Hank Stelzer, Extension Forester,
and Shelby Jones, Consulting Forester
For crop landowners who maintain share arrangements with farmers year after year, selling timber on shares seems only natural. Are these two arrangements the same? Comparing a crop share arrangement to a timber harvest share arrangement is like comparing apples to tomatoes - it’s not even close!
Crop land is commonly shared with the farmer on a 50/50 arrangement. The landowner furnishes the land, the farmer supplies the labor and equipment, and they each share one-half the costs of seed, fertilizer, spraying, harvesting and hauling. They also share the value of the sold grain. The landowner is usually familiar with the farmer, the yield expected from certain fields and the market prices for his or her various crops.
In contrast, a timber harvest share arrangement is typically developed with someone the landowner does not know. The landowner retains ownership of the cut logs until they are purchased by a mill. When the logs are sold, the landowner receives a predetermined percentage of the delivered price. The mill usually writes two checks: one to the logger and one to the landowner. Sometimes the logger collects the full amount and reimburses the landowner the agreed upon percentage.
Either way, selling timber on shares is like the fox guarding the henhouse!
Selling on "shares" can seem attractive by offering potentially higher prices to the landowner for standing timber. However, there are several elements of risk involved, as noted below, and any one of these can lead to less financial return than anticipated. Consider these facts before selling your timber on shares:
FACT: The landowner is assuming a portion of the risk of defective trees because he or she will only receive payment for those trees that are actually sold to a market.
You may be quoted a higher price per unit volume of wood on the front end of the share arrangement; but if all the trees are not sold, you lose on the back end.
FACT: The landowner typically does not know the quantity or quality of the standing timber being sold. One should receive a higher percentage for higher quality products, such as veneer logs, barrel stave logs, better species, etc., but may not even know these products are present in the timber. Therefore, even if the landowner has access to the limited amount of published timber market information, he or she would not necessarily be able to apply it to their trees.
FACT: The landowner must trust the logger to market each log for its best use (and highest value) and to be truthful in telling the landowner every mill to which logs are being delivered. Once again, the fox is guarding the henhouse!
FACT: Once the trees and logs are cut they have a limited “shelf life” during which time they must be sold. If a delay of market delivery occurs, the quality and the price received may rapidly decline.
Consider, too, that shares contracts are often sealed with a simple handshake - but they are more complex than they appear. Written contracts are always recommended, no matter how the timber is sold. Any sale of timber should be administered with care in a truly business- like manner. "Shares" arrangements, even between friends, can often lead to misunderstandings.
Selling timber in a "share" arrangement, however, can qualify the seller for capital gains tax treatment of the proceeds if specific conditions are met. Capital gains treatment is desirable because it potentially decreases federal income tax liability and may rule out assessment of self-employment tax on the proceeds of the sale.
A discussion with your forester and accountant concerning the relatively complex aspects of the federal timber tax regulations is advised before selling your timber. For more information on federal timber tax regulations, visit www.timbertax.org. To help ensure the fox is not guarding your henhouse, bring a professional forester to your woods today. For a list of professional foresters, visit the Missouri Consulting Foresters Association at www.missouriforesters.com; or the Missouri Department of Conservation at www.conservation.state.mo.us.