I trust this Christmas and year end greeting arrives in your home and finds a happy, healthy, and festive atmosphere at this special time of the year. 2011 has a been a year of the 17-year Cicada, extended devastating drought, 100 degree temperatures, windstorms, beautiful full moons, pine beetles, frustration with our federal government, and on the positive side, our free country, grandchildren, family, and friends. In the 2010 letter, I concluded with, "I look forward to the opportunity of this letter at the end of 2011, when I can list the many improvements in the land and timber business". Maybe I was a little quick on the trigger, as we continue to deal with the same market conditions we had a year ago. I look forward to an improving economy, which will trickle down to our land and timber business. I always enjoy the Christmas season for its true meaning and for the many blessings in our lives. The season allows an opportunity to reflect on the past and anticipate the prospects of ideas, plans, and projects for the New Year. I am reminded that "if you want to make your dreams come true, the first thing you have to do is wake up and go to work". I plan to embrace the New Year fully awake, alert, and with as much energy as I can generate.

In spite of the four year economic recession, markets for all products grown on our timberland remain active. The pine and hardwood pulpwood market using small diameter trees continues to be stable. Paper exports are competitive on the international market due to exchange rates. Demand for pulpwood has been good due to reduced chip production from the manufacturing of lumber at sawmills. Now the story for our value product, pine sawtimber. In 2005, new home construction peaked at 2.1 million units. Pine sawtimber and chip-n-saw values peaked in 2005. In 2010, 575,000 units were built, which is a 73% decrease from the 2005 level. As reported by Timber Mart South, the average Georgia pine sawtimber price in 2005 was $49.37 per ton and for chip-n-saw, $26.85 per ton. At the end of the third quarter, 2011, Timber Mart South reported pine sawtimber value at $24.91 per ton, a decrease of 49.54% and chip-n-saw at $14.01 per ton, a decrease of 47.82%. Pine pulpwood across the state averaged $7.39 per ton in 2005 and $8.59 per ton in the third quarter 2011, for a 16.24% increase. Lumber prices have also shown significant declines due to lack of demand. The overall consensus is it will be 2017 before the housing market fully recovers and normal demand for solid wood products returns. Improved pine sawtimber markets will follow the housing upturn.

As you might expect with the decrease in value for the timber crop produced, land values are retreating. Before the recession, land values in our area had hit historical highs due to a number of factors. Some included speculation, easy credit, equity in residential real estate, a recreation market, and tax deferred exchanges, to list only a few. In today's environment, there is no speculation, credit is difficult to obtain, and capable buyers are extremely cautious. Across the board, timberland values are settling in the plus or minus $1,000 per acre range, depending on size, location, and other factors. The exact opposite of declining land values for timberland is seen in agricultural land. With the demand for food commodities at all time highs, a world population of 7 billion people, and speculative crop commodity futures, agricultural land has maintained and increased in value. This is especially true for irrigated farmland. World demand for food commodities is increasing 2% per year, while food production is increasing 1% per year. That being the case, I continue to see stable and increasing values for productive agricultural land.

In previous recessions, the residential real estate market has led the recovery. That is not the case today, even with 4% interest rates on 30 year mortgages and low real estate values. The fact that the residential market overbuilt in 2004 through 2006 with unqualified homeowners continues to drag the housing recovery down. Home values have declined 2.7% this year, or 31% since 2006. Homeowner equity was 59.7 in 2005, and today is 38.6%. Home values are predicted to show positive movement of 1.1% through 2015. Looking back at the last 10 years, this can be called the lost decade in residential values. What we have to work through are 2.7 million foreclosures to date, with an additional 3.6 million homes at risk. One in four homeowners owe more on their home than it is worth. We continue to have 9% unemployment across our country and loans are very difficult to obtain.

In many areas, rental rates for residential property surpass mortgage payments. The good news is the inventory of new unsold homes is estimated at 190,000, which is the lowest point since 1968. There is pent-up demand for the American dream of owning a home. When our economy improves and the unemployment rate drops to the "full employment" level of 5 to 6% , the residential real estate market will more than likely move forward at a rapid rate. This will create demand for our pine sawtimber that continues to be on the stump and growing. However, the supply of available sawtimber will continue to suppress markets for several years to come.

United States lumber production totaled 40.5 billion board feet in 2005 and 24.9 billion board feet in 2010. At the same time, U.S. log exports to China, mainly from the West Coast, represent 1.4 billion board feet to date, which is nearly a 100% increase over 2010, and lumber exports to China total 5 billion board feet, an 11% increase over 2010. Export markets have put demand on wood products in the Western area of our country, creating pricing problems for logs going to mills producing lumber for national consumption. The lumber market in the United States does not justify the export prices for logs and has adversely affected some mills.

Over the past four years, 2008 through 2011, the amount of reforestation that we have participated in and across the industry has declined considerably, due to the fact very little timber has been sold through total harvests that are followed by replanting. Annual tree planting in Georgia averaged 406,536 acres between 1985 and 2006, reduced to 194,000 acres in 2010. The implications are that 15 years down the road when planted stands are ready for a first thinning, there could be a supply void. In 2010, total consumption of fiber at southern pulp and paper mills was 163 million tons. Domestically and internationally, the energy sector is producing energy from renewable sources, creating a diversion of wood fiber from paper mills to renewable energy.

If 1% of current energy produced is replaced by renewable energy sources, an additional 10 million tons of wood fiber are needed. At a 5% replacement, 50 million tons will be needed. In Georgia and the Southeast, European renewable energy standards are creating a wood pellet market using pine pulpwood and other small diameter trees. A 750 million ton European owned wood pellet plant is operating in Waycross, producing pellets for export. With our Savannah port, we are uniquely located and positioned to capitalize on this wood pellet market. Estimates are that the wood pellet demand will require an additional 20 to 50 million tons of pulpwood by 2020. Renewable energy production here in the United States and the export of wood pellets to Europe portends a competitive pine pulpwood market as we move forward. That being the case, the value of pine pulpwood should show significant price appreciation due to traditional and energy demands. A simple example is investing $225 per acre in reforestation today with average yields and a $10 per ton pine pulpwood price 15 years down the road indicates a 9.4% annual compounded rate of return. At $11 per ton, the rate of return is 10.1%. In today's environment, this is an excellent return when biological growth is guaranteed.

New products from our trees continue to be developed. From the pulping process, "fluff pulp" goes into specialty fibers, which are very absorbent, used in diapers, convalescent bed pads, and industrial towels and wraps. Cross Laminated Timber (CLT) is being produced in panels and prefabricated walls that compete with steel and concrete in vertical construction projects. CLT is made of several layers of lumber glued together. Both "fluff pulp" and CLT panels are viewed as environmentally friendly or green, versus synthetic materials used in absorbent products and concrete or steel. In Americus, Georgia, 2 million chopsticks per day are being made for export to Asian supermarkets manufactured from yellow poplar and sweetgum.

Forest certification has been active since 1993, initiated primarily due to rainforest harvesting in South America. Currently, there are three certification agencies that are active in the industry. The American Forest Foundation/Tree Farm Association is specifically designed for tree farmers and small individual private landowners. The Sustainable Forestry Initiative (SFI) was created by industry and continues to be a viable certification agency. The Forest Stewardship Council (FSC) is an international certification agency. The primary objective of Forest Certification is to ensure sustainability, protection of natural resources, and proper stewardship/forest management. I am of the opinion that your timberland is sustainable as managed, the natural resources of land, water, wildlife, and trees are protected through proper management, and you are a conscientious good steward in your landowner decisions. I have not seen the need for your forests to acquire the "certification" designation, which includes an out-of-pocket expense, a layer of bureaucratic requirements, audits, inspections, and reporting, in order to compete on the stumpage markets with buyers. I must admit that reluctantly, we may need to embrace certification. Europe has a renewable energy standard, in that 20% of the energy consumed must be from "green/renewable sources". Wood pellets produced in the United States for export must carry a renewable/green designation. In addition, paper products produced at our area mills are sold on international markets, and many paper/paper product customers are requiring that a certain percentage of the wood fiber used in the manufacturing process be from "certified forests". The movement towards "certified forests" is not going away and will become a larger force that could impact the value of trees when marketed.

I have been contacted by a major market in our area reference FSC certified wood. One of their primary customers has mandated that a certain percent of wood fiber into this mill be FSC certified in order to carry that label on their product. The proposition is "group certification" for timberland tracts in this area at no expense to the landowner. This will require an inspection, reporting of all forest management activities, and audits. There is no "premium" added to the value of your stumpage, nor is there any obligation to sell your stumpage to this mill. However, if a particular tract of timber is on the market for a bid sale and it is advertised as "FSC Certified", it very well may bring a higher value. I am not recommending certification at this point, but am making you aware of the trend. I have always been of the opinion that American Forest Foundation - Tree Farm Program is the best vehicle for the private landowner in the certification arena. I solicit comments and questions regarding certification and how it may fit your objectives and ownership. Thomas Jefferson said it best, "Agriculture, manufacturing, commerce, and navigation - the four pillars of our prosperity - are the most thriving when left most free to individual enterprise".

Twenty years ago, the Northern Spotted Owl in the Pacific Northwest became a major player in timber production and directly influenced the appreciation of southeastern pine sawtimber. Environmentalists made the decision that loss of habitat was the reason for the decline in the population and 7.4 million acres were taken out of timber production in order to preserve habitat. The spotted owl population continues to decline at 3% per year, and wildlife biologists have agreed that the population decline is not habitat related but caused by the Barred Owl. The Barred Owl is a superior predator on mice and other food chain items and is the culprit for the decline. The forces of Mother Nature are dynamic and progressive. We cannot reverse these forces, but can only work with them in order to maintain various flora and fauna in our environment. I think it appropriate to say that "everybody gets so much information all day long that they lose their common sense, and men have become the tools of their tools".

In the Pinelands National Reserve in New Jersey, the Southern Pine Beetle has destroyed 14,000 acres of shortleaf and pitch pine stands. In the Southeast, the Ipes Pine Beetle has created mortality among our pine stands, primarily from wind damage and the prolonged drought that has stressed our trees. Here in our area, we experienced severe windstorms during the early part of the year. The wind created breakage of tops and limbs, and trees were blown over into green trees. This allowed the Ipes beetle to gain a foothold. As the year progressed, the drought became more severe with 100 degree temperatures. I made a flight over our territory in July, and a number of failed trees were observed. A second flight on September 1 showed that our landscape was dotted with failed trees, both pine and hardwood. In recorded Georgia rainfall records, this is the worst drought since 1895. I cannot remember farm ponds being at such low levels. We must be very vigilant as we move into the spring and summer of 2012 in order to observe the health and vigor of our timber stands, knowing that pine beetles are active.

The Ninth Circuit Court of Appeals, with jurisdiction over the Pacific Northwest, has recently ruled that forest and agricultural practices, specifically roads, are considered "point sources" of pollution. This ruling requires permits for any new agricultural or forest roads used to remove timber or agricultural products from the woods or across fields to existing roads. This ruling will be heard by the Supreme Court. Even though it is relative to the Pacific Northwest, it could result in a wider ruling, to include the entire country. You can imagine what this will do to the value of your trees if forest roads require permits. Be aware of this ligation.

Other points of interest:

1. The environmental value of the 24 million acres of Georgia's forestland is estimated at $37.6 billion, which includes the value of water filtration, CO2 storage, wildlife habitat, aesthetics, and other intangibles. The economic value of the forest industry in Georgia in 2010 was $27.2 billion. Since 1972, 25% more wood was grown in Georgia than harvested, and 91% of the 24.4 million acres of forestland are privately owned.
2. It appears the dredging project at the Savannah port has been approved and will be accomplished. Dredging will allow supersized cargo ships to dock at this tremendous economic asset to our state and region.
3. Reforestation insurance for fire and wind damage is available with a general premium of $1.50 per acre, providing payment of $250 per acre towards reforestation. The deductible is 5% of the loss or a $500 minimum.
4. The "Bush Tax Cuts" continue through 2012, allowing a 15% maximum tax on capital gain sales, a $5 million unified estate exemption or $10 million for couples, with the top rate for the federal death tax at 35%. These are scheduled to expire at the end of 2012 unless Congress extends or makes them permanent.
5. Please remember that $10,000 per year for reforestation investments is tax deductible.
6. I encourage landowners to enroll in the Conservation Use Valuation Tax Program between January 1 and April 1 in order to reduce the punitive property tax levy against your timberland.
7. Hunting leases provide cash flows to assist with property tax payments. We continue to experience turnover in the hunting lease program for our clients, in that many hunters are adversely affected by the economy.
8. Conservation Easements are an option to protect sensitive areas of your ownership and to obtain very significant tax credits, both federal and state. Conservation Easements have unique applications to some landowners. We have participated in several and will be glad to share our acquired experience.
9. The Range Fuels plant producing cellulosic ethanol in Soperton, Georgia is in bankruptcy and closed. 10. Pecans produced in Georgia have become a product in demand, with 2010 prices at $2.30 per pound. In 2010, China bought 83 million pounds, more than all the pecans the U.S. exported to the rest of world.
10. I encourage you to become a member of the Georgia Forestry Association, which represents landowners' interests here in the state with our legislature, and the Forest Landowners Association, which represents our interests at the national level. These are two well run and effective organizations as advocates for the landowner.
11. The Megacopta Cribraria Beetle is a voracious feeder on kudzu patches and has been located in Georgia. However, it also likes soybeans.
12. Because of EPA regulations, the Warren County Oglethorpe Power plant continues to be on life support and inactive.
13. Georgia Forestry Commission county offices continue to provide excellent service to landowners, in spite of significant budget cuts in both equipment and personnel.

A year of 365 days runs by us quickly. As the old saying goes, "It's not what you look at that matters, it is what you see". My vision is positive and humbling, when considering the relationship and friendship that we share with you and your families. From all of us, we truly express our best wishes for a Merry Christmas and a healthy and prosperous New Year.