Timber! The Secret to Making Money Grow on Trees

 Diversifying the assets in an investment portfolio can protect against market drops and inflation during times of economic uncertainty.

Most of the time, this means giving out stocks, bonds, and maybe even precious metals. Timber is an asset that can help diversify a portfolio but doesn't get much attention. From 1993 to 2017, the average return on timberland was 8.36 percent. It is not as high as the S&P 500, which has a return of 9.69%, but it is a good diversification alternative that outperforms government bonds and Treasury bills.

Last year, everyone was talking about lumber because its prices had more than doubled because of the rush to build new homes and fix up old ones. This was caused by low interest rates and the government pumping money into the economy. Sawmills were in a great position because they had an oversupply of raw materials at low prices and a high demand for lumber products that didn't seem to go away. Since then, a lot has changed. Interest rates, inflation, and lumber prices have all gone up. But they are still high compared to the past.

This past year was an outlier, with wild swings and changes that don't usually happen. Prices for timber and lumber tend to go up over time, and they aren't directly affected by market forces like those that affect stocks and bonds. Timber (raw stumpage) prices are not always related to lumber prices, which was the case this past year. A person can invest in timber in two main ways: as a landowner who owns timberland or as an investor in the stocks, ETFs, or REITs of a lumber company.

Who Owns Land?

There aren't many investments that are actually fun to make. Stocks and bonds are just numbers on a screen, but if you like being outside, it can be very rewarding to own timber and the land it grows on. And, contrary to what many people think about the timber industry, it is a great way to help the environment because most of the places where trees are grown for paper or lumber would otherwise be farm fields with rows of crops. Once the trees are old enough to be used as lumber, they are cut down and replaced with a new crop. This keeps more land covered with trees, which soak up carbon dioxide.

Everything has pros and cons, and owning timber just as an investment probably won't live up to your hopes. Dr. Adam Kantrovich, an agribusiness expert at Clemson Extension, says, "If a person owns land that isn't being farmed or used for anything else, it makes sense to have timber and a timber management plan because this could lower their property taxes and bring in money through harvests." But if the goal is to invest and the only thing that matters is the return on investment, careful thought should be given. "

He goes on to say, "Timber is a long-term investment, and it's hard to know how good or bad that investment will be in 20 to 40 years."

Since 2008, stumpage prices have been low because there is a lot of southern pine on the market. Because of this glut, it could be a few years before inventories go down and prices go up. There is also a risk that insects, disease, storms, or fire will damage the wood before it is cut down. However, Hancock Timber Resource Group says that these risks are quite low, at 0.5 percent per year for natural disasters and 0.3 percent per year for insects.

The CEO of American Forest Management, Inc., Brent Keefer, is optimistic about the future of timber in South Carolina and the Southeast in general. "All parts of the forest products sector are still based on strong fundamentals. Housing is still in high demand, which drives the need for lumber and panels. I think things will get better in the long run. Both the U.S. West and Canada will keep sending their lumber production to the South, "he says. "The South's oversupply of wood, which has been going on since the Great Financial Crisis of 2008-2009, will slowly come back into balance with demand, and wood prices will slowly and steadily go up in the long run."

There are two ways that wood appreciates: growth and price. Loblolly pine, which is the most common tree planted in the South for lumber, is too small to sell for the first 15 years. Even though it has no market value, it still has value as it grows. Once it's about 7 inches across, which takes about 15 years, it's in its first product class, which is pulpwood. Pulpwood is used to make paper. At this age, the first thinning is done, which brings in money and helps the other trees grow by making them less competitive.

About five years from now, many of the remaining trees will be moved to a higher-value product class called "chip-n-saw." A chip-n-saw tree has a diameter of 10 to 15 inches. At this point, the owner of the wood can choose to do a second thinning, which will bring in more money and again help the remaining trees by getting rid of competition.

A chip-and-saw log can be used to make both pulp and small-sized wood. At 30 years old, the remaining stand is more than 15 inches in diameter and has turned into sawlogs. Sawlogs are turned into lumber, which is the most valuable of the three types of products. When they are this big and old, they are usually clear-cut to get the most money out of them. The site is then replanted for another 30-year cycle.

As Dr. Kantrovich says, the potential owner of timberland should also think about other things. In addition to the wood itself, the land below is also an investment that should be thought about. Also, new markets are starting to appear, like the carbon credit market, which could help bring in some money. Even though it is still a young market that needs to grow a bit, it may be good for landowners and others in the future if more policies and rules are put in place to stabilise it and set some minimum standards.

As a way to cut down on carbon emissions, carbon credits let a company, like an energy utility, buy credits. These credits can be earned by growing trees, which store carbon. In exchange for money, the owner of the trees agrees not to cut them down for a certain amount of time.

Brent's point of view is the same. "Right now, it's hard to say for sure if carbon credits will become a good way for timberland owners to make money. What I do know for sure is that people are becoming more and more interested in forests as a natural way to deal with climate change. Large institutions and corporations that have made net-zero commitments have a lot of money to invest, and they want to use forestry offsets as a part of their plan to reduce their carbon footprint.

If you want to buy a piece of timberland, you should talk to a forestry consultant about how much it will cost and how much you might make from it.

Stocks, funds, and trusts

Timber ETFs are made up of companies that make things out of wood or that are related to wood. A person who invests in a timber ETF has access to cash, which is different from a person who owns timberland. The IShares Global Timber & Forestry ETF puts its money into 25 companies that work with wood. Another one is the MSCI Global Timber ETF. It invests in 81 companies that deal with wood. IShares Global has about $320 million in assets and tries to track the S&P Global Timber & Forestry Index. It is the bigger of the two. Since it began in 2008, it has returned an average of 6.47 percent each year.

REITs put their money into real estate that makes money, and they have to give most of that money back to investors in the form of dividends. Timber REITs are different from most REITs in that they have a manufacturing component because they invest in companies that make wood products. Timber REITs do well when more homes are built for people to live in because they make and sell lumber and timber. There are four timber REITs to choose from, and two of them are with companies that own forests and make wood products.

Brent says, "ETFs and REITs give investors access to timberland through the stock market." In general, these investments do reflect the factors that drive the forest products market. They also tend to be linked to the public equity market as a whole. ETFs and REITs are easy to get into and sell, but they tend to be more volatile than direct investments in timberland. Direct investment in timberland, on the other hand, is harder to get into and less liquid. "

Investing in timber, either directly by buying trees or indirectly through the stock market, gives the investor a different type of asset that can provide stability, growth, and diversity. Unlike some newer types of investments, like crypto, the timber industry has been around for a long time and is an important part of our economy, even though many private investors don't take part in it.

Money really does grow on trees, despite what the old saying says.