If a Tree Falls in the Forest, Should you Buy It?
June 29, 2010
But is it a buy?
The more one examines the long upward march of average timberland prices, from about $1,000 per acre nationally in 1999 to $1,780 by 2007 according to Timber Mart-South, a timber industry newsletter, the more apparent it is that the general real estate bubble explains at least part of timber's ascent. The rapid increase in housing construction stoked unsustainable new demand for wood, and it likely helped prices for the timberland itself as well.
Now that the bubble has burst, the future for timber is much dimmer. Indeed, a correction in timberland prices has already begun. In 2009, the average price for an acre of timberland was $1,395, down 23 percent from just two years earlier.
Buz Livingston of Livingston Financial Planning in Santa Rosa Beach, Florida, agrees. In an email exchange, he related an encounter he had with the man who incorporated timber into Vanderbilt’s endowment program, who was a speaker at the 2007 National Association of Personal Finance Advisors (NAPFA) conference. After his presentation Livingston approached him and asked, pointedly, “How much of the return is due to land prices increasing?”
He grinned, “Well a lot.”
“The timber management investment company promoters simply have not impressed me,” Livingston said.
Flagging housing and real estate markets are not the only reason to approach timber investments with care. As digital technologies continue their conquest of nearly all media (our publication being just one example), a growing number of paper products are quickly becoming obsolete. Between 1993 and 2004 U.S. consumption of paper pulp dropped by 2 percent, according to the American Forest and Paper Association. Japan's consumption fell by 11 percent during the same period. Unfortunately for producers of paper pulp, who account for 45 percent of non-fuel timber sales, this trend will probably continue, and may even accelerate, in the coming years.
Most investors buy timber for safety, income and diversification. The question that potential timber investors must ask is whether timber is a better way to achieve those goals than other alternatives, such as traditional fixed-income investments or high-quality dividend-paying equities. No asset class is devoid of risk. In timber, that risk is embodied in its cyclical nature as a commodity, which has been masked, until the last two years, by decades of rising land values. Lower projected global economic growth will clearly dampen the demand for housing and paper, forcing timber investors to accept returns lower than those they have historically experienced.
Diversified investors get a dose of timber in any case, since Plum Creek and Weyerhauser are both part of the S&P 500. Whether one wants to overweight this asset class depends on more than just whether sun and rain will foster the growth of trees, as Grantham says. More importantly, it will depend on whether those trees that fall in the forest are being turned into pieces of paper or two-by-fours to frame houses. That’s not such a safe bet.
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