USA: Mindset of the market when it comes to private forest

Timberland, which a few years ago became a popular investment among
institutions and wealthy folks, has held up amid market massacres for
most other assets lately. Through September 30, 2008, the value of
timberland rose 5%. When the National Council of Real Estate
Investment Fiduciaries reports 2008’s final quarter this week, this
number is unlikely to move much. That marks a slower pace of growth,
yet it is growth nonetheless. In 2007, timber appreciation was a
towering 15%. How can positive returns exist in these dark days of
shrunken prices for everything ranging from real estate to commodities
to stocks? Oil, after a summer price spike, was down 54% in 2008,
while corn lost 11% and copper 54%. Gold, as a refuge commodity, rose
6%. Prices for lumber, a key forest product, have fallen by 34% over
the past year as housing construction has ebbed.

The answer to this
riddle is that timberland is the ultimate long-term investment, with
relatively little bought and sold each year and demand still
respectable for what does change hands. “As long as the sun shines,
the trees will grow,” says Jeremy Grantham, chairman of Boston money
manager GMO and a long-time fan of timber investing. “Timber will
never be an orphan.” Timber often is likened to high-grade bonds,
meant to be held for 10 years or more. The average annual timberland
appreciation for the past decade is 4.1% versus minus 3.8% for the
Standard & Poor’s-500 stock index. The timberland appreciation figure,
which encompasses both the land and the trees, is based on sales and
appraisals. After 10 or 15 years, investors cash out when the land is
sold. On top of the appreciation, timber generates regular income.
Trees are constantly chopped down and sold for everything from boards
to paper mulch, albeit in smaller volumes these days. Cash returns
from thisharvesting, as it’s called, are now 1.5% of the property
value, down from 3% in 2007 and about 5% annually the three years
before that. Forester Dag Rutherford, a senior vice-president at Bank
of America’s U.S. Trust, knows timber is a long-term investment.

‘No quick pay-offs here.’ Nobody creates investor dividends quite so
dramatically as a woodsman. Standing amid 70-foot pines that thrust
into the cool New England air, Dag Rutherford, a rangy veteran
forester, gives the go-ahead to start the day’s cutting. “These trees
took decades to grow,” says Mr. Rutherford, a senior vice-president at
Bank of America’s U.S. Trust wealth-management unit, which runs this
tract for a rich family. “People still need wood.”This day’s tree
toppling, in the deep woods about 100 miles from Boston, should bring
up to $8,000 worth of lumber. The operation is masterfully efficient,
capable of felling around 80 trees in two hours. Time was, a
lumberjack with a chain saw would take a day to do that.
http://stephenlaughlin.posterous.com/investing-in-timber

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