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Why invest in timberland? Where are timberland opportunities located? Supply and demand for wood products What are the characteristics of timberland as an investment? What factors influence the rate of return? What rates of return have historically been earned by timber investments? Timber income represents a cash flow; how predictable is this cash flow? How risky is timberland investment? How do timberland assets correlate with other financial assets? How volatile are timberland returns? What is the outlook for timberland as an investment?		Why invest in timberland? Timberland has become recognized as an attractive investment opportunity. Globally over $12 billion is invested in timberland holdings by institutions like banks, insurance companies, pension funds and universities. Analysis has shown this is a relatively low-risk investment that provides excellent diversification for institutional portfolios (with negative correlation with stock and bond returns and little correlation with the real estate market). More importantly, rates of return for timberland investment have been excellent, with nominal rates of return averaging 9 to 12 percent. Over the 1990's the major timber index showed a 17 percent average annual rate of return and university research indicates that intensive timber management can produce 12 to 15 percent nominal rates of return. Where are timberland opportunities located? Current major investment regions in the United States are the South, the Pacific Northwest and the Northeast. Internationally, other investment areas are New Zealand, Australia, Canada and South America. The American South is the predominant timberland investment region. The timber investment regions of the United States differ by ownership patterns, timber species growth, timber inventory and harvest schedules. This affects regional returns and is the reason that investors usually diversify across regions. Timberland acreage and timber inventories differ by region: Timberland Acres by Region: Southeast - 40% Northeast - 32% West - 28% Timberland Inventory by Region: Southeast - 31% Northeast - 25% West - 44% Additional Timberland Investment Regions Information Supply and demand for wood products The United States is the world's largest producer of industrial timber, accounting for roughly 25 percent of global industrial roundwood production. It both imports and exports wood, but imports greatly exceed exports. Southern timber products play a major role in this international trade, especially southern pine and hardwood lumber, southern pine plywood, kraft pulp and kraft-based paper. The USDA Forest Service is required to make periodic assessments of the nation's timber situation. The current assessment makes projections to the year 2050. The South is expected to lose 4 million acres of timberland and the rest of the country may lose 20 million timbered acres. Timber production should shift to the South with its greater share of private land. Over the same period significant increases are expected in domestic consumption of both softwood and hardwood, with corresponding increases in harvest levels of timber. The South will continue to be the Nation's wood basket. Currently, just over 60 percent of the nation's softwood harvest comes from the South; by 2050 it will be nearly two-thirds. Hardwood harvest will continue to amount to nearly 60 percent of the nation's harvest. Modest nominal price increases are projected until 2050. Timber production will flow to the South from other regions and increases in timber prices will result from increasing consumer demand and diminished timber supply. Additional Supply and Demand Information What are the characteristics of timberland as an investment? Trees grow. The value of timber products in each tree tends to increase over time. That is, trees grow into more valuable products over time (pulpwood into sawtimber into poles and plywood). Even with constant stumpage prices, tree volume increases and more valuable products are available for harvest, so value naturally increases over time. Timber investment usually involves an additional investment in land. Timber investments offer the flexibility in cash flows; timber sales can be timed for the market. Timber investment typically involves a long time period. However, the age structure of purchased forest stands establish the possible cash flows. Timber can be illiquid, but this can create buying opportunities for investors. Natural risks like diseases, insects and fire can cause losses, but mortality due to all causes is less than 1 percent in large holdings. Additional Timberland Investment Characteristics Information What factors influence the rate of return? Changes in timber prices. Since World War II pine sawtimber prices have exceeded inflation by 2 to 3 percent annually and pine pulpwood has kept up with inflation. USDA Forest Service projections are for continued real price increases. Tree growth and yield. Tree growth is highly impacted by site quality and forest management intensity. Tree growth can be accurately predicted via computer models. Changes in tree value. Forest management practices control stocking and influence the size of trees on a tract (and thus the products that can be produced). Overall value can be maximized. Changes in land value. Increases in land value typically increase overall rates of return. Costs. Cost effective forest management will result in higher rates of return. Additional Rate of Return Information What rates of return have historically been earned by timber investments? University studies show real rates of return in the 10 to 12 percent range can be reasonably expected. A leading timber index based on actual returns found rates of return vary from 11 to 16 percent depending on region. Since 1986 the major timberland property index has returned just over 16 percent annually (40% from income and 60% from capital appreciation). Additional Historic Rate of Return Information Timber income represents a cash flow; how predictable is this cash flow? Timber can produce a managed cash flow. Timber can be stored on the growing tree in bad markets and will grow in volume while stored. Age structure of the forest stands dictates cash flow opportunity and age structure is known at the time of investment. Timber income will be impacted by: Stumpage price change, which is a function of timber supply and demand. Government projections show real price increases should continue for the foreseeable future. Land value changes will obviously affect returns. Government projections are for continued real land value increases. Tree growth is a major impact and can be modeled by computer; the level of forest management greatly affects tree growth. Additional Timberland Cash Flow Information How risky is timberland investment? Stumpage price, land price and tree growth can be considered risks. As discussed under predictable cash flows, diversification minimizes these risks. Control of age structure and storing wood on the growing tree reduce stumpage price risk. Land prices tend to be rather predictable; timber is usually not produced on development-type land. Tree growth is variable, but easily modeled on a computer. Geographic diversification minimizes mortality risk from fire, insects and disease (which average less than 1% on large forest properties). Additional Risk Information How do timberland assets correlate with other financial assets? Published studies demonstrate timberland assets show relatively strong negative correlation with all other major financial assets (treasury bills, government and corporate bonds, and stocks). Timberland assets have a low, but positive, correlation with inflation. Geographic diversification will lower the magnitude and volatility of timberland returns. Additional diversification occurs naturally; timber product prices (pulpwood, sawtimber, poles, plywood, etc.) are only lowly correlated. Additional Correlation Information How volatile are timberland returns? Like all investments, higher returns usually mean more volatility. Timberland lies above the "capital market line"--meaning it produces high returns relative to volatility. For example, from 1960 to 2001 stocks (S&P 500) returned 10.1 percent with a standard deviation of 16.6 percent, while timberland returned 12.6 percent with a standard deviation of 13.2 percent. The Capital Asset Pricing Model shows timberland is a negative BETA and a positive ALPHA asset class. This suggests timberland is a "negative risk" investment and should be required to generate even less return than a risk-free investment. That is, timberland appears to be undervalued in term of returns generated relative to risk. Additional Volatility Information What is the outlook for timberland as an investment? Institutional investors own over 4 million acres of timberland in the South. Within a decade, this is expected to exceed 12 million acres. Timberland has been shown to provide excellent portfolio diversification. It is negatively correlated with most other financial assets, including real estate, and positively correlated with inflation. Professional timber management investment organizations can easily manage investment risk via geographical diversification and proper forest management. Timberland is above the capital market line; or another way of saying that is it produces significant returns that exceed those expected for its risk level. Timberland is expected to experience dramatic increases in its share of institutional investment over the next decade. Timberland's historic returns justify this interest. back to top>>> -- services \| properties for sale \| timberland as an investment \| software news & articles \| privacy policies \| about afm \| contact us home © 2003 American Forest Management (704) 527-6780 Designed & Developed by Metheney Consulting, Inc.