Summer 2010

Volume 19 No. 2

Indiana Forest Land Market Values as Evidenced by Liquidation

of Kimball International, Inc. Holdings

By William L. Hoover

Kimball International (KI) has its roots in the wood products industry of Jasper, Indiana. The original company was founded by W.W. Kimball in 1857 as a piano dealership. Over the life of the company, forest land was acquired in Indiana and Kentucky. Changes in KI’s markets, however, mandated an assessment of KI’s capital assets. This study reports on the sale of KI’s 9,422 acres of forest land in six counties in south-central Indiana. It’s important to note the scales involved in this discussion. “Large” private forest land holdings in Indiana are in the 10,000 to 15,000 acre range. Institutional investors generally limit their transactions to ownerships of 100,000 acres and greater. This limits the demand for Indiana forest land to residents of the state and adjacent metropolitan areas, or individuals with roots in the state.

Data Source

The sale of 117 tracts occurred on November 6, 2008. This analysis is based entirely on the publicly available information from the auction company including maps of the tracts, color aerial photos, acreage of each, brief descriptions of their positive attributes, and timber inventory data based on KI’s management units (not sale tracts). Bidders submitted a single written bid for each sale tract. The auction company’s website reported the combined winning bid price for the combination of tracts purchased by each buyer.

Sale Summary

KI held the land in 35 tracts averaging 272 acres each (range 2 to 1,731). These were divided by the auction company into 117 sale tracts. A majority of the sale tracts were completely forested. However, several small tracts, apparently originally acquired with the adjacent forested land, were primarily cropland. Several parcels were dominated by pre-merchantable hardwood plantations. Mature softwood plantations were scattered across many of the larger parcels.

The number of sale combinations was 73 (Figure 1).

The sale price for auction tracts was determined using the average price for the block of sale tracts purchased together. The stocking in MBF per acre for sale tracts was also determined by allocating the estimated stocking for each KI set of tracts to each sale tract in proportion to acreage. The average was adjusted by the forest cover percentage of each sale tract. Similarly, the timber quality distribution was allocated to each sale tract. Sale price averaged $1,632 per acre and ranged from $819 to $2,637 (Figure 2).

The bare land average value of $712 per A and was estimated by subtracting the allocated timber value from the allocated timber value. Based on conversations with individuals familiar with land markets, the sale prices were well below expectations. These properties sold at a recent low point in the U.S. economy. Quarter-to-quarter growth in GDP in real dollars was a negative 5.8 percent at the time. In June of 2008, the average price for low quality cropland in southwest Indiana was $2,718 (Purdue Agricultural Economics Report, June 2008, p. 2); this average was $2,701/acre in June 2009 (Purdue Agricultural Economics Report, August 2009, p. 2). Given that all the tracts sold had some timber stocking, a price of $1,632 could be interpreted as an indication that the market continues to discount the capital value of intermittent timber sales relative to the capital value of annual cropland income on tillable land. In addition, the poor economy at the time may have reduced the willingness or ability of potential buyers to enter this market.

Contributing Factors to Sale Price

The theory that price per acre declines as size increases was tested by regressing the per acre sale price against the total acres purchased by a given buyer. There was a  weak support for this theory. Addition of 100 acres to a sale may reduce the price by $38 per acre on average (Figure 3).

The data supported a stronger relationship between sale price and estimated timber value. Timber inventory data was available for 68 of the sale tracts. Timber value was estimated by multiplying the quality percentages reported by KI’s forester to prices per MBF of $1,500 for veneer quality timber, $900 for prime sawlogs timber, $500 for No. 1 sawlog quality timber, $300 for No. 2 sawlog quality timber, and an equivalent of $100 per MBF for pulpwood. The allocated sale price for these sale tracts was regressed against the total value of timber indicating that each $1.00 worth of timber increased the sale price of the land by $1.04. Road access, adjacency to public land, and development potential are frequently cited as factors positively correlated with the value of rural land. The significance of these factors in determining the allocated per acre sales price was assessed. Adjacency to public land was expected to be positively correlated given the values assigned and the assumption that buyers were primarily interested in “rural retreats.” Development potential was expected to be negatively correlated with sale price per acre based on the assumption that buyers were looking for rural retreats at a bargain, not land for development. Surprisingly, sale price per acre was negatively related to adjacency to public land, road access, and development potential

Summary

The lack of transactions evidence not requiring allocation of the sales price and/or timber inventory data to the sale tracts casts doubt on the reliability of all results. All conclusions must take this into account. The auction data analyzed appears to indicate that buyers were able to purchase land at prices below retail. Reducing sales price by the estimated timber value indicates a low bare land value of $172 per A. The analysis indicates that development potential had a negative effect on price because buyers were bidding based on a desire to acquire recreation land.

The analysis of the contribution of timber value to total sale price did indicate that buyers factored the potential value of timber into their bids. It is doubtful that many bidders had timber appraised. However, it appears that they did view sale tracts closely enough to make a general assessment of timber quality.

Dr. William Hoover is a Professor of Forestry and Assistant Head of the Department of Forestry and Natural Resources at Purdue University. He is founder of the National Timber Tax Website, www.timbertax.org .