Author Topic: a true non-market correlated long-term investment: forestry  (Read 12025 times)

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
So here's the deal. You can buy a share in a forest planted in 1994 and growing solidly in an area of lumber harvesting in an OPEC country.

cost today: $35k. No further cash calls until harvest in 2024/2025. At current log prices, net return will be $118k.

forest is insured for fire. Professionally managed and independently audited financially and horticulturally.

The value depends on essentially the real prices of logs and pulp in 2025. If it stays as is, no real increase other than inflation, this would give a cagr of 13% per year, regardless of anything but some rain and sunshine.

I think it offers a great diversification. It is also tradeable, hence the opportunity. Opinions?
« Last Edit: May 29, 2014, 12:47:11 PM by Mr Mark »

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8895
  • Registered member
Re: a true non-market correlated long-term investment: forestry
« Reply #1 on: May 29, 2014, 01:11:36 PM »
What are the risks and where do you buy?

Cinder

  • Bristles
  • ***
  • Posts: 468
  • Location: Central PA
Re: a true non-market correlated long-term investment: forestry
« Reply #2 on: May 29, 2014, 02:37:07 PM »
I really hope we eventually reach a point where growing industrial hemp is no longer illegal across the entire US (You can do it now in CO).  That would be my only worry that could/would limit the value of lumber.  You can create a bunch of things that we currently rely on paper for out of hemp, which grows faster, is more sustainable, and costs less.

Interesting discussion!

butchmonkey

  • 5 O'Clock Shadow
  • *
  • Posts: 73
Re: a true non-market correlated long-term investment: forestry
« Reply #3 on: May 29, 2014, 02:56:00 PM »
Tough to know whether or not there's a diversification benefit unless you have a price history to compare against other asset classes.

If you have the information, please share.

I would be particularly interesting to see its behavior relative to other commodities.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: a true non-market correlated long-term investment: forestry
« Reply #4 on: May 29, 2014, 03:03:13 PM »
Do you understand why you are getting such a high return? What are the risks you assuming. If there were no risks, ever pension manager in the country would be flooding them with case. And no the reason they are not doing it is not because they don't know about it. Maybe they are worried that the local shieks nephews sister brother is going to sell 10% to a friend at a huge discount.:) If you understand the market, feel free to invest. But don't do it because you got an email from someone who make some good points.

So here's the deal. You can buy a share in a forest planted in 1994 and growing solidly in an area of lumber harvesting in an OPEC country.

cost today: $35k. No further cash calls until harvest in 2024/2025. At current log prices, net return will be $118k.

forest is insured for fire. Professionally managed and independently audited financially and horticulturally.

The value depends on essentially the real prices of logs and pulp in 2025. If it stays as is, no real increase other than inflation, this would give a cagr of 13% per year, regardless of anything but some rain and sunshine.

I think it offers a great diversification. It is also tradeable, hence the opportunity. Opinions?

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1088
Re: a true non-market correlated long-term investment: forestry
« Reply #5 on: May 29, 2014, 03:07:19 PM »
Do you understand why you are getting such a high return? What are the risks you assuming. If there were no risks, ever pension manager in the country would be flooding them with case. And no the reason they are not doing it is not because they don't know about it. Maybe they are worried that the local shieks nephews sister brother is going to sell 10% to a friend at a huge discount.:) If you understand the market, feel free to invest. But don't do it because you got an email from someone who make some good points.

So here's the deal. You can buy a share in a forest planted in 1994 and growing solidly in an area of lumber harvesting in an OPEC country.

cost today: $35k. No further cash calls until harvest in 2024/2025. At current log prices, net return will be $118k.

forest is insured for fire. Professionally managed and independently audited financially and horticulturally.

The value depends on essentially the real prices of logs and pulp in 2025. If it stays as is, no real increase other than inflation, this would give a cagr of 13% per year, regardless of anything but some rain and sunshine.

I think it offers a great diversification. It is also tradeable, hence the opportunity. Opinions?

I am very vaguely aware of a collapse and some apparent misdoing in connection with such investments in or through Australia. Might start with that as a window into risks foobar has mentioned.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 40
  • Location: Texas
Re: a true non-market correlated long-term investment: forestry
« Reply #6 on: May 29, 2014, 03:40:26 PM »
Do you understand why you are getting such a high return? What are the risks you assuming. If there were no risks, ever pension manager in the country would be flooding them with case. And no the reason they are not doing it is not because they don't know about it. Maybe they are worried that the local shieks nephews sister brother is going to sell 10% to a friend at a huge discount.:) If you understand the market, feel free to invest. But don't do it because you got an email from someone who make some good points.

Well actually I think endowments and pension funds have been investing in forestry land for quite a while. http://www.scoop.co.nz/stories/BU1212/S00727/canadian-pension-fund-likes-nz-forest-growing-conditions.htm
http://www.businessweek.com/articles/2012-09-20/can-timber-rebuild-harvards-endowment

But I don't think it's for higher returns. I think it's for uncorrelated returns.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: a true non-market correlated long-term investment: forestry
« Reply #7 on: May 29, 2014, 03:56:51 PM »
Yes but are they investing in this one or passing it by? Why don't they shove 100% of their money in here if it is safe because 13% CAGR is more than acceptable over any 10 year period. I am not saying you will not get a 13% return. What I am saying is that you should also be prepared for a 100% loss.  That being said,  I wouldn't watch pension funds too closely for advice on how to invest. I think CalPers has bought high and sold low into every asset bubble for the past 30 years:)

I would be worried that I am missing something (i.e. the trees they are growing are best for paper while the demand is for lumber) when investing in an area far outside of my norm when the experts pass it up. If you understand the risks and think the experts is wrong, go for it. If you don't see any risks, be careful.



Do you understand why you are getting such a high return? What are the risks you assuming. If there were no risks, ever pension manager in the country would be flooding them with case. And no the reason they are not doing it is not because they don't know about it. Maybe they are worried that the local shieks nephews sister brother is going to sell 10% to a friend at a huge discount.:) If you understand the market, feel free to invest. But don't do it because you got an email from someone who make some good points.

Well actually I think endowments and pension funds have been investing in forestry land for quite a while. http://www.scoop.co.nz/stories/BU1212/S00727/canadian-pension-fund-likes-nz-forest-growing-conditions.htm
http://www.businessweek.com/articles/2012-09-20/can-timber-rebuild-harvards-endowment

But I don't think it's for higher returns. I think it's for uncorrelated returns.

FIPurpose

  • Handlebar Stache
  • *****
  • Posts: 1204
  • Location: WA
    • FI With Purpose
Re: a true non-market correlated long-term investment: forestry
« Reply #8 on: May 29, 2014, 04:05:07 PM »
What are the risks and where do you buy?

Southern California. Practically free money!

Grateful Stache

  • Stubble
  • **
  • Posts: 196
Re: a true non-market correlated long-term investment: forestry
« Reply #9 on: May 29, 2014, 04:38:27 PM »
Practically free money!

Nothing is free.

butchmonkey

  • 5 O'Clock Shadow
  • *
  • Posts: 73
Re: a true non-market correlated long-term investment: forestry
« Reply #10 on: May 29, 2014, 04:49:06 PM »
Anyone want to invest in a bridge in Brooklyn?

It's got low correlation and high returns (13.5 %).

Send money orders to

Butch monkey
PO box 1212
Cayman Islands, 001-4589

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8895
  • Registered member
Re: a true non-market correlated long-term investment: forestry
« Reply #11 on: May 29, 2014, 08:35:12 PM »
Anyone want to invest in a bridge in Brooklyn?

It's got low correlation and high returns (13.5 %).

Send money orders to

Butch monkey
PO box 1212
Cayman Islands, 001-4589

I sent the money but I have to pay the import tax before they will release the funds.  Unfortunately I sent all I had!  So I'm going to need you to front me the 1% tax on $1,0000,00 million USD is $1,0000.  Please remit payment immediately.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 40
  • Location: Texas
Re: a true non-market correlated long-term investment: forestry
« Reply #12 on: May 29, 2014, 08:35:35 PM »
Foobar I hear what you're saying and I agree with you. I was just speaking about pension funds in general. And yes they can make some stupid decisions. As far as this particular investment, we're all making an assumption about what the price of lumber will be in 10 years. But nobody knows what it'll be. You could make 20 percent a year or you could make a negative return. That and a host of other risks since it's not in the US.

butchmonkey

  • 5 O'Clock Shadow
  • *
  • Posts: 73
Re: a true non-market correlated long-term investment: forestry
« Reply #13 on: May 29, 2014, 08:54:49 PM »

Anyone want to invest in a bridge in Brooklyn?

It's got low correlation and high returns (13.5 %).

Send money orders to

Butch monkey
PO box 1212
Cayman Islands, 001-4589

I sent the money but I have to pay the import tax before they will release the funds.  Unfortunately I sent all I had!  So I'm going to need you to front me the 1% tax on $1,0000,00 million USD is $1,0000.  Please remit payment immediately.

That's terrible.

I'm going to send you $1,00000,00,0000,0,00

Please send me your address in an envelope along with  10% for postage.


Sent from my iPhone using Tapatalk

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3715
  • Age: 41
  • Location: USA
Re: a true non-market correlated long-term investment: forestry
« Reply #14 on: May 29, 2014, 09:17:49 PM »
I love the idea and have been planning a smaller, back door approach to this for a long time. I love farms and rural land. I will purchase a large (40+ acres) piece of property in the country some day to farm, fish, hunt,  etc.

I've often thought of subsidizing this purchase with a sustainable logging plan. I know a guy that does this for a living with some state run forestry organization.  I think given enough time this very unmastachian purchase could pay for itself while at the same time keeping the planet green.

BFGirl

  • Pencil Stache
  • ****
  • Posts: 719
Re: a true non-market correlated long-term investment: forestry
« Reply #15 on: May 30, 2014, 05:34:12 AM »
I think that timber can be a good investment in the right circumstances.  My Dad inherited a share of several hundred acres in the southern U.S.  It was heavily forested and they sold some of the timber on it (and replanted).  However, I would be wary of investing in timber in the situation you are describing.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #16 on: May 30, 2014, 06:34:09 AM »
Don't worry, its not a nigerian scam!

I already have a piece of one forest these guys manage, bought it it mid nineties. But there are a few shares in a few different forests for sale in the secondary market.

Risks. Yes, there could be a big fall in log prices in 2024, although you can mitigate that by altering harvest a year or two earlier or later. There is some currency risk, as the purchase is in NZ$, but log prices are based on international prices,  so should not be a big risk. If the dollar falls, log prices will rise. 

But it's an attractive option to pick up another piece of forest at 13% cagr. Post - tax that would drop to about 9.5% cagr. I disagree that there is significant risk of capital loss. NZ is a pretty stable place. And you are insured for fire.

« Last Edit: May 30, 2014, 08:07:30 AM by Mr Mark »

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 40
  • Location: Texas
Re: a true non-market correlated long-term investment: forestry
« Reply #17 on: May 30, 2014, 09:33:34 AM »
I think that timber can be a good investment in the right circumstances.  My Dad inherited a share of several hundred acres in the southern U.S.  It was heavily forested and they sold some of the timber on it (and replanted).  However, I would be wary of investing in timber in the situation you are describing.

My grandpa has been actively trading individual stocks for over 60 years. However, his best investments have been land holdings. He never wants to see land just sit there and not produce income so growing trees or running cattle is always going on. His advice to me was to always use a broker for selling the timber. Grandpa is cheap as dirt but tells me they are worth every penny.

Also, never sell the mineral rights. I don't know how many millions of dollars he's made over the years from all the mineral rights he owns around East Texas. Shale boom = $$$

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #18 on: May 30, 2014, 10:49:51 AM »

...

My grandpa has been actively trading individual stocks for over 60 years. However, his best investments have been land holdings. He never wants to see land just sit there and not produce income so growing trees or running cattle is always going on. His advice to me was to always use a broker for selling the timber. Grandpa is cheap as dirt but tells me they are worth every penny.

Also, never sell the mineral rights. I don't know how many millions of dollars he's made over the years from all the mineral rights he owns around East Texas. Shale boom = $$$

ahh, America!  Minerals elsewhere are strictly the government ( except parts of Canada maybe).

What I like is that a forest is essentially a super long term crop. The growth in cagr is not a wacky prediction on the future of the sp500 or bonds, but represents actual real trees growing bigger every year in an example of actual compound growth.

warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: a true non-market correlated long-term investment: forestry
« Reply #19 on: May 30, 2014, 11:09:01 AM »
What I like is that a forest is essentially a super long term crop. The growth in cagr is not a wacky prediction on the future of the sp500 or bonds, but represents actual real trees growing bigger every year in an example of actual compound growth.
This is a nice idea but it doesn't reflect reality. Trees that grow twice as fast don't produce twice the investment returns; on the contrary, their returns would be lower because the investment matures sooner and there is less risk related to the future price of lumber. (Also, trees probably do not grow exponentially.)

The growth of an investment in lumber is an effect of supply and demand for lumber and the land used to produce it. Market prices for any kind of investment are based on the future payouts and their uncertainties; what you call "wacky predictions".
« Last Edit: May 30, 2014, 11:14:54 AM by warfreak2 »

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #20 on: May 30, 2014, 12:39:16 PM »
Warfreak2,

no. You're incorrect. You plant trees, buy land. Then the trees literally grow, thanks to mother nature. You could cut them down in 4 years, but that would be silly. The point is that as the trees mature, the loggable ft increases. Pulp volume per acre increases. It's literally a crop. Just it takes 30 years to grow. The trees are genetically developed and selected clones. Growing trees for money is big business in new zealand. Google away.

If you believe people will still want 4x2 and paper products in 2025, you're good. I think likely the price of ethical timber by 2025 will command a huge premium, vs stripping rain forest... I see it as a super safe investment.  Remember you also own the land. That cagr assumes zero value for that...

warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: a true non-market correlated long-term investment: forestry
« Reply #21 on: May 30, 2014, 01:27:13 PM »
You plant trees, buy land. Then the trees literally grow, thanks to mother nature.
Having sat through high school science lessons while ingesting a minimal amount of paste, let's suppose I know what a tree is.

Quote
If you believe people will still want 4x2 and paper products in 2025, you're good. I think likely the price of ethical timber by 2025 will command a huge premium, vs stripping rain forest... I see it as a super safe investment. 
Uh, yeah, that's the point. (What was I supposed to be wrong about?) Your investment growth comes from the future price of timber, compared to the value of the land it's grown on. You have confidence that the price of your timber will be high in 11 years' time; that is your "wacky prediction".

If everyone was as confident as you about the safety of your investment, more people would buy land and grow timber, increasing demand for land and supply of future timber, lowering your returns to the point where they match, say, 30-year bonds. Now, it could be that you alone recognise the safety of your investment, but there's quite a lot of people who seem to think they are the only genius in the world, and at most one of them is right about it (spoiler: none of them are).

Point being that supply and demand determine the price of (and hence return on) an investment, same as they determine the price of most everything else. Supply and demand drive your investment return so that it matches other investments of similar risk. You aren't getting 13% CAGR for taking on minimal risk, not over a 30-year period.

Quote
Remember you also own the land. That cagr assumes zero value for that...
So the analyst who calculated your return on investment will be fired, because evidently you can do their job better? Either that or if you're just buying a share of the harvest, you don't own the land.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #22 on: May 30, 2014, 01:43:07 PM »
Thank you warfreak2

I think you aptly demonstrate why its a good investment that deviates from standard investors.

warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: a true non-market correlated long-term investment: forestry
« Reply #23 on: May 30, 2014, 03:17:51 PM »
Well, if you want to believe you're the genius investor who found the low-risk/high-return asset everybody else is somehow too stupid to notice, go ahead.

But a quick trip to Google confirms what the market price of the investment already revealed:
  • Your investment is risky primarily because it depends on the future price of timber.
  • But you also have what's known as "illiquidity risk", meaning that there aren't many buyers, and if you need to sell your share in the meantime, you might not get a fair price for it.
  • Plus "volume risk", the trees might not grow as tall as expected, or the number of trees might have been overestimated.
  • Fire isn't the only danger to the timber itself - trees can also be lost to disease and theft.
  • If the land is discovered to be the habitat of an endangered species, or new environmental legislation is enacted, harvesting might become forbidden by law.

The bottom line is that you can buy a share for as little as $35k because that's what the people who did their homework are willing to pay. If they thought the risk was lower than the S&P500's risk, they'd be willing to pay more per share and accept 11% CAGR, because that would still be better than investing in the S&P500. And lots of people who do their homework do invest in the S&P500.

That's not to say it's a bad investment! As far as I know, it's a perfectly good high-risk/high-return asset class that is largely uncorrelated with many other asset classes. You'll notice that I never advised against it... I'm only saying that it's not a "super safe investment", there is no "super safe investment" that returns 13%. You're making a prediction about future prices, just like investing in the stock market, except the risk is concentrated on the price of just one product, not diversified amongst all of the products and services of 500 different large companies.
« Last Edit: May 30, 2014, 03:20:36 PM by warfreak2 »

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: a true non-market correlated long-term investment: forestry
« Reply #24 on: May 30, 2014, 04:26:10 PM »
BTW where did you hear about this investment? Was it being marketed, read in a magazine, investment newsletter, blog post,...?

beltim

  • Magnum Stache
  • ******
  • Posts: 2852
Re: a true non-market correlated long-term investment: forestry
« Reply #25 on: May 30, 2014, 04:31:00 PM »
BTW where did you hear about this investment? Was it being marketed, read in a magazine, investment newsletter, blog post,...?

And also, is there a link so that others may check it out?

Mustache Police

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: a true non-market correlated long-term investment: forestry
« Reply #26 on: May 30, 2014, 06:27:46 PM »
Well, if you want to believe you're the genius investor who found the low-risk/high-return asset everybody else is somehow too stupid to notice, go ahead.

But a quick trip to Google confirms what the market price of the investment already revealed:
  • Your investment is risky primarily because it depends on the future price of timber.
  • But you also have what's known as "illiquidity risk", meaning that there aren't many buyers, and if you need to sell your share in the meantime, you might not get a fair price for it.
  • Plus "volume risk", the trees might not grow as tall as expected, or the number of trees might have been overestimated.
  • Fire isn't the only danger to the timber itself - trees can also be lost to disease and theft.
  • If the land is discovered to be the habitat of an endangered species, or new environmental legislation is enacted, harvesting might become forbidden by law.

The bottom line is that you can buy a share for as little as $35k because that's what the people who did their homework are willing to pay. If they thought the risk was lower than the S&P500's risk, they'd be willing to pay more per share and accept 11% CAGR, because that would still be better than investing in the S&P500. And lots of people who do their homework do invest in the S&P500.

That's not to say it's a bad investment! As far as I know, it's a perfectly good high-risk/high-return asset class that is largely uncorrelated with many other asset classes. You'll notice that I never advised against it... I'm only saying that it's not a "super safe investment", there is no "super safe investment" that returns 13%. You're making a prediction about future prices, just like investing in the stock market, except the risk is concentrated on the price of just one product, not diversified amongst all of the products and services of 500 different large companies.

Great ananlysis.  Spot on.

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: a true non-market correlated long-term investment: forestry
« Reply #27 on: June 01, 2014, 03:45:51 PM »
So here's the deal. You can buy a share in a forest planted in 1994 and growing solidly in an area of lumber harvesting in an OPEC country.

cost today: $35k. No further cash calls until harvest in 2024/2025. At current log prices, net return will be $118k.

forest is insured for fire. Professionally managed and independently audited financially and horticulturally.

The value depends on essentially the real prices of logs and pulp in 2025. If it stays as is, no real increase other than inflation, this would give a cagr of 13% per year, regardless of anything but some rain and sunshine.

I think it offers a great diversification. It is also tradeable, hence the opportunity. Opinions?

I own timber land and your 13% number sounds outrageously optimistic absent some serious leverage or hidden information you aren't revealing. Usually timber can be expected to average growth between 3-6% per year until harvest on top of inflation. So 8% or even 9% would be reasonable, but 13%? Sounds fishy. Trees just don't grow that fast, not even pine.

That said, timber land can be an exceptionally good diversifier to equities and is an all-around solid investment if you do it right.
« Last Edit: June 01, 2014, 03:53:03 PM by kyleaaa »

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #28 on: June 01, 2014, 04:49:08 PM »
Kyleaaa,

you obviously don't know much about growing trees in New Zealand. They use pinus radiata, aka monterey pine, already the fastest growing of all pine species, they have selectively bred them for the past 60 years so they grow even faster and straighter with disease resistance.

they go from seedlings to mature for harvest in 25 years.

The company I already have one forest with have been growing them over 30 years, and they have loads of forests all the way through the life cycle, from new plantings to those being harvested now, to replanted forests already on round 2. The growth rates are measured and estimates from an independent forest auditor.

But I appreciate the heads up.

warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: a true non-market correlated long-term investment: forestry
« Reply #29 on: June 01, 2014, 05:17:10 PM »
As pointed out before, the investment's rate of return is not the speed that the trees grow at. That's largely irrelevant, though faster growth should mean a sooner maturity date, lower risk, and hence lower returns. Like, the average seedling is something like 3 grams, and a 25-year-old pine tree is something like 1.7 tonnes, so on average they grow 56%/year... yeah, no. What matters is how much you can sell the timber for at the end.

deborah

  • Walrus Stache
  • *******
  • Posts: 9138
  • Location: Australia or another awesome area
Re: a true non-market correlated long-term investment: forestry
« Reply #30 on: June 01, 2014, 05:27:37 PM »
In Australia there were many forestry schemes that parted people from their money a decade ago. In several of the more dubious schemes you bought x trees. One thing they don't tell you is that as the trees grow they need more room, so some of the trees are removed (of course some also die). I am not saying NZ schemes are the same, but anything in primary industry that is talking about a "normal" product, with that sort of return, just doesn't seem reasonable.

MustacheCowboy

  • 5 O'Clock Shadow
  • *
  • Posts: 25
  • Location: Pennsylvania
Re: a true non-market correlated long-term investment: forestry
« Reply #31 on: June 01, 2014, 05:47:46 PM »
The timber industry in the US is coming out of the worst 5 year cycle  ever. It's success correlates to the success of the house industry (think construction starts). I work for a company who finances timberland purchases etc and we have seen millions of $$$ in net worth evaporate over the last few years. Timber can have a place in a portfolio like anything else but like any commodity it can be volitile. Do your research and nothing is guaranteed.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: a true non-market correlated long-term investment: forestry
« Reply #32 on: June 01, 2014, 07:31:45 PM »
Mr Mark, how do you compare these private investments to publicly traded timber REITs (PCL, RYN for instance) that essentially do the same thing, but have the benefit of better liquidity and transparency?

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: a true non-market correlated long-term investment: forestry
« Reply #33 on: June 01, 2014, 09:25:53 PM »
Kyleaaa,

you obviously don't know much about growing trees in New Zealand. They use pinus radiata, aka monterey pine, already the fastest growing of all pine species, they have selectively bred them for the past 60 years so they grow even faster and straighter with disease resistance.

they go from seedlings to mature for harvest in 25 years.

The company I already have one forest with have been growing them over 30 years, and they have loads of forests all the way through the life cycle, from new plantings to those being harvested now, to replanted forests already on round 2. The growth rates are measured and estimates from an independent forest auditor.

But I appreciate the heads up.

I'm quite familiar with monterey pines, as I've grown them, and the numbers still don't add up. Unless you happen to be growing them next to a super-highway right by the port. Then you'd probably get a higher than market price.

But fine, whatever you say. Generations of expert experience in the industry is wrong and you are right. Nothing could possibly go wrong. Have at it. Let me ask you this: do you actually grow the forests yourself and actively manage them or do you just invest through a company that does everything for you?
« Last Edit: June 01, 2014, 09:30:24 PM by kyleaaa »

ljp555

  • 5 O'Clock Shadow
  • *
  • Posts: 32
  • Location: San Jose, CA
Re: a true non-market correlated long-term investment: forestry
« Reply #34 on: June 01, 2014, 10:06:51 PM »
Quote
The timber industry in the US is coming out of the worst 5 year cycle  ever. It's success correlates to the success of the house industry (think construction starts).

This. I sold some inherited timberland a few years ago, when prices were down historically due to weak housing market (thus weak market for new construction).

electriceagle

  • Bristles
  • ***
  • Posts: 491
Re: a true non-market correlated long-term investment: forestry
« Reply #35 on: June 02, 2014, 07:59:57 AM »
That's a long time range and the politics may change. Your "OPEC country" may have a revolution or three and decide that foreigners should no longer be allowed to own their precious timber land.

Leisured

  • Pencil Stache
  • ****
  • Posts: 598
  • Age: 74
  • Location: South east Australia, in country
  • Retired, and loving it.
Re: a true non-market correlated long-term investment: forestry
« Reply #36 on: June 03, 2014, 01:49:34 AM »
Warfreak2 pointed out the apparent lack of liquidity in this investment. If management becomes incompetent or criminal in the future, can you sell your holding quickly? And as electriceagle pointed out, there is 'political' risk as well.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #37 on: June 03, 2014, 09:49:27 AM »
Thanks to all the commenters. Re-reading my posts I was being very defensive, and sorry for that, it wasn't my intention.  ( my tablet also autocorrected OECD to OPEC in the OP, so that didn't help)

But it did make me relook at the details behind the numbers and the risks. The prospectus was quite comprehensive and very transparent, but seeing it from your pov as non-new zealanders, was an eye opener. But it totally explains why returns may be higher as your risk views are incorporated into the price, which can create an opportunity.

First a comment on general risks.
NZ economy, stability, etc. I dont believe this is a big risk at all, except for possible tax increases on investments/ company tax ( currently the numbers assume a current 33% tax on profits when cal. after tax returns). Fair enough, although possibly offset by fact the rate is already high, and could come down! It's rated in the lowest risk category for FDI.

NZ$ exposure. NZ currency floats but central bank highly respected and interest rates are ok. Kiwi dollar is trading at a near high to US$. Offset by fact the trees will be primarily for export, and prices are thus effectively set in US$ anyhow.

Legal framework, management company, etc. Yes, always some residual risk I guess, and no federal deposit insurance (!), but the company is well respected in the industry,  operating since 1972, and company you are investing in as a limited liability partner is audited annually, plus cashflow is minimal because these forests are already planted for 15 years or so, so there are no forward cash calls, all the money has been spent and now the trees are just growing. The companies carry no leverage at all, and own land freehold. The management company can demonstrate successfully operated forests all the way to replanted forests past harvest, so they have a track record of performance. It's good enough for me. Their communications over the past years with my existing forest investment has been outstanding, and every year the local investors meet up actually physically at the forest and discuss it with the independent forest auditor.

Specific risks wrt that 13%cagr and the investment inself:
The return has been estimated using a suite of assumptions about the future: harvest volumes based on observed growth to date and projections based on decades of research by an independent review. But actual grades and volumes could be a bit different on both upside and downside by 10%. Costs to harvest again are just a rough estimate based on other nearby forests and will need to be worked out closer to harvest more accurately. Demand and capacity and the multiple nearby log processing companies is also assumed, and current log prices at the point of export also assumed. Although harvest dates can be moved a year or two to avoid temporary drops or to take advantage of temporary spikes, this is probably the biggest sensitivity.  Log prices are probably about 30% out of the slump caused by the recession, so I dont think there is as much downside as upside here. Given trends in sustainable timber demand and that 96% or so of most timber is not from sustainable managed forests, upside could be huge here IMHO.

That 13% growth is also subject to company tax at 33%, bringing after tax cagr (real - inflation excluded and would be in addition) to a more reasonable 9% per year between now and around 2025.

illiquid? Yes, but not totally. There is a secondary market where you can sell the shares but they are not publicly traded, so you would get a penalty if you have to sell early. This is also why the rate makes sense - it is not suitable for if you need the money within the next 12 years. So should only be a % of a large stash. In my case, a lot less than 5%.

I'll post a link to the website if people are interested, but I want to complete my purchase before the millions on MMM push the price up... given the low liquidity mentioned earlier, I'm hoping to use that to my advantage on the negotiation...

So, thanks for the face punches, and sorry I was coming off as an a**hole. You quite correctly did not have enough info.







AmericanEagle

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: a true non-market correlated long-term investment: forestry
« Reply #38 on: June 03, 2014, 09:36:55 PM »
Mr. Mark,
Thanks for starting this discussion, about one of my favorite investments, in forestry!
I can only assume you're investing through Roger Dickie.  Great guy.  There are some other partnerships going on in New Zealand as well but he's the biggest and has been doing this for the longest, and has a very good reputation in NZ.  I'm American, and took a trip to New Zealand which included a stopover in Waverly to their rural headquarters.  What a great country and great people.

Anyway, for those asking, forestry is a unique investment that offers high returns, and some unusual risks.  The benefits of an investment in a forest are that you have a threefold potential for profit.  Specifically:

1. The value of the trees themselves increases, as they grow.
2. The value of the underlying land can increase.
3. The value of cut timber  can increase as well, or keep pace with inflation.

The unique thing about wood is, unlike any other commodity, you will get more of it just be letting the trees grow.  Approximately 2% more per year, more growth at first, less as the trees mature.  Over the past three decades rural real estate in New Zealand has increased dramatically in value, so investors have benefitted from that.  Lastly, Americans have to consider the currency situation.  Right now the New Zealand dollar is strong, ie, not favorable for Americans buying in for the first time.  However someone who wants currency diversification or who believes the NZ economic growth will outpace America's (as I do) may wish to consider an investment.

What are the downsides?  I'd also say threefold:
1. Environmental factors.  NZ is probably over-planted with radiata pine.  A blight could really damage things. 
2. Illiquidity.  As Mr. Mark stated, this is a VERY long term investment.  There is a surprisingly robust secondary market (in NZ) but who knows if that will be be case when you want to sell.  You don't even know exactly when you will harvest - if lumber prices are low, shareholders might decide to let trees grow some more and prices recover.
3. Required ongoing payments.  Forests are professionally managed and monitored.  This means you'll be paying a yearly fee for the privledge of owning your forest share, then get a windfall at harvest.  (Upon harvest, shareholders vote as to weather to sell the land and dissolve the partnership, or retain some earnings and replant another cycle).

Those of us in America might ask, why not buy a forest in the good old USA? I looked into that very seriously as well.  There are some states with lots of old-growth forest and a good mix of hard and softwood trees.  Several states even have property tax exemptions for forest owners.  In the end, however, I decided that New Zealand offers a much more secure investment.  Forestry is a science that people study for years; I'm not going to pretend I could replicate that knowledge just by buying a random forest and letting the trees grow.  I'm also a city boy and fond of travel - I'm not going to be near my trees all year round.  So the professional management of the forest is key.  Also, the USA doesn't have any forestry-partnership investments that I'm aware of for non-accredited investors.

What I've wrote here is only a nutshell and there is a LOT more to the forest industry to learn.  Especially intresting are the use of forests as a carbon sink and investing in a forest for the carbon-credit market.   I'd say that forests are not an investment for everyone but might be useful for the Mr. Moustache crowd.  Ideally, find a forest with a planned harvest around some future date you'll need cash (kid's college, you're retirement, whatever) and invest. 

Mr. Mark, thanks again for starting the discussion and happy to compare notes with you offline on the forest situation in NZ.

Edit to correct name of city (Waverly).
« Last Edit: June 03, 2014, 09:41:31 PM by AmericanEagle »

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: a true non-market correlated long-term investment: forestry
« Reply #39 on: June 04, 2014, 06:47:45 AM »
A New Zealand forest sounds better than an OPEC one:) If they have been in business since 1972, what have been the returns since then on all the other forests they have planted? The numbers I have seen (all timber not your specific plot of land)  has timber returning about 8% real with some much better years and a few stinkers since the early 80s (US timber was a bit higher). That is a return I would be more than happy with. The question then is strictly about diversification (owning 1 forest instead of a 100).

TreeTired

  • Bristles
  • ***
  • Posts: 451
  • Age: 135
  • Location: North Carolina
  • I think we can make it
Re: a true non-market correlated long-term investment: forestry
« Reply #40 on: June 04, 2014, 07:25:27 AM »
Quote
( my tablet also autocorrected OECD to OPEC in the OP, so that didn't help)
  ahhhh!!!   That OPEC really had me confused.   I went to the OPEC website to see if maybe NZ was a member...  LOL!   

Does your $35k represent a fractional piece of an identifiable larger forest,  an actual piece of land?  (how big?)  or does it represent shares of investment in large holdings of forest?

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #41 on: June 04, 2014, 08:33:05 AM »
Quote
( my tablet also autocorrected OECD to OPEC in the OP, so that didn't help)
  ahhhh!!!   That OPEC really had me confused.   I went to the OPEC website to see if maybe NZ was a member...  LOL!   

Does your $35k represent a fractional piece of an identifiable larger forest,  an actual piece of land?  (how big?)  or does it represent shares of investment in large holdings of forest?

yeah, sorry about the typo... fortunately NZ is not an opec member!

Each forest is normally around 500 hectares (about 2500 acres)  and ownership is split into 200 shares. So you own 1/200 of the land and trees in partnership.  Your share is transferable.  But indeed, is 1 forest. 

I wouldn't personally put a large % in this type of investment,  but what I liked is the growth is literally real. You own real land and trees, and they grow.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1182
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: a true non-market correlated long-term investment: forestry
« Reply #42 on: June 04, 2014, 08:45:54 AM »
A New Zealand forest sounds better than an OPEC one:) If they have been in business since 1972, what have been the returns since then on all the other forests they have planted? The numbers I have seen (all timber not your specific plot of land)  has timber returning about 8% real with some much better years and a few stinkers since the early 80s (US timber was a bit higher). That is a return I would be more than happy with. The question then is strictly about diversification (owning 1 forest instead of a 100).

they have such an analysis on a forest from the early days now harvested, and it finished up with just over 4% cagr after tax ( real). This was grown using older gene stock trees with not the same stocking levels, and growth rates are somewhat variable.

But yes, it's one forest specific,  and as I mentioned above, typically 200 shareholders. 

The biggest issue with US lumber price apart from sensitivity to the housing market, is it can impacted by forest fires  - a big forest fire creates, counterintuitively,  lots of logs for sale at once as they clear out the thing. The main mitigation is that you can vary harvest a year or 2 if you think prices are anomously low.

but let's be clear, the downside on prices is matched by an upside too!

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 547
Re: a true non-market correlated long-term investment: forestry
« Reply #43 on: June 04, 2014, 03:13:26 PM »
Well, if you want to believe you're the genius investor who found the low-risk/high-return asset everybody else is somehow too stupid to notice, go ahead.


You do realize that this has been said of any company, technology, idea, or investment that is new/has ever started from nothing, right?


warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: a true non-market correlated long-term investment: forestry
« Reply #44 on: June 05, 2014, 06:45:37 AM »
Well, if you want to believe you're the genius investor who found the low-risk/high-return asset everybody else is somehow too stupid to notice, go ahead.


You do realize that this has been said of any company, technology, idea, or investment that is new/has ever started from nothing, right?
Startups can be very high-return, because they are very high-risk. Most startups fail, the most likely outcome is that the investor loses all their money. That is offset by the chance of 1000%+ growth. Anybody (sensible) investing in startups knows that they are taking those risks.

It doesn't take a genius to find a high-risk/high-return investment. But OP said this is (and I quote) a "super safe investment" which nonetheless returns 13%. If he is right then he must know something about future timber prices that everyone else doesn't. If the market thought it was as safe as a 25-year government bond then it would have the same price as a 25-year government bond.

Elyse

  • 5 O'Clock Shadow
  • *
  • Posts: 54
Re: a true non-market correlated long-term investment: forestry
« Reply #45 on: June 05, 2014, 07:15:03 AM »
As someone who works in the paper industry - please talk to the people buying the logs.

We have moved from buying a few big logs to many small logs. 
More bark per volume for the boilers, less stacking volume taken up by air between the logs.

You might find that they need to be harvested sooner than thought - can for cheaper than you thought.  But at least the trees replanted faster.