It used to be that investors thought that adding an integrated forest products company like International Paper was the way to add timber to their portfolios. Those days are gone. Most of the traditional forest products firms have divested themselves of timberland.
There are 514 million acres of timberland in the United States. About 31% of that is publicly owned and nearly half is in non-corporate holdings, leaving about 90 to 100 million acres of forest industry and investment timberland. In the past five years, 28 million acres of forest industry timberland have changed ownership in the United States. These acres were mainly sold by traditional forest products companies and bought by institutional investors and REITs. It is predicted these parties will purchase another 10 to 15 million acres in the next decade.
Many financial advisors are not aware that clients may hold significant financial positions in timber via direct investments. There are just over 10 million individual and family forest owners in the United States. These family forests occupy about 252 million acres of timberland. Most family forests are small tracts, as nearly three-quarters of them are less than 20 acres in size. But over a half million owners control 100 acres or more. At the other end of the spectrum, about 20,000 owners have tracts of over 1,000 acres in size.
Seventy-two percent of family forests are in the eastern United States, where the productive timberland and private ownership is located. The states with the greatest area of private forestland, each with more than 15 million acres, are Alaska, Georgia, Alabama, Mississippi, Maine, Texas, North Carolina and Arkansas. The states with the greatest number of private owners, each with more than 500,000 owners, are New York, Tennessee, North Carolina, Georgia and Florida.
Financial advisors should be aware timber assets could be a large component of an investor's portfolio and the client may not even think of this timber as an asset. Below are some of the major considerations that will affect forest owners who reforest or sell timber.
Fundamentals
What ingredients make up a timberland investment? It has a rate of return just like any investment, but several characteristics make it unique. Its main cash flows come from timber sales and those are impacted by current timber prices. But what makes it special?
First, while timber can be purchased as a stand-alone entity, most forest owners own both land and timber as a combined production unit. So it becomes a two-component investment, or two subinvestments. Second, there are potentially large initial purchase costs. Site preparation and tree planting is often required on bare land. Third, long time periods are involved in forestry. A full growing cycle (rotation) for southern pine is 25 to 35 years. Fourth, cash flow will be determined by the age structure of the forest. This defines when harvest will occur.
Fifth, forests are subject to physical risks, like wildfire, insects and disease. Fortunately, these risks are small on a well-managed forest. Sixth, the forest is both a factory and a storehouse. A forest produces the product and at the same time serves as the storehouse for the product. As wood grows it is stored on the stump. If timber markets are down, the forest allows for self-storage.
Seventh, the two components of a timber investment often react to inflation and price appreciation differently. Land and timber are often subject to different price change pressures. Eighth, land costs are an issue. Some timber investment analysts ignore land opportunity cost (you have to own or lease land to grow timber). Land cost is a relevant cost in timber investment analysis. Ninth, timber offers tax advantages. Tenth, timberland is a rare investment that allows for enjoyable side benefits (e.g., hunting and recreation) that are often not part of the investment analysis. Lastly, price information is difficult to obtain. Timber prices differ by region and tree species. Average investors would need a forester to value timber investments.
Institutional Investors
Certain financial characteristics of timberland make it attractive to investors. Timber and timberland investment opportunities go beyond the United States and are global. Institutional investors target countries like Australia, New Zealand, Chile, Uruguay and Brazil. The top ten institutional investors own over 20 million acres of timberland.