What Is a Timberland Investment?
Timber (lumber) is often seen as a good portfolio diversifier that can hedge against inflation. Timberland investment involves investment in land that producers timber. There are millions of acres of timberland in the U.S. that are owned by pension funds, charitable trusts, individual investors, and universities. Investors can own timberland through a variety of investment vehicles that have a stake in timberland.
- Timberland investments involve ownership of productive forest lands.
- Large institutional investors such as public and private pension funds primarily use timberland investment instruments.
- Timber ETFs (exchange-traded funds) are comprised of many companies that own forests and produce timber-related products.
- There are multiple ways in which investors can earn a rate of return on a timber investment including biological growth, and price and land appreciation.
Understanding Timberland Investments
The benefits of timberland investments arise from the tendency for demand in wood and lumber products to rise over the long term and are not directly linked to market forces that can affect other investment instruments like stocks and bonds. Steady growth is one of the reasons why timberland is used to diversify a portfolio and as an inflation hedge.
Investors can take a position in timber by investing in timber ETFs (exchange-traded funds), which are comprised of many companies that own forests and produce timber-related products. Also, investors can invest in REITs (real estate investment trusts) that contain one owner of forested land and produce timber-related products.
Timberland investment instruments are primarily used by large institutional investors such as public and private pension funds whereby the two main underlying assets are tree farms and managed natural forests. A Timber Investment Management Organization (TIMO) is a financial management group that aids institutional investors in managing their timberland investment portfolios. A TIMO acts as a broker for institutional clients to find, analyze and acquire investment properties that would best suit their clients.
Timberland is often seen as a good portfolio diversifier since it is not typically correlated with stocks and bonds and tends to be a good hedge against inflation.
Making a Profit with Timberland
Upward product class movement occurs when trees grow and mature over time, the number of applications for timber increases. For example, trees that are used to make paper typically take over ten years to grow before they can be used for paper products.
There are a few sources from which investors can earn a positive rate of return on a timber investment.
Biological growth means that as trees grow, they increase in weight and density. As biological growth adds volume, the trees become more valuable on a per-ton basis as they can be used for larger and more unique projects, or else can produce more standard lumber per tree.
Land appreciation can occur if the timber is located on valuable real estate. For example, if the forested land is located near a populated area, the land could be converted to a golf course or shopping mall after the timber has been harvested.
Timber price appreciation can occur as demand for housing increases. Softwood is typically used in the construction of homes. As a result, an expansionary economy and housing market might lead to increases in timber since demand would be high for softwood.
Steady growth is one of the reasons why timberland is used to diversify a portfolio and as an inflation hedge.
Risks of a Timberland Investment
Timberland investments are not perfect investments meaning they are vulnerable to risks, which can include:
- Demand for lumber can fall during a recession, causing prices to fall in turn.
- Natural disasters can destroy the forestland eroding an investment.
- Housing market downturns can hurt demand for timber resulting in lower prices.
Real-World Examples of Timberland Investments
There are a number of ways to invest in timberland besides buying the land as an individual investor. Some of those investment vehicles include:
Guggenheim Timber (CUT) is an ETF that consists of over two dozen companies that produce timber products or own forestland. The dividend yield on this global timber fund is typically over 3% per year.
The iShares S&P Global Timber & Forestry Index ETF (WOOD) tracks the S&P Global Timber & Forestry Index and typically produces a dividend yield of over 2.5%.
Weyerhaeuser Company (WY) is a REIT that invests in forestland in order to manufacture, sell, and distribute forest products. Weyerhaeuser Co. is one of the largest owners of forestland in the world.