Friday, April 8, 2011

Why Invest in Timberland?

I’m sure this is a question you see as you search the many different real estate website that specialize in selling rural property.  I came across an article by Robert Stammers, “Timber Investments Cut Down Portfolio Risk.” http://www.investopedia.com/articles/stocks/08/timber-investment.asp

This article goes into enough specific detail to understand the dynamics of investing in timberland while at the same time is easy to read and understand.  I’ll give a brief summary.

Years ago the large pulp mills and forest product manufacturing facilities had concerns about their long term fiber supply and consequently acquired large amounts of land in order to grow timber to insure their needs were met.  Since about 1990 many of these companies have sold their timberlands to investment and management companies.  These new owners have the expertise to maximize production.  Often the seller will enter into supply agreement with the new owners which gives them a buffer against volatile prices.  Who are these new owners? Pension funds, private equity investments in limited partnerships and insurance companies have all invested in timberland.  I am seeing individuals buy timberland with their individual pension plans as a hedge to the volatile stock market.  One of the largest buyers of timberland has been Timber Investment Management Organizations (TIMO’s).  

Investors must wait for the timber to mature, much like a zero-coupon bond.  They can stabilize cash flow by investing in timber stands with varying ages of maturity.  Also, with the different timber products, such as: pulpwood, poles, saw timber, and chip-n-saw, managers can shift production to avoid sharp declines in the prices of particular products and also take advantage of price increases.  Why has timberland caught the favor of investors?  Over the long term the demand for timber is increasing.  Timber is an inflation hedge, i.e. timber traditionally grows on the stump at a rate higher than inflation.  Timber has a low correlation in comparison to other asset classes. 

Investors should be aware of the risks.  Weather and fire can damage and reduce inventory.  Also, the decline is markets such as housing can have a negative impact building products.

In summary, the justification for investing in timberland is becoming more and more compelling.  As well as being a hedge, the returns have been equal to or better than other asset classes.

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