Feature while waiting for the price of gold to increase, the ounces of gold owned is not increasing. There is one more unique difference between investing in timberland verses other more traditional investments like stocks, bonds or gold. Timberland is a tangible asset that can be enjoyed while owned. One cannot go hunting or horseback riding on a share of IBM stock or a gold brick. Timberland ownership, however, allows the investor to have a place to enjoy and create memories that will last a lifetime. To many timberland owners, this is the most important characteristic of the asset. Along with the upside to timberland investing, there are a few negatives. Unlike investing in the stock market, investors in timberland must have long term investment horizons. As witnessed over the last several years with the recession and housing market crash, there is also market uncertainty. Another negative is the fact that timberland is a fairly illiquid asset. It may take 6 to 18 months to sell a timberland property. Timberland investments are also subject to damage from fire, wind, insects or disease. Geographic diversification of timberland properties, timber age class diversification and good forest management, however, can lower these environmental risks.
How Money is Made Growing Timber The value of timberland appreciates in several ways: 1) land appreciation, 2) real timber price increases, 3) biological growth and 4) forest product growth.
Land Appreciation Unless the timber property is located in an area of high growth, land appreciation contributes only about 5-7 % of the overall asset appreciation. However, the appreciation of the land can be significant if it is located in parts of the county that are experiencing rapid growth. Many times the timberland will develop a higher and better use where the value of the timber component of the investment becomes secondary to the value of the land component. There are many tracts of land that had a highest and best use for growing timber that are now golf course communities, residential subdivisions and shopping malls.
Real Timber Price Increases The housing crash of 2008 pushed softwood sawtimber prices down to levels not seen since the early 1990’s. Sixty-five percent of the total demand for softwood timber is from construction and two-thirds of this demand is from new construction. Most forest economists, however, predict the future for timber prices is bright. Several factors should help timber prices rebound and reach new highs over the next 4 -5 years. First, the housing market will slowly but surely rebound, thereby increasing demand for softwood timber. Housing starts have been at historic lows over the last four years. In order to keep up with future demand for housing, this deficit must be made up. Currently, housing starts are around one million units per year. This should increase to over 1.5 million starts by 2017. Second, exports to China will continue to increase. The U.S. is currently exporting ten times more wood to China than just seven years ago. Most of the timber being exported to China is coming from the Pacific Northwest.
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Third, imported lumber from Canada will decrease because of the devastation of Canada’s timberlands from the mountain pine beetle. The mountain pine beetle infestation has reduced timber volumes by more than half in western Canada. Canada provides the U.S. with onethird of its lumber supply. Less lumber being imported from Canada will result in a greater demand for softwood timber in the U.S. Because it takes 40 to 50 years to grow a tree to sawtimber size in Canada, it will be decades before they can import lumber into the U.S. at the same levels as before the pine beetle devastation. The combined effect of these three factors will push demand and prices for softwood timber to new highs over the next four to five years. Because softwood timber is the primary product grown on U.S. timberlands, this will help increase returns from this asset class. The long term outlook for timber prices is even more optimistic when considering worldwide demand for paper and wood products is ever increasing but the number of acres devoted to growing timber is decreasing. Thus, landowners who are investing in timber now will be assured of good markets and high demand for their forest products into the foreseeable future.
Biological Growth and Forest Product Growth Money is made growing timber due to the biological growth of trees and also due to the change in forest product class as a tree gets larger. When a tree grows, it adds more volume and is therefore more valuable. However, not only does a tree add value over time by virtue of gaining more cubic foot volume, trees grow into higher value forest products as they get larger. For example, in the southeast, loblolly pine trees become merchantable when they reach about 15 years of age. Merchantable means the trees are large enough to be sold to a timber buyer for money. At this time, the trees are approximately seven inches in diameter. Trees this size are used for pulpwood, which is used in the manufacture of paper products. Pulpwood trees are worth about $7.00 per ton. The value of this seven inch tree is $1.50. In seven years, this tree will be approximately 10 inches in diameter and can be used to make small-dimension lumber. The value of trees in this forest product class is $14 per ton. The per-ton price has doubled from what it was when the tree was seven inches in diameter. The value of this 10 inch tree is $4.50. Because of the combined effects of volume growth and forest product value growth, the tree increased in value 300% in a five year period. If the tree is allowed to grow another eight years, it will be 14 inches in diameter and be classified as a large sawtimber tree. These size trees can be used to manufacture large dimension lumber or plywood and are worth $30 per ton. The value of the single tree will now be $22.50. That is a 500% increase in value over an eight year period. That is the power of the combined effects of biological growth and forest product value growth in timber. Not only do the trees gain more volume growth over time, the value of those units of volume increase over time as the tree moves into higher value forest product classes. This example did not take into account increases in timber prices. When factoring in economist’s projections of the increase in real timber prices in the future, these numbers could go even higher.
Ways to Invest in Timberland There are several different ways to invest in timberland. The method selected depends on the investor’s total capital to be invested, the amount of liquidity desired and the amount of participation in the