Lessons Learned: Joseph Bachman- Part 2

September 9, 2020

This month, The Forestry Source features the second installment of Joseph Bachman’s Lessons Learned. While a departure from previous Lessons Learned, Bachman’s experience in the behind-the-scenes world of global forest investing provides valuable perspectives for everyone in the forestry profession. As he explains, successful forest management requires a strong understanding and application of strategic considerations, both macro and micro. Framing strategic forest management within the construct of a global value chain—as defined by Duke’s Global Value Chain analytical framework—is a valuable tool that has informed diverse career efforts and perspectives that Bachman shares below.

Unlocking the Local and Global Value of Forestry
By Joseph Bachman

In last month’s Lessons Learned column, I used the dual model of the “The School and the Farm” to define the nuances of education and experience as key to sustainability and success in the broader pursuit that is “Forestry.” Indeed, there is no better example of a human endeavor focused on the greater good.

Time and again, however, the critical balance of rural economies built upon sustainable forest management has proven easily disrupted. Creating durable economic and investment value from forest systems that is ecologically compatible is complex and requires a more strategic approach than has been historically used in the forest sector. This belies the convention of a forestry profession whose values emphasize the natural laws of science, tradition, and an inherently local connection with the land. Collectively, all these elements–scientific, economic, financial and cultural–are critical for these magnificent examples of broad sustainability to endure.

Forestry: Think Globally, Act Locally—and Vice Versa

The span of my career has been marked by the globalization of forestry, both as a commercial and environmental practice, and increasingly so in recent years. As a young professional managing southern Appalachian forests for Champion Inter- national in the mid-1990s, we grew, harvested, and sold resource to local mills in western North Carolina, which in turn supplied lumber to local furniture and flooring industries. Nowadays, these same Appalachia-sourced logs and lumber travel to the Pacific Rim, only to be reimport- ed to the United States in final form as finished goods. What was once an example of a sustainable rural economy based on local resource, labor, ingenuity, and craftsmanship was upended, with consequences both positive and otherwise.

Back then, the new and potentially higher-valued markets for 80+-year-old Appalachian hardwoods were welcomed by an integrated landowner seeking to reap sustainable value from land held for more than a hundred years. But the initial broader effects of selling these logs to off- shore buyers were difficult to detect, and long-term change even more challenging to predict. While profitability at a stand level was improved by exporting logs, short-term frustration was high for local sawmills that were dependent on these logs as they contemplated paying more to compete for traditional log supply.

Longer-term regional impacts were even more uncertain, and the probability of unintended consequences higher. Full consideration required much broader perspective than my nascent understanding of forest business allowed, and as an entry-level forester, I was not yet equipped to understand the broader implications of this new export market. My role focused primarily on growing trees on the company land base, plus some collateral duty to meet wood supply demands for Champion’s pulp mill in Canton, North Carolina, a regional fixture that had operated for a hundred years by then.

While curious about the consequences of evolving markets and the stability of the local wood economy, I was more focused on the long-term environmental sustainability of the forest resource itself. My understanding of how it all fit together was limited by the lack of a comprehensive broader macro view, as well as specific skills in accounting and finance. Gradually, through intuition, experience, and some night-school coursework, the realization became clear: Regional ecology depended on the financial stability of the land base that, in turn, was underpinned by global markets for pulp, paper, and furniture.

I’ve since realized that the interplay between the natural world and deeply intertwined, overlapping economic systems comprise the heart of forestry. Forest operations and business depend on natural systems and must coexist in the context of local culture and the global economy. Sustainable forestry, therefore, is not simply a matter of the environment, economics, or business. Sustainable forestry—while inherently local by nature—is critically important to humanity at deeply fundamental interconnected levels everywhere.

Parsing the Forest Value Chain

Personal experience in western North Carolina provided examples of the concept of forest systems—writ large—as sustainable investments. As pressure mounted since the 1980s for the forest industry to deliver investment returns commensurate with its cost of capital, forests, both industrial and private, have increasingly needed to “pay their way,” or demonstrate a financial return in addition to providing inherent ecological values. Forests have evolved from being natural features on the landscape or a source of raw materials to multi-dimensional financial assets that are highly coveted by institutional capital. Successful investing in forests requires a strategic understanding of how forest value, however broadly defined, is created through decision-making. Translating understanding to execution is even more challenging, is indeed rare, and both strategy and execution require a common frame- work to incorporate diverse interests and contributions to craft successful outcomes.

While the attraction of forests as investments with both financial and eco- logical advantages may be self-evident to some, the inherent complexity of managing the multiple environmental and cultural values that define forests as unique assets requires a unified, integral approach. The challenge is to accelerate and grow the ability of forestry professionals to understand and apply both local and global context to strategic thinking and decision-making, both of which are essential to successful investment decisions. So how do we go about this? By understanding the fundamentals of the forest value chain.

As a formal structural concept, the global value chain (GVC)—as defined by Duke University’s Global Value Chain Center—is an excellent starting point in understanding the interplay between forest management, economics, business, finance, and investing (see Global Value Chain Analysis, a Primer, Second Edition, by Gary Gereffi and Karina Fernandez-Stark, Duke University, 2016, tinyurl.com/y6y9cp9z). At the most basic level, a value chain defines the full range of activities that firms and workers perform to create products from conception through end use.

Within the GVC, there is a tremendous advantage to moving away from a purely academic approach to forest management to one that is informed by on-the-ground experience. Forestry, when referring to the entire suite of processes that create commercial value, is often used too broadly. As such, specificity is valuable. In the interest of such analytical segmentation, the following common definitions are essential to understand:

First, forestry is defined as fundamentally managerial or decision-making profession concerning ecological systems. As a human endeavor, it is integrative and essentially scientific, while also inclusive of other disciplines and interests.

Within the broader definition of business being a commercial activity that creates a product or service to drive a profit, forest business is the commercial process of growing, selling, and distributing primary forest products to achieve a profit. Traditionally and most commonly, this connotes the supplying of raw material to forest products manufacturing facilities. As noted earlier, interest in ecological values is evolving along with markets necessary to achieve associated profits. While monetizing these values is critical to our future in the profession, the scale of benefits is currently modest relative to traditional commodity values.

The third core definition is that of timber investment. The world of institutional forest investing has the imperative of deriving a financial return from the placing of capital in assets, in this case forestland, and (hopefully) doing so in a responsible way. Colloquially known as timber investment, it is often included in institutional assets (pension funds, foundations, endowments, and ultra-high-net-worth individuals) as alternative or real asset portfolios. Most often, timber investment connotes a forest commodity perspective relying on the sale of logs and pulpwood (at a profit) to create the cash flow that is ultimately paid to investors. Investing, therefore, focuses primarily on decisions to place capital in the forest assets, operating that asset in context of its role in a global value chain, and deciding optimally when to buy more, sell, or hold in perpetuity. Hence, timber investment’s reliance on forest business and hence forestry in creating desired returns.

When applied to forests, value chains are unique, because the basic concept can expand to incorporate both public and private goods in terms of environmental values. GVC as a unit of analysis considers important assumptions about private-sector realities, such as the evolution of markets; the practicality of achieving operational objectives; and the diversification of cash generation from the traditional timber to emergent markets for ecosystems services.

Furthermore, GVC analysis goes well beyond the supply chain concept and can be used strategically to actively “think forward” to understand and consider local, regional, and global implications.

The above simple yet common definitions are important to both inform and focus conversations, education, and skill-building around the GVC, while helping to develop a better understanding of its core elements. Drawing from experience in having worked in all three realms—forestry, forest businesses, and timber investment—at various junctures of my career allows a nuanced understanding of each element’s critical contribution to success, as well as a global perspective on how a highly functional global value chain can be a broader force for financial and ecological good.

Lessons from the Value Chain

The successful practice of forestry requires a multi-generational vision coupled with an imperative to act consistently within that vision when making decisions. Foresters, driven by an inherent sense of steward- ship and connection to the local forest, may sometimes fail to understand not only the drivers of financial results, but also the specific fiduciary duty to those who have placed a long-term financial bet on the as- sets managed by foresters. Nuanced implications of expense, profit, and the critical resulting cash flow might be overlooked by those purely “doing the Lord’s work,” as a former boss put it.

In the business world, where timescales are compressed, performance is often focused on quarterly or annual results. This immediacy may undermine the benefits of long-term management of the resource that results in today’s timber sale and associated profits. Also, avoiding the bite of current regeneration costs to replenish tomorrow’s resource base may prove tempting when trying to meet current financial targets. Conversely, the temporal urgency of markets and serving customers in the context of brutal competition may not be well understood by forest managers more focused on long-term resource growth, or by investors who lack understanding of the day-to-day challenges of such businesses at the coal face. Throughout my career, I have seen these dynamics produce short-term and short-sighted decisions at odds with common benefits. Navigating these choices necessitates true understanding gleaned only from on-the- ground experience working in forest operations to create sustainable value.

From an investment perspective— whether that of institutional investors themselves or in observing investment decision-making processes—understanding the ecological basis of forest systems and the difficulty in creating consistent profits within competitive forest commodity markets is of utmost importance and some- times scarce. Institutional investors hire forest investment advisers to help generate these returns. They would be well served by educating themselves on both forestry and forest business to allow more critical questioning of their advisers and holding them more accountable for decisions made as their fiduciaries.

Looking Forward

So, how do we unlock the potential of global forest resources for the greatest value and greatest good? The GVC is a simple strategic framework to help for- esters think and behave more strategically, and to inform more responsible and responsive forest business operations. The GVC can also help foster better critical thinking on the part of forest investors as they weigh where and how to invest capital most effectively. Finally, and importantly, the GVC framework helps align incentives for all who participate in the economic equation and, if expanded, can benefit all stakeholders who rely on forest systems. Separate competencies within the GVC may then be unified for common benefit.

As someone who has spent time in roles in each of these areas—forestry, forest businesses, and timber investment— some simple lessons anchor my career perspectives and efforts. First, forestry defined as local resource management is the rarest and most specific skill of the three categories in the GVC. We as professionals would do well to reflect on this strength to elevate our profession and the value that underpins forest investments broadly speaking. The imperative of management, and good management, at that, is indeed quite rare and is a clear indicator of a sustainable GVC.

Secondly, “know what you don’t know” are words to live by. As in all sectors, different professionals and industry players bring diverse and valuable skills to bear. Knowing where an individual’s or entity’s skills are best applied is essential to successful resource management. Strategic forest management is undermined when attorneys tell foresters how to build roads, or when individuals who have never bought or sold a stick of wood dictate commercial terms—and thereby deny the expertise of those who have spent careers understanding the endearing nuance of the wood business.

By the same token, a “be proud and contribute what you do know” attitude is necessary for the value chain to function. The world is run by those who show up. Competence reigns, and confidence allows it to be recognized. At some point, the combination of the two becomes talent. This is what makes the globe turn, and foresters would do well to wield this approach more publicly and more ardently. In this context, the GVC becomes more than just a descriptive structure: It serves as a fulcrum for dialogue in understanding how roles relate to one another within a complex yet connected forest-based system, while also providing a platform from which we can advocate for the importance of our profession.

Finally, it behooves all of us to increase our understanding of how natural systems function. Connection cannot be outsourced nor left to those who have spent time in the woods. Connection builds understanding and appreciation of sustaining natural capital across countries and regions. Credence to environmental issues in other places can allow more responsible investment choices in global capital markets. At this point, the GVC becomes the large proverbial tent to accommodate all interests, skills, and talent connected to forest resources. Breaking down increasingly complex relationships and creating a comparative lens to view competing chains globally allows more strategic thinking that can guide our profession into the future.

The multigenerational vision so unique to forestry should be the underpinning of sustainable business and investments that promote and perpetuate humanity, both economically and environmentally. In order to continue to define, support, and achieve a multigenerational vision for forestry, our industry must foster ongoing investment in education, skills, diversity, and leadership. I look forward to sharing perspectives on these critical needs in next month’s The Forestry Source’s annual issue on education. 

Until then, get outside, connect with your landscape, reflect on your role in a global context, and find enjoyment in these final summer days.

Joseph Bachman can be reached at joe.bachman@duke.edu.

Do you have lessons learned that you would like to share with fellow SAF members in a future issue? Please e-mail Andrea Watts, wattsa@safnet.org.

SAF members can read the full September 2020 edition of The Forestry Source here.