Sustainable Forestry

INVESTMENT FUNDAMENTALS

Assured Growth

Biological growth increases both the volume and value of the timber - as trees increase in diameter they are utilised for more valuable end products. This growth is predictable at the time of investment and at constant timber prices provides the investor with an assured return.

In the US, which has the longest run data, timber prices over the longer term have grown ahead of inflation, providing investors with long term stable real returns. With assured growth in volume this combination provides investors with a mechanism to preserve capital.

Cash flow largely arises from harvesting of the timber. The investor can time harvesting to suit cash flow requirements or in response to movements in timber price. The ability to effectively warehouse the asset at nominal cost, particularly in times of weak prices, allows value to accrue by leaving the trees to grow and await price recovery or to time cash flow to suit investors' requirements.

Risk Profile

A well structured, diversified sustainable timberlands portfolio has historically been shown to be a low risk investment, with minimal physical losses. In some instances, insurance against loss is available.

The primary risks are market risks of timber prices and forestry values, relative illiquidity compared to stocks and bonds, and physical risks of damage to the crop from weather, pests and disease which can be minimised through a diverse timberland portfolio. The main risk is the price of timber, a factor of supply and demand.

Timber prices have been relatively static over recent years and in some countries remain below peak levels in real terms. Timber has yet to experience the price hike seen in other commodities over the past two to three years, resulting from a rapid increase in demand combined with constrained supply. As the fundamentals are similar, a significant rise in price may occur.

Timber Demand

Timber is an internationally traded commodity. It has wide ranging traditional uses, from paper and packaging, through to pallets and fencing to high value construction and joinery. The utility products are generally made from softwoods (conifers) and the highest value products from hardwoods (broadleaves).

The uses of timber are now being extended to include biomass for electricity generation and bioethanol as a substitute for oil derived fuels, both from a non polluting source. These new markets are creating significant new demand for timber - demand which is forecast to grow.

For more detailed information please read FIM's paper - Forestry An Undervalued Resource 2009