Diversification/Risk
Reduction
Asset managers are aware of the need for diversification
among multiple assets that respond differently to
economic events. Timberland provides such diversification
for the overall portfolio. Timberland returns, for
more than thirty years, have been negatively correlated
with the returns from both equity and fixed income
assets. In addition, timberland provides diversification
within the real estate segment of a portfolio because
returns have a low correlation with the returns
from conventional real estate.
Biological Growth
| A unique feature of timberland investments
is biological growth. Unique because growth
is highly predictable. Unique because growth
is immune to economic events or market fluctuations.
The importance of biological growth is magnified
by the fact that, as trees grow and become
larger, their value increases much faster
than their size. Larger trees can be used
to make higher-valued products.
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Real Rate of
Return
An investment in timberland is an investment
in a "hard asset" and provides substantial protection
from inflation. Although lower inflation in recent years
has turned many investors away from real assets, astute
investors have seized the opportunity, while such assets
are out of favor, to take advantage of favorable buying
opportunities. Even in sustained periods of low inflation,
timberland has provided very competitive returns.
The Future
of Timber
"The outlook for timberland investors is attractive.
Supplies are decreasing, demand is increasing and prices
are expected to continue to appreciate in real terms.
Declining supplies are a result of competing uses for
forestland, a lack of reforestation and public pressure
to curtail timber harvest on federal lands. Higher demand
for timber results from an expanding global market for
wood products and a shifting emphasis to renewable resources.
Increasing global demand for forest products is expected
to continue due to worldwide demographic trends."
- Quote from Forest
Investment Associates
Advice from the
experts
“Quick: name an investment that
has made over 15% a year for the past 30 years. Not
stocks, not corporate bonds or even commercial real
estate….it's Timber” Quote from Rick Young of
Armadillo investments. Rick Young worked for Wall
Street investment firms for 15 years, is an accomplished
student of Warren Buffet, Ben Graham, and other legendary
investors. In 1977, he established Young Research &
Publishing, Inc., as an independent financial services
advisory service. Today he serves the needs of more
than 50,000 investors with his unique approach to safe
and secure wealth-building. His clients include Fortune
500 corporations and international banks as well as
individual investors. Forbes praises his forecasts as
"remarkably accurate," and Money magazine says his recommendations
"have been worth their weight in bullion."
In the Daily Wealth research report an article on
Why Trees are Better Than Stocks, Steve Sjuggerud
reveals how the average Wall Street investor has
no idea that timberland investments have consistently
beaten the stock market – and generated an average
annual return of 14.5% over the last 30 years.
Jeremy Grantham is an outstanding money manager
with an outstanding multi-decade track record.
Among Jeremy’s leading investment tips, he most
recommends buying timber.
‘Timber is the only asset that’s very negatively
correlated with the stock market.” Grantham
says. “One such timber stock is PCL.”
Current
valuation
The current market value of Black Walnut
trees is determined by several factors including but
not limited to the tree’s form, diameter, height as
well as current market conditions. Laake Forest plantation
has goals to grow prime and select veneer quality trees
with log height sizes of 16-24 feet and log diameters
of 20-28 inches. Prices paid for such logs over the
past 2-3 years as reported by the Indiana and Missouri
Departments of Forestry range from $5.14 to $7.25 a
board foot or a range in valuation per tree of approximately
$1,315 to $6,264.
Future
valuation
One can analyze the trend of historical Black
Walnut tree prices to help forecast future values. Based
on the annual historical price trend data provided by
the Indiana and Missouri Departments of Forestry, actual
prices paid for hardwood trees (referred to as “nominal”
prices) over the past 25 to 30 years from 2005 have
increased 2.14 to 3.56 fold respectively.
Additionally, per a quote from Tennessee Timber News
September 2006 “Over all market conditions are
very favorable for the landowner at this time across
all market grade segments. This is being driven by increased
foreign demand for our products. The report on exports
put out by the USDA shows that these exports are up
over last year with China being a major trading partner
for hardwood lumber species. Europe is up over last
year …. by slightly over 3%. Here at home demand for
most species is being met at this time but not generally
exceeded. This absence of a surplus is helping to keep
prices steady on most species and is contributing to
an increase of prices paid on those species where demand
is on the rise.”
Also per a quote from The Department of Forestry
Wildlife and Fisheries January 2006 “Black Walnut
– Demand is firm, prices are strong”
In conclusion, Black Walnut tree prices fluctuate from
year to year. However, over the long term actual prices
have clearly increased and at a reasonably steady rate.
Additionally, indicators generally point toward continued
strong demand. Given these conditions, one can extrapolate
historical price trends to the future and forecast that
prices for trees of the condition, size and height outlined
in the aforementioned “Current valuation” segment. Using
such information it is estimated that the future valuations
in the next 25-30 years for such types of Black Walnut
trees should range from $4,684 - $12,192 a tree. Note
that these forecasted valuations, while a bit more detailed,
are generally in line with others provided by experts
in the field and posted on various internet sites.
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