Speaking to a few of my readers I have been asked to write a bit about the basics of timber management and investment. And just for kicks I’m going to include a tidbit of its history:
In the fifth century a group of Romanian monks established a pine forest on the Adriatic coast. This was one of the first examples of timber management established to provide the monastery with a source of fuel and food. This (now) massive forest was mentioned by Dante Alighieri in his 1308 poem Divine Comedy. In China the Han and Ming dynasty adopted forest management practices, and in Germany forest management and sustainable harvesting were practiced as early as the 14th century. In almost all cases these forests consisted of different types of Pine and Oak.
The practice of actually establishing forests, at a large scale at least, came about in conjunction with the invention of the steam engine and the great navy’s of the colonial era.
Tropical Forestry is the branch of forestry which deals with equatorial forests that yield woods such as teak and mahogany. Tropical forest management, particularly with hardwoods is relatively new. These forests weren’t really “managed” until the 20th century, which explains why we are still identifying best practices for the region. However, there is speculation that the Mayans did indeed plant and manage certain tree species. Unfortunately very little of this knowledge was passed down after the great cities were abandoned. The advantage of tropical forests is that they grow year-round with no significant dormant period; tropical hardwoods can grow up to ten times faster than its temperate counterparts.
As I mentioned above, forest management has been practiced for centuries, however forest investment as we see it today is, in relative terms, new. Since natural forests are finite and evermore protected, there has been and always will be a real necessity to establish “man-made” plantations. When people or institutions invest in forestry, generally they are investing in the raw material for pulp or lumber. Naturally, these are considered longterm investments since most timber species require between 15 and 40 years before they become “harvestable”. That said, many plantations today are bought and sold at different stages of the harvest cycle. Most of the large plantations, particularly in Latin America, have been sold at least once. For example there are risk averse investors who prefer to enter once the forest has been established, at say, year 4 or 5. The reason for this is that new forests are more prone to damage, be it physical or biological, when they are young. An established forest (4+ years old) is generally more robust and has a higher survival rate.
Investments in the establishment of new plantations usually include costs for: land purchase, legal fees, nursery/germination efforts, planting costs, management, and the subsequent maintenance of a timber forest. These investors often seek to exit at that 4 or 5 year mark. (By the way, a well-prepared forest manager should be able to facilitate this transaction.) Investors who come in at that secondary mark should expect to pay ongoing maintenance costs, as well as a start-up premium for entering at a low-risk stage.
Timberland investment has grown substantially as market volatility and inflation rates have boosted demand for tangible-asset investments. The good news for timberland investors, is that no matter what the market is doing, the trees will continue to grow as long as the sun continues to shine and the rain continues to fall. So, for example: if timber prices are down in a particular year (Due to housing market slumps, etc) the investor may simply choose to delay harvesting, and in the meantime the wood volume will continue to grow/increase.
Historically timber investments have shown market resiliency through the decades, several factors can be attributed to it continuing this performance trend:
- Global population/demographic changes: expected to reach 7.5 billion in 2020
- New environmental policy and regulation will limit natural-forest sources of timber
- Increased demand for alternative energy sources
- Global economic growth (as measured by GDP) is expected to double by 2030
- Demand from emerging markets, particularly in Asia (link to chart)
SUSTAINABLE/IMPACT TIMBER INVESTMENTS
This blog, as it were, aims to promote and discuss impact reforestation investments. In theory these should not only perform financially but also:
- create stable job creation and economic development in the rural areas
- promote transparent and non-corrupt business practices
- promote environmentally friendly forest projects
- provide the investor with returns with 5 to 12% IRR’s
- mitigate pressure on standing natural forests
- create biodiversity protection
- at least partially rehabilitate degraded ecosystems and improve natural habitats
- sequester greenhouse gases in the atmosphere
- protect natural forest stands