Why is Timberland a Good Investment?
Timberland is Uncorrelated to the Stock
Market
Trees don’t know about wars, bear markets, housing
crises, job losses, fuel prices or any other factor that negatively
impacts the economy. Trees just keep growing year after year. So investing
in timberland is an excellent way to balance your portfolio as its value
rises even when stocks are falling. Timberland is negatively correlated
with other components of the portfolio. Because timberland investments
tend to move counter cyclically with stocks and bonds, and independent
of the real estate sector, timberland can provide portfolio diversification.
By managing the timber growth and subsequent harvests, the forest investment
could be structured to act and behave in many respects like a long-term
bond.
Trees Grow
Trees grow; the growth is compared to the interest
earned at a bank. This growth is a hedge against price fluctuations.
Returns from timberland investments are not only from biological growth
but from upward product class movement, timber price appreciation, land
price appreciation, and management/marketing inputs. The biological
growth of trees makes up most of the returns of a forestland investment.
Biological growth ranges from 3% in an unmanaged natural stand to 12%
in an intensively managed highly productive plantation, with the average
ranging between 6-9%. Upward product class movement comes from a tree
moving from pulpwood to sawtimber, the two basic products derived from
a tree. The value of sawtimber is about two to four times the value
of pulpwood; therefore, as a tree grows, more of its volume is allocated
to sawtimber. Value is being added as volume growth and product upgrade.
In regards to timber price appreciation, there has been and is expected
to be a strong demand for the South’s forest resources. Prices
may fluctuate on the short-term but over the long-term are expected
to increase. Timberland price appreciation is partly derived from the
value the land itself can produce. Forest practices continue to improve
the production from the land. Combine the improved production with timber
price appreciation, the overall value derived from the timber will increase;
therefore, causing the underlying value of the land to increase. Also,
the land itself can increase in value independently of the timber influences.
Increased demand for recreational property and geographical factors
can both positively influence the value of timberland. In some areas
these influences far out way the positive effects from the increased
value from timber.
Historically, investments in timberland have provided
total real returns (net of inflation) of 6-10 percent, and nominal returns
of 9-15 percent.
Relatively Low Risk
As stated earlier, trees do not know of the outside
forces that affect the economy, they just keep growing. As timber is
growing it is standing on the stump. This storage of inventory allows
flexibility to the investor. For example, investors can increase or
delay the timing of harvests according to the price of the timber products.
It also enables the forest manager to predict with relative certainty
the volume and value of future harvests. Also, the investor can time
revenues to match their own objectives, whether it is to meet a certain
need or fill in gaps when other investments are depressed.