With inflation expected to rise over the next few years as various quantitative easing programs come to a head and emerging markets continue to grow at a blistering pace, investors have clamored for all things commodities. From gold to corn, and from oil to copper, portfolios are now stuffed to the brim with various natural resources. Funds like the iShares S&P North American Natural Resources ETF (ARCA:IGE) have become standard portfolio additions. However, the overall run-up in prices and popularity of hard assets makes finding values in the sector difficult. One such value remains in the boring world of timber. The often-ignored asset class could be the key to long-term, inflation-beating returns.
Sowing the Seeds of Growth
With the American housing market still in the proverbial toilet, lumber seems like an unlikely portfolio candidate. However, growth abroad could help return American lumber exports to prominence, and timber companies appear positioned for sustainable, long-term growth. Global demand for timber continues to rise with China leading the way. According to a recent research paper by RISI, Chinese demand for timber in 2011 reached record levels and also showed a 30% rise to its timber demand deficit. This echoes similar findings by one of the largest lumber producers in the U.S., West Fraser Timber (OTCBB:WFTBF.PK). Company data show that the amount of timber shipped to China "picked up substantially" between the final quarter of 2011 and the first quarter of 2012. Analysts predict that China will need to import about 182 million cubic meters of wood by 2015. This is an increase of 70% from its current timber import level.
In the face of this rising demand is decreased production out of British Columbia. The Canadian province is the No.1 source for softwood lumber in the west and for exports to China. As both pine beetle and Asian longhorn beetle infestations have wreaked havoc on the region's forests, production has dwindled. As a result of this widespread outbreak, 80% of British Columbia's pine trees will be wiped out by 2013. In addition, any sort of housing rebound in the United States would put upward pressure on lumber pricing. Already there have been some signs of recovery, and a return to normal would lead to a doubling of the current new home construction rate.
Bullish demand aside, timber has historically been a great long-term investment. According to data provided by Forisk Timber Group, the timber sector has outperformed many other asset classes in annualized returns over the last 10 years. In 2011, a basket of timber companies returned 5.69%. That bested the total return of 2.11% for the S&P 500.
As Boring as It Gets
Given the long-term demand from emerging Asia, dwindling supplies and return to normalcy in the U.S. housing market, investors may want to give timber firms a go. While they certainly represent a slow and steady play, boring can be beautiful. The iShares S&P Global Timber & Forestry (Nasdaq:WOOD) ETF offers a broad play on the theme. It tracks 27 different forestry-related firms including MeadWestvaco (NYSE:MWV) and Potlatch (Nasdaq:PCH). The fund charges 0.48% in expenses and has a three-year annual return rate of 24.57%. Also offering a broad approach is the Guggenheim Timber ETF (ARCA:CUT).
Some of the more interesting plays may be found in individual companies. As the only MLP in the sector, Pope Resources (Nasdaq:POPE) is often overlooked by investors. However, that's a shame. Currently yielding 3.5%, Pope has had stellar earnings and managed to grow its distribution by 40% in 2011 alone. Also ignored by investors is Deltic Timber (NYSE:DEL) with its 445,800 acres of timberland in Arkansas and north Louisiana.
Finally, the REIT trio of Weyerhaeuser (NYSE:WY), Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN) all offer large land holdings, steady cash flows and high dividends. The three firms should be on the top of every timber investor's list.
Despite the fact that commodity fervor continues to enthrall investors, timber remains absent from many portfolios. However, it could be one of the best long-term values around. The previous firms, along with Fibria Celulose SA (NYSE:FBR), make ideal ways to play the asset class's steady and boring returns.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.