As I write this, the stock market has officially entered into “correction territory”, defined as “a 10 percent drop in stocks from their peak. Since Jan. 26, the S.&P. 500 has fallen 10.16 percent.” (NYT, 2/8/2018). Though many have said this was bound to happen at some point (as it always seems to when the market races along seemingly unstoppably for a while), it certainly does make both institutional investors and those of us with 401Ks and IRAs pause and take notice.
This correction may be a temporary situation, or could be more prolonged as the investment community’s powers-that-be analyze the underlying causes of this recent dip. No matter, investing in anything has its set of complications and uncertainties; that’s what defines the “risk” part of it all, which in many cases determines the level of the “reward” or return that may be realized.
Because of potential stock market volatility, other investment vehicles were developed in the past to help investors spread their risks out. Alternatives to stock ownership such as bonds and precious metals have become an integral part of institutional investment portfolios, as their performance often runs counter to how equities perform at any given time. And over the last 30+ years now, institutional investors have increasingly become aware of the real estate sector as an addition to client portfolios, and within the real estate sector, timberland investing has grown in interest and participation.
Timberland investing is considered a counter-balanced investment to the stock market in general. Its returns do not always follow those of stocks, and in some cases act in opposite fashion to how the stock market is doing. Timberland, and the timber on it, are real assets; physical entities that can be seen, and felt, and walked on. As part of the real estate sector, the land on which a commodity like timber is grown is an asset that is often categorized as “something they are not making any more of.” So, when concern sets in about stock market performance, more attention is usually paid to “alternative investments”, like timberland, to diversify and reduce overall investment risk.
Over the last few years, with stock markets showing steady and significant increases, institutional investors were very pleased with their performance and alternative investments began to take a backseat to the market, as the continual climb was/is hard to ignore. We find that some of our larger investors are not quite as ready to place as much capital into timberland as they were back in the late 1990’s and early 2000’s (when the stock market was floundering). Since the low point in March 2009, stocks have progressively increased, with a particularly strong jump witnessed over the last year. Consequently, some focus had been taken away from real estate investing, and subsequently, timberland as well. But depending on how long this current “correction” lasts, it will be interesting to see if we might start seeing an increase in funds being diverted again to timberland investing.
Regardless, timberland remains a significant and wonderfully-diverse investment. Its principle product has a unique characteristic not shared by any stock, or bond, or precious metal, or bitcoin for that matter. Timber grows. It biologically increases its own supply. We’ve never seen a stock or a gold coin do that. And as timber grows, several financial effects occur; first, the increase in the material produced through growth (boardfeet of sawlogs, tons of pulpwood, etc.) adds more supply for the landowner to sell, thereby increasing the landowner’ potential income.
Secondly, as timber grows, it often morphs into different, and more valuable, products. In our region, between the diameters of 6 inches and 10 inches (measured at 4.5 feet above the ground, or “DBH”), the commercial product that can be extracted from those trees is often classified as pulpwood, or cordwood. Trees in this size class can range in value anywhere from approximately 50 cents to a few dollars. Once a tree grows to a diameter of 12 inches at DBH, it now enters the “sawtimber” product class, and this is where value starts to increase substantially – not only because of increased total volume of material, but also because product classes (uses) change as the tree grows in diameter.
As an example, a 12” Dbh black cherry tree with a merchantable height of 16 feet (1 “log”), has a volume of about 36 board feet as measured in the Doyle Log Rule (log rules are another topic we will discuss in upcoming issues!). The market may be currently paying, say, $0.40/board foot for cherry logs at that small size, so this tree is “worth” about $14.40; substantially higher than if it were in the pulpwood class, but on the low end of the sawtimber value range. Once that tree grows to a 16” Dbh, it increases a bit in merchantable height as well (say to 1.5 logs), thus having a volume of about 114 board feet, and would be valued at about $0.80/board foot. The tree would then be worth about $91.20 – a substantial increase from its 12” version!
Once timber gets into the 18” Dbh class and above, depending on its overall quality (soundness), higher stumpage values per volume unit come into play. A 20” Dbh tree with 2 merchantable logs has about 269 board feet in it, and may be priced at approximately $1.20/board foot – recognizing that higher grade products (quality lumber and possibly veneer) can be milled out of it. This 20” tree may be worth about $322.80, once again a substantially higher value than its 16” self.
Obviously, these changes don’t happen overnight. It takes patience, planning and some expense (taxes, management costs) to grow timber to its harvestable stage. But – growth is not subject to the swings we have seen in the stock market; where a sneeze or a tweet may cause Wall Street to move up or down on a daily basis, timber consistently continues to grow. Sure, there are certain things that affect its growth (moisture, occasional forest pest infestations, etc.), but by and large, it’s a pretty steady-as-she-goes factor that is an advantage a timberland investment has over the stock market. And maybe one of the biggest attractions of timberland as an investment is – the owner can walk on it, camp on it, fish and hunt on it – basically, a timberland owner can physically enjoy the land itself, without negatively affecting the continued growth in value of the timber being carried on that land.
Timberland investing is not for everyone, but it is certainly a terrific alternative to the stock market. And on those days when your 401K may slip a bit, there’s nothing like a good walk in your woods to get some stress relief, realizing too that your timber continues to grow.
Since 1954, FORECON has been in the business of helping woodlot/forest landowners their returns on the forest products their woodlots grow, while also helping them enjoy the many other benefits of timberland ownership. We would be happy to discuss your ownership desires with you, and stand ready to work on your behalf by providing the experienced and professional services you deserve. Please call any one of our offices today – our foresters would be glad to talk with you!