Why Investing In Timberland Is Attractive:

Nature’s Alternative Investment – Part 2

Timberland investment returns come from a variety of economic transactions.  Besides the obvious selling of the trees themselves, there is often the potential for income from the sale of recreational and hunting leases, income from leases for telecommunication antennas or wind-power installations, the sale of tracts for development, or the sale of conservation rights.

Rising Demand and Prices

Nature’s Alternative Investment – Part 2

Nature’s Alternative Investment – Part 2

In our last installment on Timberland Investing, we discussed the unique ability that timber has as a capital asset to increase in quantity (and quality) simply because of biological growth.  It’s certainly one of the exceptional “perks” associated with this investment vehicle, and is a variable that can be improved by sound forest management practices.

Of course, supply and demand principles directly affect timberland investment results as well, and we will highlight some of the situations inherent in income associated with the sale of timber products in this installment.

Timberland investment returns come from a variety of economic transactions.  Besides the obvious selling of the trees themselves, there is often the potential for income from the sale of recreational and hunting leases, income from leases for telecommunication antennas or wind-power installations, the sale of tracts for development, or the sale of conservation rights.

Though renewable, timber is still a geographically limited natural resource that has seen increased demand. So the price of timber (hardwood timber in particular) has generally increased over time.

Since the mid-1980s, the Pennsylvania State University School of Forest Resources has published a quarterly Pennsylvania Woodlands Timber Market Report. During the period from December 1985 through December 2016, reported timber prices have increased significantly.

In nominal dollars (not adjusted for inflation), red oak increased from $261/Mbf to $653/Mbf, white oak increased from $147/Mbf to $647/Mbf, black cherry increased from $286/Mbf to $988/Mbf, white ash increased from $215/Mbf to $436/Mbf, sugar maple increased from $93/Mbf to $522/Mbf, red maple increased from $78/Mbf to $475/Mbf, and poplar increased from $58/Mbf to $247/Mbf (please note these unit values reflect volumes in Doyle Log Rule.)  Other valuable hardwood species have seen significant increases as well.

The table below compares these average stumpage prices by species in Northwestern Pennsylvania for December 1985 and December 2016. Total and annually compounded increases are displayed, which, when combined with the annual growth rates, yield a total annual increase for each species. Well-managed timberlands often exceed the listed growth rates and stumpage prices listed below.

growth rates and stumpage prices

Using the US Forest Service growth estimates and the Penn State price data, the combination of growth and price indicates a species-blended annual appreciation rate of 8.16% (please note that this example assumes equal volume by species and that general stand conditions are similar to the land base analyzed to estimate the species-specific growth rates above.)

Better Grade = More Money

Timber also increases in value because of grade improvements, which are usually accomplished through planned silvicultural thinnings. This process increases growth on the higher quality trees, and helps them increase in diameter quicker. As they do, their quality or “grade” typically increases… and their value does as well.

Good forestry practices produce grade improvements in at least two ways. First, poorly formed and unhealthy trees are removed from the stand through intermediate thinnings. This allows the straighter, healthier trees to remain and take better advantage of the growing site. Secondly, a well-managed stand grows faster and is more likely to regenerate with a genetically superior seed source.

It is more difficult to estimate the component of value return related to grade appreciation; a recent study was done using a powerful simulation model called ForestSim in which “average” hardwood stocking data and species-specific unit pricing information was uploaded and projected over a 30-year period.  The results of this analysis showed that, on average, grade appreciation can add an extra 1% to 3% to the overall annual increase in value to a well-managed hardwood stand over time.

In our next issue, we will pull together the concepts discussed in Part 1 and this article and review in more depth how sound management enhances the returns on a timberland investment, as well as what the typical costs of management are.

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