Managing pine beetle risk when investing in land

For years I’ve been working with people in Alabama with their forest land, whether as a forestry consultant or as a Realtor helping with a purchase.  Frequently, I’m asked about pine beetles and its associated risk and how that risk should influence management decisions.   I could write a book on the amount of misinformation I’ve heard.  When looking at land for sale, I’ve seen the pine beetle risk influence buyer’s decision.  I’ve also had landowners cut their timber and then refuse to spend the money to replant their land, citing pine beetle risk.  Worse, I’ve seen unethical wood buyers use the scare of a pine beetle infestation, whether real or not, to convince the owner to sell their timber, many times at less than market value.   So, are pine beetles a significant risk?  They are a risk, but that risk can be managed.  I use the following analogy when asked about the risk: If you bought 100 head of cattle as an investment, would you put them out to pasture and not check on them?  The same thing applies with a pine forest.  Periodic inspections combined with a little knowledge regarding what you are looking for, can prevent a large area of lost timber.  I’ve attached the link to a Publication by the Mississippi State Extension Service.  It explains how to identify a beetle attack and how to manage.  It also gives a link to more detailed information.

http://www.mfc.ms.gov/pdf/Pubs/Pine_Bark_Beetles_2448.pdf\

Timberland after the Recession?

How Timberland has as an asset performed through the recession and what is the outlook for the future?

Since timberland started to sell to investors in the late 80’s and early 90’s, it’s performance as an asset class has gone up and done due to many factors, such as supply, global influences, changes in the economy, etc..  One of the most negative factors on timberland is the decline in saw timber prices, due primarily to the decline in housing starts.  So, I started looking around for economic opinions as to when a recovery is expected, attending seminars and reading various articles.  The consensus seems to be that the recovery will be modest over the next few years.  As the population grows there will be a demand for more housing, whether it is for multifamily or single family dwellings.  Given this increase, saw timber values are expected to gradually increase.  No one is expecting a return of the housing boom as we experienced in the middle of the last decade or the high stumpage values that we enjoyed around 2000.  A long term trend either up or down is not expected for pulpwood.  There is a lot of talk in the industry about using wood for fuel on a significant level, such as power plants or exports.  If this occurs, it will help with the demand and price for biomass, whether it’s a clean or dirty chip.  However, I believe this is still something on the distant horizon.  To develop the technology and then build the infrastructure to support it will take time. 

What am I seeing in today’s Marketplace?

I am constantly checking website activity and talking with my peers to get a feeling on the markets.  I’m seeing activity: webpage clicks, emails, phone calls at a level almost as high as when the markets were strong.  However, there is a significant decrease in actual purchases.  People are being very careful and are shopping price, which is the proper thing to do in this economy.  One item of misinformation that I’m hearing is the inability to borrow money.  The conventional banks still have restrictive terms, such as requiring 40% down; however, the land banks that specialize in loaning money to buy land are actively pursuing loans and have good terms.

So what should an Investor do when considering investing in Timberland?

The simple answer is “Do your homework.”  The expected returns for timberlands may not be as high as they were five and ten years ago, but there is still a decent return to be made.  My first advice is to accumulate knowledge.  You can do this in one of two ways: (1) you can go about the process of educating yourself, or (2) you can hire an expert.  I’ve seen both methods work successfully.  I’ve met a few landowners who were very knowledgeable about investing in timberland and set out a plan and implemented it accordingly.  I also know landowners who are successful and they know relatively little about investing in land.  They hire and trust an expert.  Sadly, I’ve seen many landowners who rushed into decisions without doing their due diligence and make mistakes that can be long term, primarily an ill advised timber sale.   One problem with timber is revenue is generated obviously from selling timber and the sales are a long time apart because of the time it takes to grow trees.  An ill advised or poor timed timber sale may take a generation to recover.  In summary, timberland still remains a strong asset class.  Return may not be as high as past but none the less it still has positive attributes such as: an inflation hedge and stable returns providing the investor does his homework accordingly. 

Click here to see timberland for sale in Alabama.
To learn more about managing timberland and the services offered by a Consultant Forester, click here.

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.