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While it would be difficult to draft such a covenant, some consideration might be given to outlining the basic management premises, the types of departures contemplated as well as the procedures to be used in computing the level of cutting so that some initial guides are available. It would also be well to attach the initial management plan to the agreement.

The major advantage of the proposed trust agreement is that it continues a tax-free income, approximately at existing levels, for the minors, incompetents, and others who elect to continue to receive either income and/or the proceeds of forest capital liquidation over a period of years.

ANALYSIS OF PROPOSALS FOR AMENDING PUBLIC LAW 587

The hearings disclosed

In the hearings held by the Indian Affairs Subcommittee on October 2 and 4, 1957, 34 witnesses appeared as spokesmen for distinct groups or as individuals. Three witnesses made general statements that did not address themselves to S. 2047 or an alternative. Three Indian witnesses did not have a fixed position. One leaned toward Federal purchase, if the price was right; another was for Indian operation on undisclosed conditions. The remaining 28 witnesses expressed definite opinions. Twenty-three were for complete Federal purchase and supported S. 2047 in full or with modification. The tribal executive committee endorsed S. 2047. Twelve witnesses did not specify which Federal agency should manage the land. Nine specified the Forest Service, which is provided in S. 2047, and two suggested the Bureau of Land Management. One witness, the Weyerhaeuser Timber Co., suggested what in essence is a combination, in unknown parts, of public and private acquisitions. One other witness, the National Lumber Manufacturers Association, proposed that Public Law 587 be carried out, but in a footnote states that there is some question as to whether the law should be amended to provide for a longer liquidation period and installment payments by purchasers. One witness specified State or private purchase if possible, and two others specified private, but did not detail plans. In answer to questions, many witnesses agreed that a minimum requirement was extension of the period for liquidation of the timber for the benefit of withdrawing members.

Out of the hearings there evolved three alternatives to Public Law 587 for the disposal of the Klamath timber for those members who wish to withdraw:

1. Extension of the liquidation to a period up to 20 years. 2. Preferential sale to private buyers with

(a) A sustained yield covenant in the deed ;

(6) The Federal Government paying the Indians the difference between the sustained yield price and the liquidation value. This proposal was

advanced by a prospective purchaser, the Weyerhaeuser Timber Co. 3. S. 2047 which would authorize Federal purchase of the entire reservation. The problem posed by liquidating three-fourths of the reservation

As presently enacted Public Law 587 requires that commencing in about July 1958 and by August 13, 1960, sufficient of the tribal land, timber and other assets must be disposed of to satisfy withdrawing members.

In a period of less than 2 years over 3 billion board feet of timber and onehalf of a million acres of land may be dumped on a limited local market. Possible results from liquidation

The committee has been told that liquidation under Public Law 587 will

1. Depress the value of the Indians' timber and adversely affect the income of the tribal members who elect to withdraw.

2. For those Indians who elect to join in an organization to manage their timber, the opportunity to successfully develop income will be diminished and possibly destroyed during the liquidation period.

3. Adversely affect the western pine timber industry by causing timber liquidating purchasers to flock into the area and quickly cut their timber. In 1954 the entire ponderosa pine industry produced 3.6 billion board feet of lumber with Oregon accounting for 1.3 billion board feet.

4. Adversely affect Klamath County by creating a boom-and-bust economy.

5. Adversely affect Klamath County and surrounding areas by diminishing the cut of adjacent public timber during the liquidation period, and thus reducing in lieu payments to local government.

On the other hand, there are other possibilities which are not to be excluded. The dumping of this timber may merely result in its sale to a single or very few of the private concerns in the area. This would cause a realinement of public timber purchasing patterns with relatively little effect on the industry or local shared revenues from other Federal lands. However, the prices received by the Indians would be at investment or a forced-sale level and thus well below that which would be received in an extended and orderly liquidation of the timber.

The Weyerhaeuser Timber Co. testified that its mills at Klamath Falls have a capacity of 200 million board-feet a year and their own lands supply only 50 percent of their needs. They are capable of utilizing the entire reservation volume. The other mills in Klamath Falls have an even less satisfactory rawmaterial position, being primarily dependent on public timber. While it might be expected that the other firms would purchase some of the smaller economic units, their financial position probably would not permit extensive purchases. In addition, since they are now heavy purchasers of public timber which they can acquire on a more favorable pay-as-you-cut basis, they probably would not desire to acquire a substantial volume unless the price was discounted heavily. Thus they would not desire to bid heavily.

A conditioning factor could be the nature of Weyerhaeuser operations. For example, at their Coos Bay and Springfield, Oreg., plants this company operates entirely upon their own timber. They have, in the past, entered into a number of exchanges with Government agencies in order to block up their holdings. It can be expected that the other concerns in the Klamath Falls area may visualize that if Weyerhaeuser purchases enough of the Klamath Reservation this may largely take this firm out of the public stumpage market. In addition, this company owns a private railroad which taps a portion of the reservation and which may be a transportation advantage. These economic factors could possibly condition local firms to at least abstain from bidding upon the portions of the reservation they believe Weyerhaeuser has a strong interest in acquiring.

If the situation developed in this manner, the price offered for the timber and land would, in all probability, be based on the investment value and well below the expectations of the withdrawing Indians. It cannot be rationally argued that because a firm has an economic advantage over competitors that can be translated into dollars, that this will cause them to be willing to pay more for the timber than they have to. This fact merely means that if forced to compete they can pay more before common factors influence bidding. A bidder only pays more than the asking price because he has to do so—not because he is able to

do so.

Were the liquidation of the portion needed to satisfy the withdrawing members conducted in such a manner that there were but a few purchasers, only one bidder per tract, and the price well below the Indians' expectations, the Indians, and perhaps others, would protest the sales.

The possibility also exists that a few outside purchasers might come in and, bent upon quick liquidation, offer relatively high prices for some of the units. There are 21 small virgin tracts averaging about 40 million board-feet each. Some of these could be liquidated quickly and might be sold at almost current values.

Continuing to the other end of the scale of possibilities, a large number of bidders might come in and a mad scramble for timber might develop. This would make it virtually impossible for firms genuinely interested in giving stable management to the lands to bid on other than a liquidation price. It is pertinent to note that only three of the economic sale units are bigger than the largest firms in Klamath Falls could liquidate in 1 year. In short, depending upon the number of bidders, and their ability to transfer their operations almost entirely to the liquidation of the reservation timber, the Klamaths might experience on the various units discounts to present worth, ranging from almost nothing to over 60 percent.

98089-57-20

Another complication might develop in a liquidation sale. Bidders might concentrate their attention on the more valuable virgin tracts but display less interest in the cutover pine and lodgepole units. Thus the Indians would see some of their tracts bringing premium prices while others were not even bid upon. For example, the 15 small cutover pine units aggregating 50,000 acres average less than 5,000 board-feet per acre, and in several cases the stand is less than 3,000 board-feet per acre. It is possible that these units may not command great interest either from those interested in liquidation or in long-term management. Provision would have to be made for continued management of these units until their ultimate disposal. Even more important would be the problem posed if annual taxes and expenses ate up the value of this non- or low-revenue producing property. This would compound the Indians' unhappiness that these units failed to sell or were subject to extremely heavy sale discounts.

Finally, liquidation-type sales would create a conservation problem where heretofore none has existed. The Oregon conservation law does not even attempt to insure sustained yield.

TIMBER VALUE

Basic to any discussion of disposal of the 3 or 4 billion board-feet of timber on this reservation is consideration of timber values. Most of the timber offered on the open market in the West is sold by Federal agencies. They use a payas-you-cut method where the bidder makes a small downpayment with his bid, and then he pays for the timber as he cuts it, with the downpayment serving as the final payment. This method provides for the purchase of stumpage with a minimum of working capital invested for stumpage.

Competitive-type sales in areas where production needs exceed supply has acted further to assure premium prices. The term “retail price” has been used to express the amount received. A galaxy of other factors have helped in establishing good prices and the result is that it is common to find uninformed people Faluing large tracts to be sold for cash, such as this reservation may be, at what, in all respects, represents a book value. Customarily the timber sold on this reservation has been the higher quality mature trees and the entire reservation volume would not possess this book value unless it were cut under the perpetual sustained-yield program which harvests trees when they mature.

The disposal of large blocks of timber for cash introduces different valuation concepts which are influenced by the method of disposal selected and the time period over which the disposal will be made.

Public Law 587 contemplates rapid liquidation, and cash payment in full. Because it will be a dumping operation the price will reflect what the bidders themselves plan to do. Further, it will be affected by an intangible, whether potential bidders decline to offer to purchase, sensing a buyers' market. Orderly liquidation versus sustained-yield value

A manager directed to liquidate at a fair price--in other words, in some control-and not forced to sell would logically select three courses of action. First, he would attempt to estimate the maximum rate at which he could feed the timber into the best market without depressing the price, weighing this against the maximum period he wished to or was permitted to use for liquidation. Second, he would tailor his payment requests to attract the widest response from buyers. Third, he would move his lower quality timber first, or in all events tie such units to premium quality ones in order to insure complete liquidation. In no event would he hold low quality timber or allow it to become a tag end.

The soundness of the decisions made here would influence the orderly liquidation value. It is virtually impossible for an appraiser to estimate with any degree of certainty the myriad of plans which potential bidders might have. One could contemplate immediate liquidation, while another planned a 10-year program; a third was hopeful of a 30-year liquidation, while a fourth was intent on a sustained-yield operation under which he would preserve the growing slash and harvest only the annual growth.

In a cash sale the buyer usually will desire to discount the book value to take into account the deferral of income from his investment, and, in addition, he will discount for risk. It is a sound premise that the longer the liquidation period contemplated, the greater discount for cash, and the less will be the additional discount for risk. If a purchaser contemplating a 30-year liquidation has to complete it in 10 years he will have made such a large discount for the cash payment that he could successfully liquidate in the shorter period because of the interest cost savings. The price each buyer could afford to pay, considering only the discount for cash, would vary considerably. For example, if liquidation by all buyers could be handled in 2 years, the approximate time allowed under Public Law 587, and if no other sales impediment existed, the discount at 5 percent would net the timber owner 93 percent of the income derived from the timber.

If the timber were cut in equal amounts over a 10-year period the discount would provide the timber owner 77 percent of the income expected to be realized ; if cut over 25 years in equal amounts the timber would bring 56 percent of the book value; if the timber were to be cut over a 120-year period, and although the growth rate would be high enough to perpetuate the cut, a discount to 16 percent would be indicated. Here, however, the appraiser could not value the property on a liquidation period, but his computation would have to take into account annual earning capacity. If a 5 percent return were desired, the valuation would be obtained by offering to pay 15 to 20 times annual earnings. Another approach for such a long-term liquidation would be to take into account the ingrowth of volume and quality on the immature stands, as well as the liquidation of the capital.

The example shows the liquidation value of the Klamath Reservation if the timber has a book value of $100 million and were cut in equal annual amounts:

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1

Another method of computing value is based upon earnings."

1 Selected acquisitions, forest products industry:

Relationship between prices paid for companies and earning of these companies

Acquisitions

Consideration

Market

value Appraisal acquiring date com

pany's shares

By

Of

[blocks in formation]

Weyerhaeuser Timber Co.- Kieckhefer Container 5,398,004 shares of

Co. and Eddy Weyerhaeuser and
Paper Co.

cash for 2,576 shares
Kieckhefer at $5,328
per share and 19,757
Eddy shares at $360

per share. International Paper Co.--- Long Bell Lumber 849,997 common shares

Co.

of International and
49,997 units of Con-
tingent Interest in
common (prospectus

dated May 8, 1957). Georgia Pacific Corp.--- Hammond Lumber $ 75,000,000 cash

Co.

(Moody's).
Do..---
Coos Bay Lumber Co. $ 70,000,000 cash

(Moody's).
United States Plywood | Associated Plywood 276,000 common shares
Corp.

Mills, Inc.

of United States Ply-
wood and 62,804 pre-
ferred shares of United
States Plywood
(United States Ply-
wood's prospectus,

June 5, 1956).
Simpson Redwood Co..---- M & M Wood-work- Purchase price $35 per

ing Co.

share (Wall Street
Journal, Ju 1, 1956).

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Acquisitions

Total market

valuie

Earnings of acquired

company

Times earnings

By

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Year

Amount

1956

15.4

Weyerhaeuser Timber Co. Kieckhefer Container $207, 823, 154

Co. and Eddy 13,724, 928
Paper Co.

7, 112, 520

• $ 10, 355, 000

c3,866, 000

14, 821,000

228, 660, 602

117,000,000

1955

• 9, 730, 463

12.0

International Paper Co..
Georgia Pacific Corp.-

Long Bell Lumber

Co.
Hammond Lumber

Co.
Coos Bay Lumber Co.

75,000,000

1955

13, 546, 591

21 1

Do..--

70,000,000

1955

18. 2

83, 856, 252

h 737, 913

1954

20.3

United States Plywood

Corp.

Associated Plywood

Mills, Inc.

8, 694, 000
6, 280, 400

14, 974, 400

Simpson Redwood Co....

1956

12. 55

13 7

M & M Wood-work

ing Co.

e Common; 100 preferred (United States Plywood prospectus).

Kieckhofer. < Eddy. & Approximately. « Prospectus, May 8, 1957. s Annual report to stockholders. & Moody's. A United States Plywood's prospectus. i Per share (M & M's annual report to stockholders),

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