What is a Timber Investment?

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AndroAsc
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What is a Timber Investment?

Post by AndroAsc »

I've noticed that there is a Timber category in the GMO forecast, and for some reason GMO chooses to identify this as a separate asset class. Does anyone know exactly what does a Timber Investment refer to? Is it supposed to be some kind of commodity like gold, and is it worth diversifying to? Where does timber investment lies in terms of tax efficiency?

EDIT: I stumbled across a few old threads and this website: http://georgenichols.com/publishedwriti ... /index.htm
Basically states that there is no good diversified instrument for this asset class. Any updates since then?
rayout
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Re: What is a Timber Investment?

Post by rayout »

Probably refers to Timber REITs. These REITs are able to shed their profits from the sale of timber as long term capital gains and thus are an option to hold outside tax deferred space: http://forisk.wordpress.com/2011/01/19/ ... dividends/
staythecourse
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Re: What is a Timber Investment?

Post by staythecourse »

Timber, as a true asset class, is when you actually own the trees themselves, NOT the timber REIT stocks.

There are TIMO's (Timber Management Org) that raise money and actually purchase forests and make money of growing and cutting their timber. GMO runs their own TIMO, I believe, along with Campbell group and Hancock TImber.

It seems it takes 1 mill. to enter this asset class, so that eliminates most.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
donfairplay
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Re: What is a Timber Investment?

Post by donfairplay »

staythecourse wrote: It seems it takes 1 mill. to enter this asset class, so that eliminates most.
Timber ETF, though.

Guggenheim Timber ETF (CUT.P)

I don't own it, but only because it doesn't have a pretty upward-sloping graph.

There really is an ETF for everything.

edit: Upon further research, that ETF just invests in the equities of timber companies. I'd have thought they would do something for the .70% expense ratio, but I would be wrong.
Last edited by donfairplay on Sun Feb 19, 2012 1:14 am, edited 1 time in total.
staythecourse
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Re: What is a Timber Investment?

Post by staythecourse »

donfairplay wrote:
staythecourse wrote: It seems it takes 1 mill. to enter this asset class, so that eliminates most.
Timber ETF, though.

Guggenheim Timber ETF (CUT.P)

I don't own it, but only because it doesn't have a pretty upward-sloping graph.

There really is an ETF for everything.
There is CUT and WOOD ETF, but neither are considered true plays in Timber.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
donfairplay
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Re: What is a Timber Investment?

Post by donfairplay »

Staythecourse, you are correct (like always).

Timber ETF with a .70% ER and it doesn't own any timber.

I'm about a million dollars short of the million dollar investment minimum - it's a damn shame I can't diversify into trees without 7 figures.
Valuethinker
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Re: What is a Timber Investment?

Post by Valuethinker »

AndroAsc wrote:I've noticed that there is a Timber category in the GMO forecast, and for some reason GMO chooses to identify this as a separate asset class. Does anyone know exactly what does a Timber Investment refer to? Is it supposed to be some kind of commodity like gold, and is it worth diversifying to? Where does timber investment lies in terms of tax efficiency?

EDIT: I stumbled across a few old threads and this website: http://georgenichols.com/publishedwriti ... /index.htm
Basically states that there is no good diversified instrument for this asset class. Any updates since then?
Endowments like Harvard and Yale have made a lot of money invested directly in privately owned forest.

I believe these are structured as 'private REITs'.

The analogy is to Commercial Real Estate Investment. Unless you have access to the TIAA RE annuity product, there's no good way for an individual American investor to invest in trees. in the case of CRE 'REIT wrecks' google search will tell you about some of the horror stories, and Swensen documents at least one.

Plumb Creek Timber (and perhaps Weyerhaueser?) are 2 large quoted timber plays in the USA, that might have some of the characteristics you seek.

Note timber is a bandwagon that may already have left town. Some of the low volatility is simply, as with CRE, that we can only value these things when timber changes hands-- a lagging indicator, whereas a quoted stock price is a leading indicator. Returns have been good, but a lot of money has flowed into the asset class.
SlowEddie
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Re: What is a Timber Investment?

Post by SlowEddie »

I own timber land as an investment and include it as part of my commodity allocation. My experience is that it is possible to buy timber land for less than $100,000, but you'll have to devote a lot of time chasing down bad leads (poor quality "stems"). Beware that non-diversified timber investments can lead to problems (disease, ice storms, blow downs, etc.) It helps to educate yourself on forestry or have a friend who's a forester.

The beauty of timber is that it grows for free (offset by related taxes and a little silvaculture expense). The bad news is it is a very long-term, illiquid investment. And it's a commodity, pure and simple. Pricing can and will be volatile. For example, 20 years or more ago, I forget, there was a boom in hard maple prices because the Japanese had a bowling craze and the demand for high-quality maple sky rocketed, then plummeted -- hard to see that one coming.

With great trepidation, I sort of disagree with ValueThinker. Timber was a crowded trade but the housing bust changed much of that. Many northern hardwoods took a 50% haircut and have not recovered to any great extent. There are some bargains to be found, but it's hard to find them through multiple listings. Here's a web site that specializes in forest land: http://www.fountainforestry.com/. I offer no opinion about their services or listings, but their web site, besides being a very clever marketing tool, offers quite a bit of insight.

Bottom line: It can be a great investment if you have a 20-year time frame. Preferably longer! It would help if you love large acreage for recreation purposes.

Ed
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Re: What is a Timber Investment?

Post by Valuethinker »

SlowEddie wrote:I own timber land as an investment and include it as part of my commodity allocation. My experience is that it is possible to buy timber land for less than $100,000, but you'll have to devote a lot of time chasing down bad leads (poor quality "stems"). Beware that non-diversified timber investments can lead to problems (disease, ice storms, blow downs, etc.) It helps to educate yourself on forestry or have a friend who's a forester.

The beauty of timber is that it grows for free (offset by related taxes and a little silvaculture expense). The bad news is it is a very long-term, illiquid investment. And it's a commodity, pure and simple. Pricing can and will be volatile. For example, 20 years or more ago, I forget, there was a boom in hard maple prices because the Japanese had a bowling craze and the demand for high-quality maple sky rocketed, then plummeted -- hard to see that one coming.

With great trepidation, I sort of disagree with ValueThinker. Timber was a crowded trade but the housing bust changed much of that. Many northern hardwoods took a 50% haircut and have not recovered to any great extent. There are some bargains to be found, but it's hard to find them through multiple listings. Here's a web site that specializes in forest land: http://www.fountainforestry.com/. I offer no opinion about their services or listings, but their web site, besides being a very clever marketing tool, offers quite a bit of insight.

Bottom line: It can be a great investment if you have a 20-year time frame. Preferably longer! It would help if you love large acreage for recreation purposes.

Ed
1. you are doing timber the 'right' way: ie a direct investment where you are in control of costs, aware of fundamental factors, market trends. This is not an informationally perfect market, there are high transactions costs, illiquidity etc.

2. you are not just disagreeing with me, rather you are showing more knowledge and insight.

My 'knowledge' is reading asset allocation papers and articles, where the comment has been made (about GMO) that indeed, Harvard and Yale and others have made out big on timber, but the 'cap rates' on timber plantations have fallen (ie there's less upside to go for) and indeed Harvard and Yale exited some of their investments.

I am hardly omniscient (ask my partner ;-)).

If we ever get, on this Forum, where we are afraid to disagree with 'Valuethinker' or 'JoeBloggs' because she writes a lot of commentary and/or reads around a lot, then we've lost the purpose of being here-- to educate and inform each other.

Occasionally you see me take on 'real authorities' around here when I think they are talking the equivalent of Botox (rhyming slang for English word relating to cows ;-)).
Last edited by Valuethinker on Sun Feb 19, 2012 9:04 am, edited 1 time in total.
Valuethinker
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Re: What is a Timber Investment?

Post by Valuethinker »

donfairplay wrote:Staythecourse, you are correct (like always).

Timber ETF with a .70% ER and it doesn't own any timber.

I'm about a million dollars short of the million dollar investment minimum - it's a damn shame I can't diversify into trees without 7 figures.
I think that is $1m ticket size, ie that would be your *minimum* investment into the fund? It's not total assets?

If you have nearly $1m to put into Timber, I would submit to you that you could own a diversified portfolio of stocks + TIPS bonds, perhaps some REITs, and basically just retire. (ie the implication would be that you had a net worth of at least $10m).
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Re: What is a Timber Investment?

Post by nisiprius »

A friend of mine had a relative who was a farmer and owned a woodlot. That definitely counts as "a timber investment."

Not quite sure how it happened. I don't think it was purchased as an investment, it was something that had been in the family for years, it was not unusual for farmers to own woodlots--I think they bought them literally to serve directly as sources of lumber and fuel for farm operations. The woodlot was some miles from the farm, nobody lived near it. Occasional problems with, yes, people coming in with saws and big trucks and stealing trees. I don't think it was a big item in his financial picture. He had some woodworking tools and sometimes made small items from his own wood.

Come to think of it, isn't that the sort of situation Robert Frost was talking about? "Whose woods these are I think I know/His house is in the village, though/He will not see me stopping here/To steal some trees and get some dough?" :)
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SlowEddie
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Re: What is a Timber Investment?

Post by SlowEddie »

donfairplay: $1 million is actually a low amount to join a TIMO. The Molpus Group, one of the big boys who manages timber for the Ivy League universities, had an entry price of $5 million, last I knew, and that's down from $50 million! I guess times are tough.

Valuethinker: Thanks for your reply. I take your comments as strong praise. I mostly lurk on this site to try to learn a few new things, and I've learned a few from you!
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Bruce
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Re: What is a Timber Investment?

Post by Bruce »

Rayout,
Thanks for sharing the link to the Forisk Blog, thought this Jan 2012 post was an interesting view,

“Aren’t shares in timber REITs similar to owning timberlands?” Sorry, no. Thanks for playing. When you own shares in a timber REIT, you don’t own timberland. You own a piece of a business, over which you have no control unless you are a major shareholder, that happens to generate revenue from selling trees and related activities. In theory, shares of timber REITs rise over time because they account for the trees and other products being produced and sold. As the economy improves, so do revenues and, assuming stable margins, profits to shareholders. In practice, the super liquidity of timber REIT equities also diminishes their diversification potential; timber REITs basically correlate to the S&P 500 over time.

Timberlands, on the other hand, are real assets. The challenge of the asset class over the past five years reflects a run-up in prices that outpaced housing markets and GDP growth. While interest in timberland assets remains extremely strong, we continue to reach for firm ground following a decade-long transfer of wealth from first-time buyers to early entrants exiting the timberland market."


regards
Bruce | | Winner of the 2017 Bogleheads Contest | | "Simplicity is the master key to financial success."
Valuethinker
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Re: What is a Timber Investment?

Post by Valuethinker »

SlowEddie wrote:donfairplay: $1 million is actually a low amount to join a TIMO. The Molpus Group, one of the big boys who manages timber for the Ivy League universities, had an entry price of $5 million, last I knew, and that's down from $50 million! I guess times are tough.

Valuethinker: Thanks for your reply. I take your comments as strong praise. I mostly lurk on this site to try to learn a few new things, and I've learned a few from you!
Eddie

1. if I see far, it is merely because I stand upon the shoulders of giants: I read William Bernstein in 1999, and Burton Malkiel in about 1985, and John Bogle at various points. Plus of course many of the storied posters here: Cyberbob, John Norstrad, The Finance Buff, Grabiner, Nisiprius, Swedroe, Dave S... I have missed a few.

2. that's both of us, then, who have learned.

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Re: What is a Timber Investment?

Post by rustymutt »

For years, investors have bought river bottom land in SE Kansas and planted walnut trees. Until the timber is mature enough to harvest for the wood, the trees fruit brings in revenues each year. Cattle or goats can also be grazing on the grasses that grow in these orchards.

That is a pure Timber investment in it's raw form.
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Re: What is a Timber Investment?

Post by NoRoboGuy »

A couple observations about the Plum Creek Timber (PCL) REIT. Plum Creek is the largest and most geographically diverse private landowner in the nation.

At the end of 2010, Plum Creek owned approximately 6.8 million acres of timberlands in 19 states.

The REIT's shares outstanding were 161.3 million shares as of the last report.

If you value the cost per acre as a function of the current price of the shares, that means the REIT values each acre at less than $923, not counting the discounted earnings valuation expressed using timber or land sales.

In the interest of disclosure, PCL is the only investment I hold that is a "single stock."
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Clearly_Irrational
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Re: What is a Timber Investment?

Post by Clearly_Irrational »

I looked into timber extensively since it has distinct characteristics from other investments. Sadly, there aren't any good funds that replicate the performance of direct timber ownership and that's a tad too expensive for my throw weight. If you've got a hefty net worth and are willing to put up with the hassle of direct ownership I think this could be a good way to use a small part of your investment dollars.
staythecourse
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Re: What is a Timber Investment?

Post by staythecourse »

Even though the publically traded timber reits are not a viable play for timber ke in mind they do have huge tax advantages. They are distributions are taxed as capital gains and not ordinary income.

Good luck
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Re: What is a Timber Investment?

Post by tadamsmar »

SlowEddie wrote:I own timber land as an investment and include it as part of my commodity allocation. My experience is that it is possible to buy timber land for less than $100,000, but you'll have to devote a lot of time chasing down bad leads (poor quality "stems"). Beware that non-diversified timber investments can lead to problems (disease, ice storms, blow downs, etc.) It helps to educate yourself on forestry or have a friend who's a forester.

The beauty of timber is that it grows for free (offset by related taxes and a little silvaculture expense). The bad news is it is a very long-term, illiquid investment. And it's a commodity, pure and simple. Pricing can and will be volatile. For example, 20 years or more ago, I forget, there was a boom in hard maple prices because the Japanese had a bowling craze and the demand for high-quality maple sky rocketed, then plummeted -- hard to see that one coming.

With great trepidation, I sort of disagree with ValueThinker. Timber was a crowded trade but the housing bust changed much of that. Many northern hardwoods took a 50% haircut and have not recovered to any great extent. There are some bargains to be found, but it's hard to find them through multiple listings. Here's a web site that specializes in forest land: http://www.fountainforestry.com/. I offer no opinion about their services or listings, but their web site, besides being a very clever marketing tool, offers quite a bit of insight.

Bottom line: It can be a great investment if you have a 20-year time frame. Preferably longer! It would help if you love large acreage for recreation purposes.

Ed
I own about 40 acres of timberland with my brother. We inherited it.

I noticed that people were saying that this and that was not a pure play in timber. Even timberland is not a pure play in timber. It's a play in timber and land!

In my case, I found that the county ranger, the county ag agent, people like that could put me in touch with free (government employee) advisors on timber. Or better than free, the government will actually cost share the planting of timber, I think they do it to to promote commerce and to get you to use good timber management practices (stream buffers for instance).

But government employees are not a good source on how to sell timber. I think they were sued or accused of interference with commerce or something, so they will not tell you what they really think about how to sell. I think the best way to sell timber is an auction. I paid a commission (10 or 15% I think) to a private forester (Dougherty and Dougherty) and the bid varied by a factor of 3 with the local mills low balling it. If I had just contacted some local mills, I would have sold for 1/3 of the auction value! Dougherty put out announcements to over 100 mills and the mill that bought was about 100 miles away from the timber.

Dougherty also underbid the government contractors for replanting seedlings.

Probably a good idea to get a good private forester involved as an advisor.

In the county where I own the timber, you get a big property tax break for 20 or more acres of timberland. So, it's a good way to hold land for appreciation.
Last edited by tadamsmar on Mon Feb 20, 2012 6:46 am, edited 1 time in total.
64415
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Re: What is a Timber Investment?

Post by 64415 »

Has anyone performed any due diligence on Roger Dickey in New Zealand? I know he offers direct timberland investment to the average retail investor in New Zealand. I asked for a prospectus a few years ago, but didn't take my research any further.
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Re: What is a Timber Investment?

Post by tadamsmar »

If you own timberland then timber price fluxuations are not always as big a risk as one might think. You don't have to sell timber the day it matures, you can wait for years for the price to come back up. A hurricane can knock down a bunch of houses and increase demand for a while. A hurricane can knock down a bunch of trees and increase supply for a while.

There are other related issues. I recall that when I was arranging to put in seedlings about 10 years ago there was a concern that Russia might get its act together and end up providing a lot more timber for market, since there was a potential there.
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Re: What is a Timber Investment?

Post by ladders11 »

donfairplay wrote:Staythecourse, you are correct (like always).

Timber ETF with a .70% ER and it doesn't own any timber.

I'm about a million dollars short of the million dollar investment minimum - it's a damn shame I can't diversify into trees without 7 figures.
I think that if regular people could invest in timber, it would not have any advantages. I would expect that the high historical returns of these assets derive from a period of bargain prices that existed in the 90s. From what I understand, it also requires considerable skill to manage.
louis c wrote:A couple observations about the Plum Creek Timber (PCL) REIT. Plum Creek is the largest and most geographically diverse private landowner in the nation.

At the end of 2010, Plum Creek owned approximately 6.8 million acres of timberlands in 19 states.

The REIT's shares outstanding were 161.3 million shares as of the last report.

If you value the cost per acre as a function of the current price of the shares, that means the REIT values each acre at less than $923, not counting the discounted earnings valuation expressed using timber or land sales.

In the interest of disclosure, PCL is the only investment I hold that is a "single stock."
I can only express caution about investing in PCL - one can't just consider it an asset class all to itself. Like any stock, returns will depend on the price paid, and it is likely that the better returns have been the result of purchases at a low PE and PB. If the PE and PB have been trending higher as the investment has picked up steam, then return expectations should be metered down likewise.

Even a reputable company has inherent single stock risks - fraud, liability, mismanagement. Sino-forest immediately comes to mind.

And to these concerns, we must consider that there could be a problem growing the company once it reaches a certain size. With PCL, this would mean the "the largest and most geographically diverse private landowner in the nation" getting even larger. Does this mean that they will have to press for performance? Can they manage their wealth at this size? Basically, it is time to roll-tape on the problems with active equity mutual funds, because most can be directly applied to active timber investment companies.
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Re: What is a Timber Investment?

Post by NoRoboGuy »

louis c wrote:A couple observations about the Plum Creek Timber (PCL) REIT. Plum Creek is the largest and most geographically diverse private landowner in the nation.

At the end of 2010, Plum Creek owned approximately 6.8 million acres of timberlands in 19 states.

The REIT's shares outstanding were 161.3 million shares as of the last report.

If you value the cost per acre as a function of the current price of the shares, that means the REIT values each acre at less than $923, not counting the discounted earnings valuation expressed using timber or land sales.

In the interest of disclosure, PCL is the only investment I hold that is a "single stock."
ladders11 wrote:I can only express caution about investing in PCL - one can't just consider it an asset class all to itself. Like any stock, returns will depend on the price paid, and it is likely that the better returns have been the result of purchases at a low PE and PB. If the PE and PB have been trending higher as the investment has picked up steam, then return expectations should be metered down likewise.

Even a reputable company has inherent single stock risks - fraud, liability, mismanagement. Sino-forest immediately comes to mind.

And to these concerns, we must consider that there could be a problem growing the company once it reaches a certain size. With PCL, this would mean the "the largest and most geographically diverse private landowner in the nation" getting even larger. Does this mean that they will have to press for performance? Can they manage their wealth at this size? Basically, it is time to roll-tape on the problems with active equity mutual funds, because most can be directly applied to active timber investment companies.
Agree on having caution due to single company risk. I think timber should be a limited part within a REIT allocation if you choose to have one at all. PCL is 1/3 of my 5% domestic REIT allocation (I have 4% allocated to foreign REIT). I think PCL is the closest thing to a proxy for raw timber, but it is only a proxy, certainly not the real thing.
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Re: What is a Timber Investment?

Post by dyangu »

louis c wrote: At the end of 2010, Plum Creek owned approximately 6.8 million acres of timberlands in 19 states.

The REIT's shares outstanding were 161.3 million shares as of the last report.

If you value the cost per acre as a function of the current price of the shares, that means the REIT values each acre at less than $923, not counting the discounted earnings valuation expressed using timber or land sales.
You forgot to add their debt.
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