Value-Added Processing -- for the Sawmill

      How to make sawing, drying and other processing operations profitable. March 22, 2001

by Professor Gene Wengert

Sawmilling
Assume that you have five red oak logs that are 16" in diameter (small end) and 16' long, and one red oak log that is 16" x 8'. These logs would scale as 790 board feet Doyle scale. Let us also assume that these logs are Grade 2 red oak logs, with a value of $500 per MBF. Therefore, the logs are delivered to the sawmill for a total price of $395.

We would estimate that these logs will produce 1000 BF of lumber (although very careful sawing with a thin kerf mill could exceed this amount). They should produce 220 BF of FAS and Select grade lumber (worth $1225 per MBF) for a value of $270. They should produce 352 BF of No. 1 Common grade lumber (worth $875 per MBF) for a value of $308. They should produce 242 BF of No. 2 Common grade lumber (worth $550 per MBF) for a value of $133. They should also produce 160 BF of No. 3 Common grade lumber worth $57. (There was 24 BF of below grade or unsatisfactory lumber.) The total value of the lumber produced is valued at $768. This is green rough lumber. It is the value delivered to a customer.

The value added by sawing these logs and producing approximately 1000 BF of lumber is $768 - $395, which equals $373. This is not profit, however, as the sawing costs, lumber storage costs (if the lumber is not sold right away), log storage costs (if the logs are not sawn right away), lumber marketing costs, lumber delivery costs, and office costs must all be considered. These costs will vary greatly from mill to mill, but an average number including all of these costs except delivery might be $100 per MBF. (SPECIAL NOTE: Controlling the various costs, especially storage costs (sometimes called inventory costs) is certainly a key to successful sawmill operation.)

The “Bottom-Line” for sawmilling in this example is therefore $273 per MBF of lumber produced. (Note: This is close to $345 per MBF log scale.)

Drying
When we consider the potential markets for green lumber, we notice that if the lumber were kiln dried, the value goes up tremendously, at least for some grades and for some species. (This is certainly a key to successful drying: do not dry lumber that has only a small increase in value as a result of drying; look for the species and grades that have large increases in value.)

Continuing with the red oak example above, the customers for No. 3 Common do not pay anything extra for drying, so this lumber should be sold ASAP. (Sometimes No. 3A is used for flooring, but almost every flooring mill will prefer to dry the lumber themselves.) The No. 2 Common lumber has some limited markets for kiln dried lumber. These markets will typically pay about $175 per MBF extra for kiln dried lumber. For No. 1 Common, markets abound, with kiln dried premiums of $275 or more. Likewise, Select and FAS lumber markets are plentiful and will pay at least $300 per MBF for kiln drying. The value of 207 BF of FAS and Select kiln-dried lumber (Note: 220 BF of lumber will shrink about 6% in drying to 207 BF) is $321; 331 BF of No. 1 Common, $381; 227 BF of No. 2 Common is $170; and 160 BF of No. 3 Common is still $57 (green). The total value after drying (except for the No. 3 Common, which is green) is $321 + $381 + $170 + $57, which is $929. This is a value-added due to drying of $929 - $768, which is $161 (for kiln drying 765 BF). This is equivalent to a value-added of $210 per MBF. However, this is not the profit in drying. It is necessary to subtract the cost of drying, including stacking, inventory, energy, equipment, insurance, drying degrade (cracks, splits, etc.) and so on, as before. Again, such numbers vary greatly and are related to how profitable an operation really can be. However, a good number for total cost of drying oak lumber is $95 per MBF. For the example here, the drying cost for the 765 BF of kiln-dried lumber would be $73. So, the net profit $161 - $73, which is $88 gain for drying 765 BF or $115 per MBF. (Note: Six percent shrinkage is included.)

Additional Processing
FAS and Select lumber cannot usually be cut-up PROFITABLY into smaller pieces by a secondary processing operation. Much of it is sold as export lumber or special use lumber, markets which a small producer does not have access to. Therefore, this lumber should be sold as kiln-dried lumber. A few pieces might be kept for a retail outlet, running them through a planer or molder to make S2S (surfaced 2 sides) lumber. This potential is not considered in this example, but this special local retail market should be investigated.

The No. 1 Common lumber can be cut into smaller pieces profitably. In the hardwood business, such pieces are called hardwood dimension. Often these dimension pieces are S2S or even S4S. If the 331 BF of No. 1 Common lumber (worth $381 if sold as lumber) is sawn into dimension, approximately 205 BF of parts will be obtained with a value of $492 (based on $2400 per MBF). The cost of manufacturing these parts is about $62. So, the net value is $492 - $62, or $430. This is $49 more than if the lumber was sold without further processing (or the gain is over $239 per MBF of No. 1 Common lumber).

The No. 2 Common lumber can also be cut into smaller pieces profitably. If the 227 BF of No. 2 Common lumber (worth $170 if sold as lumber) is sawn into dimension, approximately 112 BF of parts will be obtained with a value of $269 (based on $2400 per MBF). The cost of manufacturing these parts is about $41. So, the net value is $269 - $41, or $228. This is $58 more than if the lumber was sold without further processing (or the gain is over $255 per MBF of No. 2 Common lumber). Manufacturing unfinished t&g flooring from No. 2 Common would result in similar gains.

The bottom-line for secondary manufacturing is that $551 worth of lumber (558 BF) was manufactured into $761 of dimension. Added to $321 worth of FAS and $57 worth of No. 3 Common, the total value is $1139 from $395 worth of logs.

There are always specialty markets that have even higher profit potential. Four examples:

One company sells small, individually wrapped pieces of lumber, guaranteed 100% defect free, S4S, 5.5" x 4', for $7 to $12 each. This is equivalent to $3500 to $6000 per MBF. However, not every piece of lumber would have this product potential.

Special made-to-order flooring would have higher costs than the standard flooring, with high gains as well. Not all pieces of lumber will be suitable for this use.

One company takes 5/4 lumber, planes it smooth and then resaws it into two thin (1/2") pieces of lumber, puts a t&g on the edges, and sells it as solid wood t&g paneling with a smooth side (from the molder) or a rough side (from the resaw) for $1.78 per square foot, which is equivalent to $2840 per MBF of lumber.

One company sells S2S kiln-dried retail lumber for hobbyists at an average price of $3500 per MBF. Much of this lumber is only 36" long. They do discard pieces and sections of pieces with large defects.

Summary
From the preceding example, log costs were $395. These logs were sawn at a cost of $100 and produced 974 BF of lumber. The sawn lumber had a value of $768. Subtracting the log costs and production costs, the profit (after expenses) is $273. (The sawing profit is equivalent to $280 per MBF of lumber produced or $346 per MBF Doyle log scale.)

If the upper grade lumber was dried, resulting in 765 BF of kiln-dried lumber, the total lumber produced (including the low grade sold green) would have a value of $929. Subtracting drying costs, the profit (after expenses) from log to dried lumber is $361. The profit from drying itself is $88. (The drying profit is equivalent to $115 per MBF of lumber.)

If the top grade is sold as KD lumber, the low grade sold green, and the middle grade lumber (558 BF) is cut into hardwood dimension parts, flooring, or similar, the total value of dimension and lumber is $1139. Subtracting secondary manufacturing costs, the profit (after expenses) from log to lumber and parts is $468. The profit from secondary manufacturing itself is $107. (The secondary manufacturing profit is equivalent to $192 per MBF of lumber.)

Summary Table
Purchase logs: 5 red oak logs, 16" x 16' and 1 red oak log 16" x 8'
790 BF Doyle log scale; 1000 BF International 1/4-Inch scale
Delivered to mill at $395

Saw logs—$100 sawing costs
Rough, Green Lumber Produced

FAS&SelNo. 1 ComNo. 2 ComNo. 3 Com
220 BF352 BF242 BF160 BF
$270$308$133$57

Total lumber value $768
Total profit: $768 - $395 - $100 = $273



Kiln dry No. 2 Com and Better grade lumber--­814 BF which shrinks to 765 BF at a cost of $73.

FAS& SelNo. 1 ComNo. 2 ComNo. 3 Com
207 BF331 BF227 BF160 BF
$321$381$170$57

Total lumber value $929
Total profit: $929 - (log) - (sawing cost) - (drying cost) = $929 - $395 - $100 - $73 = $361
Drying added $88 for drying 765 BF (or $115 per MBF lumber)



Cut No.1 Com and No. 2 Com into parts/dimension/flooring­--558 BF of lumber at a cost of $103.
Sell FAS lumber kiln dried; sell No. 3 Common lumber green

FAS&SelNo. 1 ComNo. 2 ComNo. 3 Com
207 BF205 BF parts112 BF parts160 BF
$321$492$269$57

Total wood value $1139
Total profit: $1139 - $395 - $100 - $73 - $103 = $468
Manufacturing added $107 for processing 558 BF of lumber (or $192 per MBF of lumber)

Gene Wengert, Professor of Wood Processing, Emeritus, Univ of Wisconsin-Madison and President, The WoodDoctor's Rx, LLC, 2872 Charleston Drive, Madison, WI 53711-6502, 608-271-4441 Preferred e-mail: gwengert@woodweb.com



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