Forestry Investment News and Opinion from John Barnes

Pros and Cons of Forestry Investments

Timber is one of the most stable investments in the world. It is a precious commodity and is able to yield high returns, even in a down economy. Timber products are at an advantage, they will always be in demand, from tissue paper to wood chips for fuel, as more and more countries develop their infrastructure.

So if you are considering adding timber to your portfolio then the information below should give an unbiased overview of the pros and cons involved in this type of investment.

As mentioned previously with timber there is nearly always a guarantee that you will get an excellent return on your investment. At the moment you can reasonably expect a return of between 10-14% per year, although that figure is set to rise as the world comes out of the financial crisis. Should the world experience another crisis however there is no panic as value can be stored on the stump and the harvest put back until the markets have recovered. This is the great advantage of timber over other crops as once it matures it will keep on growing and adding value.

There are not many risks associated with this type of investment either. The main concern for a lot of investors is the threat of pests and natural disasters, such as forest fires and storms. What should be kept in mind here is that all reputable forestry investment specialists will be insured should such an occurrence happen. Another issue that should be taken into account when researching forestry management specialists is what time frames they estimate for the investment. If for example you invest with a company mainly specialising in eucalyptus such as my sponsor Greenwood Management then they estimate a time frame of six to eight years before harvesting.

Investing in timber is a good choice if you are looking for a stable long term investment. The yield is not affected by the economy and the returns are quite generous.

The Forestry Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here .

2 Responses to Pros and Cons of Forestry Investments

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Dear John,

I am also an admirer of the asset class, especially for such characteristics as low-to-negative correlation to the traditional asset classes, biological growth component in the returns and positive impact on the ecology from putting land to growing trees over an extended period of time.

Having said that, I noticed several statements in your post that may be misleading without putting them into context.

1. Timber products [. ] will always be in demand:

There is a great variety of timber products, and some of them are likely to be in demand at any given point in time, while the others may as well be not. The softwood in the US is a good example: as the housing starts dropped to the historical lows, the demand for this type of timber plummeted, forcing many sawmills to take downtimes or close.

2. At the moment you can reasonably expect a return of between 10-14% per year:

The expected return is very region- and species-specific, and to the best of my knowledge in a typical investment in the US the expected return is substantially lower. 10-14% is more representative of the fast-growing subtropical regions, which comprise a growing, but yet fairly small portion of the timberland investments worldwide.

3. with timber there is nearly always a guarantee that you will get an excellent return on your investment:

I would be very careful not to make such statement about ANY investment. There is ALWAYS a downside risk. You can buy timberland at the peak of the price cycle and get negative capital gain at the exit, you can overstate the growth rates and get lower cut timber income, you can overconcentrate in one particular species for which there is a limited end-use The list goes on. The key is to understand the return drivers.

In summary, it appears to me that this post, despite claiming to provide an unbiased overview of the pros and cons gave a rather unbalanced picture of the asset class.