Timber as an alternative - didn't work so well...

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thx1138
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Timber as an alternative - didn't work so well...

Post by thx1138 » Wed Oct 10, 2018 12:59 pm

From the WSJ:

https://www.wsj.com/articles/thousands- ... ding_now_2

Some relevant quotes for those unable to handle the pay-wall:
“We figured we’d plant trees and come back and harvest it in 30 years and in the meantime go into town to make a living doing something else,” he said.

Three decades later the trees are ready to cut, and Mr. George is learning how many other Southerners had the same idea.
“If you work and you didn’t want to put all your money in the stock market, you’d buy 40 acres and plant trees and they’d be ready to cut by the time your kid went to college,” said Skip Stead, a timber broker in Lincoln, Ala. “It’s like a 401(k).”
A glut of timber has piled up in the Southeast. There are far more ready-to-cut trees than the region’s mills can saw or pulp. The surfeit has crushed timber prices in Mississippi, Alabama and several other states.
The California Public Employees’ Retirement System spent more than $2 billion on Southern timberland, and harvested trees at depressed prices to pay interest on money borrowed to buy. Calpers sold much of its land this summer at a loss.
In the South, timber prices haven’t stopped sliding. Adjusted for inflation, the price of Southern pine is down about 45% since 2007, according to Daowei Zhang, an Auburn University professor of forest economics. So-called saw timber, for making lumber, is at a 50-year low, adjusted for inflation.
Article also includes examples of folks who planted over their farms 30 years back as a "retirement investment" only to now discover they can barely cover the cost of clearing the land with the timber they harvest. A significant factor is that there just aren't enough mills in the area to cut the lumber and it is prohibitively expensive to transport uncut logs to locations with more mill capacity. So despite the fact lumber consumption is up overall these trees are hardly worth anything because there isn't mill capacity nearby to process them (sort of like oil stuck in the ground because there are no pipelines nearby). Another issue is that since many of these stands were planted around the same time the trees will soon become too old to harvest for quality wood. That means there may not be an incentive for lumber companies to make the capital investment in opening mills nearby.

So the big lesson here appears to be an old one - don't accept uncompensated idiosyncratic risk (e.g. lumber in one location). For reference Calpers has about $250B in assets so their southern timber investment was a bit less than 1% of their portfolio.

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willthrill81
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Re: Timber as an alternative - didn't work so well...

Post by willthrill81 » Wed Oct 10, 2018 1:02 pm

My parents planted a lot of pines for timber back in 1984. Within five more years, they might be worth $150k. Had they put that same money into U.S. equities, they would currently have $500k (minus tax drag). :oops:
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daheld
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Re: Timber as an alternative - didn't work so well...

Post by daheld » Wed Oct 10, 2018 1:14 pm

We (my brother and I) own about 85 acres on a family farm that's been in the family for about 70 years or so. The older portion of the farm, owned by relatives, has been in the family for over 100 years. Timber is a nice addition to being a landowner, but is not a source of consistent or reliable income. You get to cut about once a generation, timber prices can fluctuate wildly, and there's no guarantee you're going to make a lot of money.

I realize the article is about a specific set of people in a specific location, and I wasn't able to read the article due to the paywall, but it seems insane to me that people would plant tracts of trees and expect to have a retirement just waiting to be harvested. That's not the way it works.

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nedsaid
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Re: Timber as an alternative - didn't work so well...

Post by nedsaid » Wed Oct 10, 2018 1:15 pm

Well, Timber did work for me. I purchased shares of Plum Creek Timber in 1989 and it was probably the best investment I ever made. I later on owned shares of Willamette Industries and exchanged into Weyerhauser shares after Weyerhauser made a cash purchase of Willamette. Also owned other forest products stocks. Thing was, I was an early adopter, timing is everything. Forest products was one of my favorite industry groups.

Weyerhauser merged with Plum Creek and I still own shares of the combined company that kept the Weyerhauser name. I plan to keep my shares.

It looks like what happened is that people piled in and Timber isn't the sure thing that it was 30 years ago. Even the college endowments got into the act. You can have too much of a good thing.
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Re: Timber as an alternative - didn't work so well...

Post by Jack FFR1846 » Wed Oct 10, 2018 1:22 pm

I directly own timber as I harvest hardwoods for firewood on my own property. There's a state program that I am in where the land is taxed at 10% of assessed value (other property in the state is 100% assessment). I mainly use the wood as a supplemental heating source. In the past, I have asked our closest sawmill (less than half a mile away) about harvesting for lumber. They would pay $zero and charge me $100 for use of their truck as I do the cutting of trees myself. In their case, they're chock full of trees aging in stacks on their property and don't have the room. I believe they do work directly with tree removal companies and likely pay them something.
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Sconie
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Re: Timber as an alternative - didn't work so well...

Post by Sconie » Wed Oct 10, 2018 1:29 pm

In a similar vein, for years, Jeremy Grantham at GMO was pushing both timber as the one of the only assets with a potentially good return future return. That said, just last year Grantham dumped-off GMOs timber holdings to The Rohatyn Group (TRG):

https://www.businesswire.com/news/home/ ... -Resources

Interestingly, TRG has already announced their intention of disposing of their U.S. timberland holdings----almost all located in the upper Midwest---- retaining only the foreign timberlands purchased from GMO.
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Re: Timber as an alternative - didn't work so well...

Post by texasdiver » Wed Oct 10, 2018 1:46 pm

This article is about the south but I hear similar things to a lesser degree in New England. I have a cousin in Vermont who has what they call "wood lots" up there. Mostly hardwood for lumber and cord wood for sale as firewood. Apparently prices are also way down in the past 20 years for New England hardwood as well.

I guess less people are using firewood to heat their homes as in the past, and with places like Ikea and Wafair there is less demand for hardwood furniture and cabinetry.

TheAccountant
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Re: Timber as an alternative - didn't work so well...

Post by TheAccountant » Wed Oct 10, 2018 1:55 pm

We sold some trees on a 15-acre plot of land for ~ $ 2,500. Not surprised at all.

renue74
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Re: Timber as an alternative - didn't work so well...

Post by renue74 » Wed Oct 10, 2018 2:06 pm

My inlaws have 99 acres in the south. They are within 5 minutes of a wood yard (central location that logging trucks bring harvest logs).

This year they cut out 30 acres and the payoff was horrible. They didn't plant the pine, but had purchased the land next to their land...because they like to have land.

In no way, would I ever say owning tree farms would be retirement returns. They use the land as a hobby. Building ponds, barns, farm land tracks...the timber harvest was a way to clear space for a pond they had planned.

Same inlaws also have a huge wood burning stove they use to supplement their home heating. I will say, it's awesome to visit during Xmas and Thanksgiving. Their house is toasty warm. :sharebeer

not4me
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Re: Timber as an alternative - didn't work so well...

Post by not4me » Thu Oct 11, 2018 1:09 pm

To me, this mainly illustrates not "investing" in what you don't understand. There's a lot of misunderstanding in regard to this area. Untold number of stories where it didn't work out....untold number where it did.

I didn't read this article (due to paywall, but have seen several like it). Close proximity of mills to the trees is a consideration. But, all trees aren't the same. All mills aren't the same. Hard wood vs soft, saw logs vs pulp, etc. Notice the price quote compared back to 2007...ring a bell? Think back to the heat of the housing market then. When housing took a hit, lumber was in oversupply, mills closed etc. Mills are opening now & are more efficient, need fewer folks to operate & still hard to find labor enough. Some are making money by buying from discouraged people who thought they could plant & come back in 30 years!

I don't know specifically how Calpers, GMO, etc mentioned are invested in timber, but I would expect they are in for the long term. They won't have to sell today...& trees will keep growing. Of course, I'm not saying there aren't risks: wildfires, insects, hurricanes, etc etc....certainly not as liquid or passive as index investing...& Calpers, et al probably didn't sell all their stock on the day the indexes were down 3% in one day

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Re: Timber as an alternative - didn't work so well...

Post by nisiprius » Thu Oct 11, 2018 1:18 pm

Swensen invested some of the Yale endowment fund in timber; anyone know how that's done?
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not4me
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Re: Timber as an alternative - didn't work so well...

Post by not4me » Thu Oct 11, 2018 1:52 pm

nisiprius wrote:
Thu Oct 11, 2018 1:18 pm
Swensen invested some of the Yale endowment fund in timber; anyone know how that's done?
I don't, but would be interested in hearing as well. I did a quick search to see what the "current" state is comparing "timber" to stocks. I use quotes because different sources use different methods as to what "timber" really includes. One such place is NCREIF -- National Council of Real Estate Investment Fiduciaries. I didn't attempt to delve into their numbers, but took what was readily available through another site quoting them. It compared the NCREIF Timberland Index against the S&P 500 for 1993-2017. I don't know why that time frame.

It had sp500 for that time period having a return of 9.69%, std dev 14.47%, and sharpe of 0.41. For timber, it had a return of 8.36%, std dev of 9.09%, and sharpe of 0.64. I would expect someone could shop around & find some time periods where it had a negative correlation, but I think it is now positive. By tweaking index & time period, this can get skewed to what you want to show ( I think ).

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Re: Timber as an alternative - didn't work so well...

Post by Whakamole » Thu Oct 11, 2018 2:12 pm

nisiprius wrote:
Thu Oct 11, 2018 1:18 pm
Swensen invested some of the Yale endowment fund in timber; anyone know how that's done?
I imagine if prices are low, he's not cutting it and is just letting the trees grow.

Hopefully there is also some diversity, both geographical and in the type of tree, given the size of the endowment fund. That's not something feasible if you are buying timberland yourself, unless you are going through a REIT.

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Re: Timber as an alternative - didn't work so well...

Post by BigMoneyNoWhammies » Thu Oct 11, 2018 2:21 pm

nisiprius wrote:
Thu Oct 11, 2018 1:18 pm
Swensen invested some of the Yale endowment fund in timber; anyone know how that's done?
I don't know about the Yale endowment specifically, but the article does mention that a lot of hedge funds and large institutional investors like pension funds and endowments invested in timber land back in the day as a portfolio diversifier and most have since sold off the land at a loss.

Also, many of the people who planted the timber didn't necessarily do it for just retirement investment purposes. Many in the south planted in the 80's due to the implementation of USDA's Conservation Reserve Program, where farmers are basically paid a set price per acre to keep some of their farm land as woodland or natural habitat.

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watchnerd
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Re: Timber as an alternative - didn't work so well...

Post by watchnerd » Fri Oct 12, 2018 12:58 am

My house is on about an acre of land, with about 70 trees on it, most of which are fir, spruce, and big leaf maple, 50-150 feet tall.

A cord of firewood around here goes for $50-100.

From what I can tell, it would cost me more to harvest the trees than any potential profit.
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Re: Timber as an alternative - didn't work so well...

Post by Valuethinker » Fri Oct 12, 2018 4:46 am

texasdiver wrote:
Wed Oct 10, 2018 1:46 pm
This article is about the south but I hear similar things to a lesser degree in New England. I have a cousin in Vermont who has what they call "wood lots" up there. Mostly hardwood for lumber and cord wood for sale as firewood. Apparently prices are also way down in the past 20 years for New England hardwood as well.

I guess less people are using firewood to heat their homes as in the past, and with places like Ikea and Wafair there is less demand for hardwood furniture and cabinetry.
I suspect it is the growth of composite timber products. Glue-lam (sp?) timbers that can span more space than all but the longest oak beams. We get a lot more product out of a volume of wood, now. That, at least, a major factor.

The thing that surprises me is that with the growth of Chinese demand (which has deforested Indonesia, Vietnam etc.) this hasn't affected US markets. Perhaps because of the transportation costs and mill availability mentioned above.

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Re: Timber as an alternative - didn't work so well...

Post by McGilicutty » Fri Oct 12, 2018 5:24 am

I've heard that there is good demand for white oaks that are turned into barrels for whisky and wine. Supposedly, the barrels can only be used once for whisky and then again for wine and then they are pretty much useless except for maybe as a lawn ornament.

As for firewood, my uncle says that there is money in it so long as you sharpen your own chainsaw. :D IOW, the margins are el zippo.

daheld
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Re: Timber as an alternative - didn't work so well...

Post by daheld » Fri Oct 12, 2018 7:22 am

McGilicutty wrote:
Fri Oct 12, 2018 5:24 am
I've heard that there is good demand for white oaks that are turned into barrels for whisky and wine. Supposedly, the barrels can only be used once for whisky and then again for wine and then they are pretty much useless except for maybe as a lawn ornament.

As for firewood, my uncle says that there is money in it so long as you sharpen your own chainsaw. :D IOW, the margins are el zippo.
Can confirm. I live in a part of the country that produces essentially all of the white oak used for barrel staves used for whiskey in America. We had 85 acres logged a couple years ago, and the payout was very, very well worth it. We have very little hardwoods that would be furniture grade (cherry, maple, etc.).

As for the discussion above, nobody is having timber cut for firewood--that is generally a process that happens after loggers leave and have harvested their cut. We literally let people come cut firewood for both their own use and to sell for free. It helps remove some of the undergrowth and brush and scrubby stuff left over from cutting timber, and they make a few bucks. Nobody's getting rich cutting or selling firewood.

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willthrill81
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Re: Timber as an alternative - didn't work so well...

Post by willthrill81 » Sun Oct 14, 2018 2:35 pm

Whakamole wrote:
Thu Oct 11, 2018 2:12 pm
nisiprius wrote:
Thu Oct 11, 2018 1:18 pm
Swensen invested some of the Yale endowment fund in timber; anyone know how that's done?
I imagine if prices are low, he's not cutting it and is just letting the trees grow.
A classic example of market timing*. One of the problems you can encounter with this approach is the risk of disease, storms, and the finite lifespan of 'modern' trees (i.e. hybridized versions bred to grow quickly but have far less density than uncultivated trees).
Old-growth wood refers to wood from trees that belonged to forests that grew up over hundreds of years. A majority of today’s lumber is harvested from trees that have been cultivated to grow rapidly, so the wood is not as dense. As a result, it is weaker and more susceptible to decay and instability.
https://www.bostonbuildingresources.com ... rowth-wood

*Being that I'm a trend follower, I don't have a problem with objective, rules-based market timing.
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ClevrChico
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Re: Timber as an alternative - didn't work so well...

Post by ClevrChico » Sun Oct 14, 2018 2:55 pm

Fascinating! I had this recommended to me about 20 years ago by a know it all type person. They also suggested landlording. I'm glad I ignored the noise and stuck to index funds.

I know a couple people that did the timber investment plan, and it's way too late to turn back now. I wonder if it will pay off at all.

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