISING STUMPAGE ON NATIONAL FORESTS. Using the data from the operation cited, X=$19.20—($6-+$0.90-+.25 [$6-+.90]) —($5.40-++.30-++.15 [$5+.30]) X=$19.20—$6.90—.25 (6.90) —$6.55. X=$4.03, the stumpage price. The profit on logging and manufacturing may also be calculated separately by using the overturn method for the former and the investment method for the latter. This use of the two methods is adapted to the usual conditions in the industry where logging and milling are conducted by separate business organizations. Manufac- turing operations represent the larger investments and their profit can be determined best asa return on investment. Logging jobbers, however, who supply the mills with timber require comparatively little capital. Personal ability and effort are as a rule the main factors in their business. Their profit may thus be satisfactorily determined (1) by the overturn method, or (2) by payment for personal services with a percentage return on such capital as their logging business may require. While a distinction is recognized in calculations of this character between logging and milling, the stumpage price should always be obtained from the selling price of lumber, not the selling price of logs. (For a further discussion of this point see p- 35.) Rates of Profit Under Overturn Method. The percentage of overturn used in computing profit should be gauged by the per- manency of the operation, the various elements of risk which attend it, and the local requirements and standards of the particular business. For tie or mining timber operations, with the cut contracted in advance and the market risk thus eliminated, 20 per cent may be taken as standard on fairly accessible chances which involve no unusual logging hazards. In saw-timber sales subject to the usual market risks, 25 per cent should be used under average conditions. If, on the other hand, inaccessible timber must be opened up and exceptional risks incurred in log driving or in marketing the cut, a profit of 30 to 35 per cent is equitable. DISTRIBUTION OF PROFIT AND DEPRECIATION IN MIXED STANDS. Prorated on Quantity of Timber. In the foregoing instructions profit and depreciation have been prorated evenly over the entire cut. This is the simplest method and is directly applicable where one species is involved. The same method may be used in mixed stands. Average figures for profit and depreciation, together with the operating costs, may be deducted (1) from the selling price for each species giving directly its stumpage rate, or (2) from an average selling price for all species giving an average stumpage rate, which may then be distributed over the various species on any basis desired. Prorated on Net Value of Timber. It is preferable to prorate the total annual profit and depreciation in mixed stands on value rather than quantity. The final results are the same. Distribution on value, however, furnishes a fairer basis for fixing stumpage rates as between species. It also affords the most logical means of carrying out the Service policy of maintaining a minimum rate for green timber of each species and adjusting stumpage prices on the more valuable timbers so that they will carry the less valuable in the sale. At the same time it facilitates giving due weight in appraisals to differences in producing costs between species, as in reduced milling charges for inferior woods manufactured only into low-grade lumber or timbers. The most satisfactory method is to prorate the gross annual depreciation and profit over the difference between operating cost and selling price, for the several species in the proportions entering into the annual cut. To illustrate: APPRAISING STUMPAGE ON NATIONAL FORESTS. 45 A yearly cut is made up of 4,000,000 feet of sugar pine, 3,000,000 feet of yellow pine, and 2,000,000 feet of white fir. The margins between selling prices and costs of pro- duction, exclusive of depreciation and profit, are: a Selling | Operat- Species. price. | ing cost. Margin. jules UG ee eee eee eee Ses cmiacisie cceeteincat Meshier te ter smjerininim~ =ie =~ -l='= $20 $10 $10 Yellow pine 18 10 8 SIV LS nee co eet ete seen ee aan lns Comino meincheite meleters|=/a.cin nic cin'e|uia'e)s(o,cie,sia\s\=i= 15 9 6 The total net value, or sum of the margins, over which depreciation and profit may be prorated, is thus: PSanreeae oma, fT 1N OT Dee Bene Ae en Soo pEeaao doce -- $40, 000 VWelliony pisney Sep Or coe OnE Ero neeaece nea The charge for log freight from the end of this tap line to the mill is $80 per M feet in any event. Profit and production cost, exclusive of stumpage price, may then be sum- marized as follows: rH _,| With tap line Vith A y a ae ee as independ- operation. SRC Ayn carrier, Return on investment in mill site $0.08 $0.08 Profi pe ee te rates eee eee ae 3.68 3.68 Depreciation. af 1.27 1.27 Logging costs. 4.74 4.74 Milling costs 5.40 5.40 Tap-line transportation.......... 1.17 55 Main-line transportation 80 .80 PRO bell Beste eh e inets eset ane ei fone oe iain inl wsininis eaten see nics'enineinieiaete 17.14 16.52 Where different methods of handling the main transportation problem should be considered, as is frequently the case in inaccessible chances, it is desirable for the appraiser to present the cost data under each. In this instance the choice obviously lies between a more and a less conservative policy as to whether the sale of National Forest stumpage should await the general economic development of the region or whether the Government timber should itself carry the principal burden of such development. Ordinarily the more conservative policy will be followed under such conditions. Stumpage prices will be based, therefore, upon the lower schedule of costs. The average lumber value of the white-pine timber on the tract has been deter- mined from three tables, which follow. The first gives, for sound timber, the aver- age value by grades of stumpage of varying size, as indicated by the number of logs per thousand feet. 1 318,360 prorated annually over 30,000,000 feet. (See p. 56.) 2 The additional equipment required is 2 engines in current use. Their depreciation, at 10 per cent annually, and average investment are figured as $2,400 and $13,200, respectively. Profit on the latter figure is allowed at 20 per cent. 4 These are the estimated proportions of the total costs of operation and maintenance chargeable to the timber. (See p. 56.) 60 SOUND WHITE PINE. APPRAISING STUMPAGE ON NATIONAL FORESTS. Logs per thousand. Grade 18 6 | 3 Grade. value per thousand. rz mon Propor- Propor- Propor- Per cent A Per cent F Per cent + tional tional tional Ofgrade. | value, | ferade. | value, | Ofsrade. | value, (Biselect=sems-ecsce ene $45.00 0.14 $0. 06 1.57 $0.71 12. 26 $5. 52 C'select (22. - 55. 38. 00 1.97 15 6.10 2.32 12. 67 4.81 D select .....--- 27.00 3.72 1.00 8. 88 2.40 9. 29 2.51 Shopeececre-n-=- 20. 00 +43 -09 7.91 1.58 24. 41 4.88 No. 1 common... 25.00 47.20 11.80 29.92 | 7.48 15.19 3.80 No. 2 common..... 21.00 21.73 4.56 18. 40 3. 86 9.09 1.91 No. 3 common..... 15.00 21.03 3.15 22.18 3.33 14.97 2.25 No. 4 common....- 11.00 3. 66 -40 4.85 | 53 2.07 -23 No. 5 common.........-.- 6.00 12 -O1 -19 O01 05)| Sessceeeee MNotalisscssetssesealsesess cee 100 21. 82 100 | 22. 22 100 25.91 | The second table gives similar data for defective white pine. DEFECTIVE WHITE PINE. Logs per thousand, Grade 15 10 4 Grade. value per thousand. = = — —— Propor- Propor- Propor- Sieouee tional Ereeies tional reper tional * | value. : value. | value. | Biselectest.-.0s=3es~ 320 $45.00 0.91 30. 41 0. 93 $0. 42 10.94 | $4.92 Ciselect-<22. 223-2252 38. 00 3.52 1.34 7.85 2.98 11. 60 4.41 ID select zc. --ciseses 27.00 7.17 1.94 11.32 3. 06 11.60 3.13 Shop ss. ccccseceaaes, 20. 00 +21 04 1.83 | «37 9, 87 1.97 No. 1 comimon......-. 25.00 18. 23 4.56 14.12 3.53 4.68 nea lyf No. 2 common....... 21.00 15.38 3. 23 6.94 1.46 3.77 -79 No. 3 common......-. 15.00 28. 24 4, 24 27.85 4.18 19. 21 2.88 No. 4 common....-.-- 11.00 23.77 2.61 25. 28 2.78 22. 41 2.47 No. 5 common..........-. 6.00 2.57 15 3.88 -23 5.92 36 Ota ees actos nee -| tose seitocse 100 18.52 100 19. 01 100 22.10 The third table sets forth the run of the white-pine stumpage on the chance, by size classes of sound and defective timber, respectively, with the average cut of grades and grade values. GRADES AND GRADE VALUES OF WHITE PINE. Propor- tional! s Lumber value. Per cent of White pine. log class in the Per stand. thousand. Slog SOUNG ee sscets his dew toes Se Soe heats eee. ee eee 24 $25.91 6-log, sound......... 16 22. 22 18-log, sound.........--- 20 21.82 4-log, 28 per cent defective. 16 22.10 10-log, 32 per cent defective... 2 12 19.01 15-log;.32; per cent: defectives: ssa. rnc el is ay +! bs a : ms , b ‘ U * “4 a ’ 1 , i i ¥ i p -Gh Forged ee a va bib we BN ak te +3 Gaylord Bros. Makers Syracuse, N. PAT, JAN, 21, 1908 TMI