An international group of researchers estimated timber investment returns for 22 countries and 54 species/management regimes. Returns were estimated for the principal plantation countries in the Americas—Brazil, Argentina, Uruguay, Chile, Colombia, Venezuela, Paraguay, Mexico, and the United States—as well as New Zealand, Australia, South Africa, China, Vietnam, Laos, Spain, Finland, Poland, Scotland, and France. In this post, professor Frederick Cubbage (North Carolina State University) – the lead author of recently published paper in the Journal of Forest Policy and Economics – shares the main findings of the research and discusses practical implications for global timberland investments.
First of all, thank you, professor Cubbage, that you agreed to participate in the interview for Forest Monitor blog.
Let’s start with a question why timber investment analyses are actually needed?
“Timber investment analyses help explain the increase in forest plantation area and future projections for more planted forests, the increase in forest industry investments, and the role of forest plantation timber to substitute for timber coming from natural forests. While planted forests have detractors as well as proponents, their area and share of industrial wood continue to increase.
Since we started our studies in 2005, many new world-class pulp mills have been built throughout the world, with the brunt of them in the selected developing countries we have benchmarked through the last 15 years, although new plants now exist or are planned in Asia and Finland at least. In addition, as the new promise to plant one trillion trees made in Davos at the World Economic Forum in 2020 indicates, planted forests are perceived to be extremely important for mitigating climate change in the medium run.”
What was the objective of your recently published research in the Journal of Forest Policy and Economics and how this research may help investors and policy makers?
“The objective of this research was to examine the current timber investment returns in many regions throughout the world. We performed a longitudinal study of timber investment returns and trends, without the costs of land, for selected countries and species as of 2017. We compared those with prior research we have conducted back to 2005, as well as with other related forest economics literature. This research and analysis can help investors and policy makers compare timber returns among countries based on the underlying forest growth, factor costs, and timber prices; provide benchmarks for important countries in the world; and offer a template for more detailed analyses for their own investments.”
What were the main results?
“South American plantation growth rates and their concomitant returns were generally greater, at more than 12% Internal Rates of Return (IRRs), as were those in China, Vietnam, and Laos. These IRRs were followed by those for plantations in southern hemisphere countries of Australia and New Zealand and in Mexico, with IRRs around 8%. Temperate forest plantations in the U.S. and Europe returned less, from 4% to 8%, but those countries have less financial risk, better timber markets, and more infrastructure. Returns to most planted species in all countries except Asia have decreased from 2005 to 2017.”
“If land costs were included in calculating the overall timberland investment returns, the IRRs would decrease from three percentage points less for loblolly pine in the U.S. South to eight percentage points less for Brazil eucalypts.”
Based on your expertise and published paper, is investing in timber assets worth it?
“In general, timber investments compare relatively well with other assets. They are approximately equal to or better than bonds and government securities but do have lower rates of return on average than U.S. stock markets in the last decade. Timberland does bring unique contributions to an investment portfolio because it is an asset that is not correlated with the stock market. Furthermore, the variation in returns in stocks as evidenced by U.S. markets as a proxy is huge—almost two times greater than the means. Despite fluctuations, timber does not seem nearly as volatile, although investors surely hope for more upswings.
As usual, the question is whether the trends of high returns for the stock market, low returns for bonds, and low returns for Northern Hemisphere timber will continue. If investors seek to match high stock returns, it might suggest that timberland investments in the more challenging countries in Asia or new afforestation countries in South and Central America will be more worth pursuing in the future—if the risks can be overcome through careful investment selection and structure.”
And final question, how investors and managers can make higher returns with a timberland purchase?
First, timber buyers usually buy land and timber together. They could make more money by simply paying slightly less than the “true” market value for either the land itself, or for the growing stock on the land, and then making more when any timber or land sales occur. Land prices are somewhat uncertain, and at least vary by location, site characteristics, timber markets, and landowner willingness to sell. Timber inventories for small or large tracts are uncertain. Simply taking advantage of imperfect knowledge can help timberland investors profit more. Furthermore, if a tract has a significant share of immature or young mature timber, buyers may increase returns by harvesting this timber and getting early cash flows before they begin to replant and incur those expenses. Another viable alternative would be to lease timber rights instead of acquiring the land. This strategy would reduce the initial costs as well as gain more liquidity in the investment in comparison to land ownership.
Second, timberland buyers also may sell some small parcels—say 5% to 10% of a large tract—for higher and better and uses (HBU sales)—development into other agricultural, housing, or commercial land uses. Major forest products companies, REITs, and many TIMOs make a specific practice of this. The sale of conservation easements on timberland has been a related profitable HBU practice for some timberland owners and TIMOs. These essentially sell some portion of the development rights for a tract of land but retains the right to manage the forest for timber production or other natural resource uses. The timberland then usually must stay in timber, which can earn rates of return such as calculated here, although easements usually specify natural forest management, not plantations.
Third, managers may be able to make more money by indeed being better than average forest managers, with higher growth rates, lower costs, or better timber sales. Somebody, of course, must be below average, but this may fall to a lot of small woodland owners rather than large investors. This is still moot, however. Small owners may manage more themselves and have less costs than TIMOs and REITs, and thus greater IRRs, if not greater LEVs. In a related strategy, landowners can try to own more high site quality land and properties; this may favour small selective owners. Geographic diversity may, however, provide large owners more advantages in reducing overall timberland risk from natural disasters such as fire or hurricanes, or pathogens such as insects or disease.
Last, one can also make more money in timberland ownership by diversifying the goods and services managed beyond the timber returns analyzed here, and “stack” different types of returns. While nontimber products and services have been considered minor, their opportunities are increasing rapidly. Conservation easements are one type of nontimber payment. The common hunting leases in the U.S. South are another. Opportunities for carbon storage payments have been increasing slowly, but have more promise as climate change worsens, demands for mitigation increase, and government programs proliferate.”
Professor Frederick Cubbage will be the speaker at the International Forest Business Conference 2020, where he will present two presentations:
- Timberland Investment Trends: Tempests on Wall Street versus Global Opportunities
- Projecting global and regional outlooks for planted forests under the shared socioeconomic pathways
Fred Cubbage is Professor, Department of Forestry and Environmental Resources, North Carolina State University. He has co-authored more than 500 papers and articles, 3 books, and 500 professional speeches on global timber investments, natural resource and conservation policy, and agroforestry. He has been a Co-PI on more than $15 million in research grants. He is the Co-Director of the Southern Forest Assessment Consortium (SOFAC), which he founded in 1994. SOFAC is a timber market modelling and investment co-op with about 25 private industry and state forestry organizations as members. He teaches natural resource policy and forest economics.
Fred was a Service Forester in Kentucky for 2 years; a professor at Georgia for 10 years; an economist and Research Work Unit Project Leader with the Forest Service for 5 years; Department Head at NC State for 10 years; and now is a professor at NC State, for 15 more years. He received undergraduate and graduate degrees at Iowa State University and the University of Minnesota, respectively. Fred served as the President of the Society of American Foresters in 2017.
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