Growing Black Walnut Trees for Profit, What’s the Rate of Return?

Growing Black Walnut for Profit

What type of money can you realistically make by starting a timber production business? It is possible for a timber lot to provide you with a livable income or large enough rate of return to be justified?Is timber production the kindling that you need to get your portfolio moving?

This article will focus specifically on the planting and production of black walnut timber. Black walnut is a highly valuable and desirable wood, and if the conditions are right, can be used to produce high value veneer. Veneer is effectively extremely thin wood (small as 1/50th of an inch thick) that is put on top of other woods and products to make them appear as if they are black walnut.

Because you use so little of the actual wood to make veneer, a large tree can make a huge quantity of veneer. It’s probably best to lay out some of the basics first. Veneer requires great quality trees (straight, no defects, no weird growth) that are 19 inches or larger. The larger, the better.

There are a few terms you should know, one of which is stumpage. Stumpage or stumpage prices represent the value of the tree as it stands. You should also know MBF, which represents a thousand board feet of wood. A board foot is basically 144 square inches (therefore a 12x12x1 inch board is a BF). Just for the record the M in MBF is the roman character for 1000.

Let’s jump forward a bit here and talk about what is a 50 foot tall tree that is 19 inches in diameter worth today. Well in theory that tree has 703 BF in it, as long as there are no major defects. Certain fast growing seedlings will reach this size in 30 to 40 years. So what’s the ROR?

The range is tremendous in pricing of a BF, but $1.05 to $1.84 per BF for stumpage pricing should be expected (the range however goes all the way up to $5.30, according to (“Missouri Timber Prices Trends, Jan-March 2013”)

So in theory that tree that took you 30 to 40 years to get, is worth around 703 * 1.50 = $1,054, Let’s call it a roughly $1,000 standing. You space the trees 12 by 12 or roughly 300 trees per acre, but there is a kicker. Normally only about 10% of the trees get to veneer quality, but good news, the genetically modified seedlings state they can obtain 60% veneer quality.

For my calculations, I’m going to assume 30% mean veneer quality (60% seems very conveniently high as you might deduct from the conclusion of this article), therefore every acre produces 90 veneer quality black walnut trees plus another 200 or so trees which are worth about a ¼ as much as the veneer quality trees.

The value of your acre of black walnut trees after 30 to 40 years?

  • 90 (veneer quality trees) * $1000 each = $90,000
  • 210 (non-veneer quality trees) * $250 each = $52,500

That’s $142,500 per acre of wood over 30 to 40 years.

So what exactly does it cost to grow these trees? The land, the establishing costs, possibly insurance, and taxes.

In Ohio, it’s very possible to get $5k per acre land, and due to Current Agricultural Use Value (CAUV) , you can effectively have taxes in the $1 – $5 per acre a year range. Seedlings cost about $7 each (if purchasing 400 or more, and $5.75 if 1000+), 300 per acre or roughly $2100 per acre.

So cost wise we are at:

  • $5,000 for the land
  • $2,100 for the seedlings
  • $200 of taxes (or less, for the entire 40 years.)
  • $100 – $150 of fees for CAUV and consulting

Total Cost: $7,400 per acre + weed control (this is where it gets tricky).

Weed control can be a plastic disc, maybe some mulch, and keeping it bush hogged down around the trees every once in a while, for the first few years. There might even be some sprays in there, especially initially. So let’s just knock this cost up to about $10,000 per acre.

So you walk with $142,500 in revenues on your $10,000 over 30 to 40 years, it sounds pretty solid until you really put a pencil to the numbers. That represents a return of only 6.8% (if it takes 40 years).

The wood will likely go up with inflation and so will the land, but that is virtually irrelevant since inflation will also affect your end profits as well. This example also assumes that you purchased the land in cash and don’t have leverage to realize gains on the land.

It’s important to note that I’m not saying the land was expensed, you still have it, but it’s likely to increase around inflation rate (unless development comes into play).

So let’s scale this up to get an idea of what a large project would look like.

You have $100,000 and you buy 10 acres with this plan, you plant them and get them established and in 30-40 years you have 30-60% veneer quality wood (I’ll assume the conservative 30%), the wood on your ten acres is now worth $1,425,000 (inflation ignored) + your land is worth $100,000 (inflation ignored) or a total of $1,525,000. Note once again, it’s assumed that the wood, land, and purchasing power all hit around the same rate, therefore inflation is irrelevant.

So you 15x’d your money, in four decades. And again, it sounds great, but you can get very similar rates of return historically in the stock market. In fact, it’s roughly 7% return, which is where most stock portfolios tend to perform long-term.

You might argue there is more unknown in the stock market, but can we really comment on black walnut prices, land prices, etc. forty years from now? Also, it’s very illiquid. Sure it’s possible black walnut will become even more valuable, but again at that point, it’s a shot in the dark.

Long story short, I don’t think the math is there unless you simply want to do it for a hobby or if you can get the trees for free or the land for extremely cheap. One final note is that there is some pruning that has to be done especially while the trees are young.

Now if you got your cost down to half, maybe you seeded and planted your own trees and got $2-3k per acre cost, I can maybe see it, but the killer will always be that you need a high % veneer (which is unknown), and it takes 30 to 40 years. Also if you grow your own trees, you are likely to have a tree that only produces a small amount of veneer quality trees.

If you got your establish costs down to $6,000 and leveraged into a loan on the land, then maybe we would be in business. The interest paid on the note would be deductible against the sale of the wood, and the rate of return would be $145,000 / 6,000 = 24.1x or more like 8 to 10% return (depending on appreciation of land), but still that is a pretty vicious cycle to get a 10% return.

You are getting into “why don’t you just buy rental properties” territory.

I will say that the numbers for genetically selected plants is extremely suspicious to me. The time frame of “30 to 40 years,” is extremely hard to argue against. If the plants don’t grow fast enough, it could be do to a million reasons (soil conditions, watering, pruning, etc.). Additionally, it might be hard to have a battle with someone 40 years from now. But even more suspicious is the veneer quality prediction of 60%. The numbers in this article were written with 30%, because I cannot believe for a minute you will obtain 60% veneer from what research I have done. Again something that is impossible to argue and if it was true, would boost the return conveniently into the above 10% range. I think it’s incredibly likely that you actually get less veneer valued wood than I even assumed (30%) and it takes the full 40 years or longer.

The argument will be made that the nuts that these trees produce has value, and that is true, but the process of shelling them and finding large scale real buyers is tricky. You can wholesale them to someone, but the amount of time to collect them can pull you down into the sub $10 per hour labor arena. Of course if you were a homesteader it might not be a bad idea to get 10-15 lbs of these shelled nuts and try to sell them at a farmers market for $10 – 12 a lb, maybe you can pull an extra $100 or so off a handful of trees.

Finally someone is likely to think “what about the intermediate wood?” The wood that you collect in years about 4 to 39, the branches, etc.. Some of that can be used for gunstock, firewood, or misc. wood. Of course I acknowledge that is very true, I don’t see any real possible return unless you have a reliable buyer. How likely do you think it is you will be able to pawn off $5,000 of wood a year without major labor and time involvement?

So there you have it, my personal research and opinion on the viability of black walnut profitability. Now of course, prices could increase over time, but given the issues that could arise from now until 40 years from now, I’ll hold off for now. Now that being said, can you make any money from existing trees already on your lot? That’s an entirely different post.

 

 

 

3 thoughts on “Growing Black Walnut Trees for Profit, What’s the Rate of Return?

  1. As a professional forester and being in the business for over 35 years in Ohio, I think your numbers are more than generous. I do not know how you arrived at 10% of the trees will be veneer quality. I did not see where you mentioned anything about soil type. There are specific types of soils that walnut will grow the best and obtain the growth rates you are talking about. Your article is very misleading full of inaccurate information and too many assumptions.

Leave a Reply

Your email address will not be published. Required fields are marked *