Additional Correlation Information

How do timber and timberland assets correlate with other financial assets?  Timber and timberland tend to have a negative correlation with other financial assets like stock and bonds.  A study published in the Southern Journal of Applied Forestry used the Southern Timberland Index Fund (STIF) to represent timber and found that the addition of the STIF to a group of financial asset alternatives reduced the risk of efficient portfolios by an average of 43 percent.  The correlation coefficients for the STIF were:

How do timber and timberland hold up against inflation?  They are generally found to have a low but positive correlation with inflation.  The correlation varies by region due to regional responses to macroeconomic factors like interest rates and housing starts.  A study of correlation between a timberland index and the CPI found a correlation coefficient of 0.47.  Timber and timberland are lowly to negatively correlated with other commercial real estate. 

Over the last 40 years the magnitude and volatility of timberland returns have been highest in the Pacific Northwest, mid-level in the South, and lowest in the Northeast.  Actual performance of portfolios using various proportions of timber growing regions demonstrates that volatility can be greatly reduced by geographic diversification while having minimal effects on total return.  For example, a typical portfolio might be 50 percent Southern, 40 percent Pacific Northwest, and 10 percent Northeast. 

Even individual timber products (pulpwood, chip-n-saw, sawtimber, poles, veneer) are lowly to moderately correlated.  Just the structure of the age classes and planned product distribution over time provides additional diversification.

Thus, timber and timberland are negatively correlated with most financial assets and positively correlated with inflation.  This makes timber and timberland an ideal diversification tool.