Sawmill & Treating Insights for January 2007
Log costs make up approximately 60-70% of the total costs of a sawmilling operation; therefore, determining the appropriate value to pay for logs can significantly impact the bottom line.
Most sawmills base the purchase price of logs on what the local market values are or what they must pay to get the resource into the mill, rather than on what the associated profit from the logs are. Sawmills are typically set up to profitably handle a certain size and quality of raw material. Logs that fall outside of the ideal size and quality range actually lead to losses for the mill; therefore, knowing this range is vital to maintaining profitability.
It seems that log costs continue to increase every year as lumber prices remain stagnant or increase at a slower rate, leaving a shrinking opportunity for profit. As the trend for increasing raw material costs continues, it becomes an even greater priority to be able to manage your raw material costs accurately.
Many mills approximate log values by comparing the value of the total volume and grade of products produced from a single run or multiple runs for a particular species. While this method gives an indication of the bottom line, it does not account for the variability due to diameter, length, and grade (quality) of logs that went into the mill. Luckily for most mills there are logs that are processed at higher profits that offset the losses by those that produce little profit. While the bottom line shows a profit, in reality, a loss has been incurred since many of the logs did not yield products that had enough value to compensate the prices paid.
Knowledge about the value produced for each log grade and size would allow greater decisions to be made about which logs to process and which to merchandise. The ideal log to process should have: lower purchase cost, high grade yield and high volume yield for the specific markets that you serve. Poorer logs have higher processing costs, excessive purchase price, maybe undesirable species or hidden defects. They may not yield material that meets the needs of your specific markets.
Most mills cannot afford to buy only ideal and good logs for their unique market. But if they knew what particular log types were processed at a loss and the level of loss was determined, they could better determine which logs should be processes and which should be sold (merchandised). Also, many log grades and values associated with those grades often do not reflect the value of finished products from those grades. Knowing your actual product output would allow a mill to structure better log grades and grade prices.
Determining the actual value of a log comes from knowing all the costs associated with the production and sale of the material and subtracting that from the value of the material processed, with some profit margin included. To determine this value you must know: 1.) what your processing costs per minute are, 2.) how long it takes to process a particular size and quality of log and 3.) what the value of the output of that log quality and size are.
Typical hardwood sawmill operating costs very between $4.50 and $20 per minute based on mill size and the technology used. With such a large potential range of operating costs, having knowledge of your actual operating costs is vital for planning and controlling sawmill operations. For those interested in methods of how to determine your operating costs, I recommend obtaining a copy of COST (Cost of Sawing Timber) from the USDA Forest Service, which is a stand alone computer program that calculates the cost-per-minute to operate your sawmill. To obtain a free copy of COST, contact the USDA Forest Service in Princeton, West Virginia by telephone (304-431-2700) or visit their webpage: http://www.fs.fed.us/ne/princeton/.
Another approach to determining sawmill costs is the cost management system developed by Robert Pajala at the University of Wisconsin. A copy of the publication “A Simple Profit Planning and Cost Management System for Small Sawmills by Robert E. Pajala: can be downloaded at http://www.extension.umn.edu/distribution/naturalresources/DD6075.html
PROCESSING TIME AND OUTPUT
Once you know the cost of processing, it would seem that obtaining the actual value of logs would be a simple process; however, it is made complex by the difficulty in separating the output of individual logs or groups of logs. The larger the variability of logs going into the mill the greater the variability of the value estimate when you’re done.
I propose three different methods to determine the value of products produced from a log or group of logs with similar characteristics and the time required to produce those products: 1) a batch study, 2) grade yield and volume study and 3) the “continuous” study.
The first method consists of processing a batch of logs with the same grade but with similar length and diameter through the mill. The time to process the logs and the product output is measured. To simplify measurement, processing costs are often associated with the amount of time the logs spend at the head rig. If a resaw is used, this measurement becomes more complex as the time the log is being processed at the resaw must be accounted for. This measurement usually is taken only when the cant is being sawn, not as the cant is moving in material handling.
A value for all lumber and cants is then compared to the cost to process those logs. Batches of other log grades and sizes are then run for comparison. All materials must be accounted for and cleared before the next batch is processed. The advantage of this method is that large batches can be run so that little special effort must be made for the study.
The main problem with this method is that the more the variability included in the batch of logs, the less accurate the log value information. For example, if you were determining the value of three clear face grade logs compared to two clear face grade logs, it is known that that diameter and length differences will also lead to lumber value differences.
The second method is to conduct a large scale grade yield and volume study. In this study, logs of different sizes and grades can be processed at the same time, but the lumber from each log must be tracked through the mill (you need to measure the processing time, volume and value of lumber produced). The more simple and linear the production flow in the mill, the easier this type of study is to conduct. This type of study is not practical in mills that contain multiple head rigs and resaws, since it is very difficult to reliably determine processing time and track the origin of each board.
With multiple sawing centers, there are just too many logs in the mill producing boards at one time. One advantage of this method is that it allows for mills to continue producing without interruption; however, is does require large amounts of manpower to track and measure. Each board must be tracked and the more machines in the mill, the more effort is required to track boards.
The final method suggested is known as the “continuous” study method. This method is similar to the last one in that all the lumber produced from a log is tracked and accounted for. The difference is that only one log is tracked at a time. This method allows for very accurate accounting of material and requires the least amount of personnel to conduct.
The downside is that it takes a significant amount of time to accumulate enough data to cover all logs and sizes. This method works well regardless of the mill size and number of machines. Such a study could easily be carried out by a “roamer” when not needed where one or two logs could be tracked each day.
For more information about this method, you should obtain a copy of “Continuous Sawmill Studies: Protocols, Practices and Profits by Robert Mayer and Jan Wiedenbeck, from the USDA Forest Service in Princeton, West Virginia by telephoning (304-431-2700) or by visiting their Web page, http://www.fs.fed.us/ne/princeton/.
Once you have determined the operating costs per-minute, the total processing time for a log or batch of logs and the value of lumber produced from those logs, it is easy to calculate the actual value of your logs. Don’t forget to include a desired profit margin. I have found conducting this type of exercise to be rather eye opening at many operations.
The variability within clear face log grades is often quite large, with many logs actually being marginal or not profitable within a log grade. While conducting such a study does require time, effort and some cost, the information gained will provide you with valuable information about your log values.
Knowing the value of material produced from logs will allow you to develop more accurate log grades and assign log grade values. Also, knowledge of your break even log cost will allow you make better decisions regarding when to process a log and when to merchandise it. Both of these decisions will directly impact your ability to remain profitable as the cost of raw material continues to increase.