Tags: paulownia, managed forests, US Forest Service, underserved peoples, PanAmerican Properties, PanAm Pro, ENOCIS, Enoch Olinga College
What are the characteristics of timberland as an investment?
Trees grow. The value of timber products in each tree tends to increase over time. That is, trees grow into more valuable products over time (pulpwood into saw timber into poles and plywood). Even with constant stumpage prices, tree volume increases and more valuable products are available for harvest, so value naturally increases over time. Timber investment usually involves an additional investment in land. However, investing in a managed forest, the entrepreneur relieves themselves of the cost of the land, maintenance and personnel costs involved with independent investment in timber. PanAmerican Properties, Inc. offers a lucrative investment opportunity whose proceeds rest in a tax free zone. Additionally the program restores deforested areas of the rainforest and creates jobs for the underserved peoples of Panama. Proceeds from the project are used to educate students of excellence by providing them scholarships via the Enoch Olinga College
Timber investments offer the flexibility in cash flows; timber sales can be timed for the market.
Timber investment typically involves a long time period. However, the age structure of purchased forest stands establishes the possible cash flows. Timber can be illiquid, but this can create buying opportunities for investors. Natural risks like diseases, insects and fire can cause losses, but mortality due to all causes is less than 0.5 percent in large holdings.
One of the advantages of the PanAm Pro project is the investor receives a deed which can be negotiated, sold or gifted to third parties.
The paulownia reforestation program offers a much faster and more lucrative turnaround of their assets. Traditionally, it takes twenty or more years before the investor receives a return with paulownia the first return on investment is within 12-18 months. A typical paulownia contract is ten years.
What factors influence the rate of return?
Changes in timber prices. Since World War II pine saw timber prices have exceeded inflation by 2 to 3 percent annually and pine pulpwood has kept up with inflation. USDA Forest Service projections are for continued real price increases.
Tree growth and yield. Tree growth is highly impacted by site quality and forest management intensity. Tree growth can be accurately predicted via computer models.
Changes in tree value. Forest management practices control stocking and influence the size of trees on a tract (and thus the products that can be produced). Overall value can be maximized.
Changes in land value. Increases in land value typically increase overall rates of return.
Costs. Cost effective forest management will result in higher rates of return. Rates of return of 13 to 16% can be generated in Canada and the USA compared with returns of 3 to 6% in UK and Europe with even higher rates of return in Panama the difference rates of return can be attributed to the cost of land and lower labor costs.
What rates of return have historically been earned by timber investments?
University studies show real rates of return in the 10 to 12 percent range can be reasonably expected. A leading timber index based on actual returns found rates of return vary from 11 to 16 percent depending on region. Since 1986 the major timberland property index has returned just over 16 percent annually (40% from income and 60% from capital appreciation).
Timber income represents a cash flow; how predictable is this cash flow?
Timber can produce a managed cash flow. Timber can be stored on the growing tree in bad markets and will grow in volume while stored. Age structure of the forest stands dictates cash flow opportunity and age structure is known at the time of investment.
Timber income will be impacted by:
Stumpage price change, which is a function of timber supply and demand. Government projections show real price increases should continue for the foreseeable future.
Land value changes will obviously affect returns. Government projections are for continued real land value increases.
Tree growth is a major impact and can be modeled by computer; the level of forest management greatly affects tree growth.
How risky is timberland investment?
Stumpage price, land price and tree growth can be considered risks. As discussed under predictable cash flows, diversification minimizes these risks. Control of age structure and storing wood on the growing tree reduce stumpage price risk. Land prices tend to be rather predictable; timber is usually not produced on development-type land. Tree growth is variable, but easily modeled on a computer. Geographic diversification minimizes mortality risk from fire, insects and disease (which average less than 1% on large forest properties).
How do timberland assets correlate with other financial assets?
Published studies demonstrate timberland assets show relatively strong negative correlation with all other major financial assets (treasury bills, government and corporate bonds, and stocks). Timberland assets have a low, but positive, correlation with inflation. Geographic diversification will lower the magnitude and volatility of timberland returns. Additional diversification occurs naturally; timber product prices (pulpwood, saw timber, poles, plywood, etc.) are only lowly correlated.
How volatile are timberland returns?
Like all investments, higher returns usually mean more volatility. Timberland lies above the "capital market line"--meaning it produces high returns relative to volatility. For example, from 1960 to 2001 stocks (S&P 500) returned 10.1 percent with a standard deviation of 16.6 percent, while timberland returned 12.6 percent with a standard deviation of 13.2 percent.
The Capital Asset Pricing Model shows timberland is a negative BETA and a positive ALPHA asset class. This suggests timberland is a "negative risk" investment and should be required to generate even less return than a risk-free investment. That is, timberland appears to be undervalued in term of returns generated relative to risk.
What is the outlook for timberland as an investment?
Institutional investors own over 4 million acres of timberland in the South. Within a decade, this is expected to exceed 12 million acres. Timberland has been shown to provide excellent portfolio diversification. It is negatively correlated with most other financial assets, including real estate, and positively correlated with inflation. Professional timber management investment organizations can easily manage investment risk via geographical diversification and proper forest management. Timberland is above the capital market line; or another way of saying that is it produces significant returns that exceed those expected for its risk level. Timberland is expected to experience dramatic increases in its share of institutional investment over the next decade. Timberland's historic returns justify this interest.
For more information on paulownia, you may visit the web site paulownianow an informative site with a lot of pictures and technical information. There is even a pictorial instruction on how to plant paulownia seeds which can be purchased from the institution by contacting them at info@paulownianow.org
For investment information on managed paulownia plantations you may contact PanAmerican Properties, Inc.
Powered by Qumana
