The ultimate agricultural investement

“If you don’t feel comfortable owning something for ten years don’t own it for ten minutes” Warren Buffet.

Global demand for hardwood has itself been multiplied by 25 times in the last 40 years. With the economic growth of developing countries and the world’s population growing at its highest ever rate this bullish trend is likely to continue. Although 13% of the world’s surface is covered in forests concerns over global warming has resulted in a global crackdown on illegal logging and deforestation. Supply is being severely restricted and this along with the increase in demand is likely to drive timber prices higher in the years to come.

Historically the price for timber has risen by about 6% a year for the last 100 years. This beats the average inflation rate during this period by 3% every year. It is unheard of for a company to consistently rise the price of its products by 3% a year.

Forests can offer a very attractive safe haven from the recent volatility in global stock markets. Trees grow year in and year out. Trees in good growing areas grow at about 6-8% a year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. This means that they give you built in investment growth. Despite being a resource investment, forests are not constantly depleting. Unlike a gold mine or an oil well trees will grow back. Forestry is a sustainable investment.

Forestry is one of the only investments that can deliver returns even when its price has collapsed. If market conditions have driven the price of timber down there is no need to cut down the trees. Unlike other agricultural investments like fruit and crops where the commodity is only ripe once forests do not have to be harvested every year. Forests allow investors to ‘bank it on the stump’ when market conditions are unfavourable. The trees will continue to grow at 6% a year no matter what the price of timber.

This is not to imply that timber is an absolutely risk free investment, but with the ability to bank it on the stump, investing in timber does come with an extra safety net. As long as the sun shines and the rain rains the trees will grow. If the trees are not harvested they get bigger and more expensive.

The ultimate agricultural investement

From 1971 to 2010, an investor in timber saw an average annual return of over 14%- turning £10,000 into over £1.5 million. That beats stocks and bonds over the same period.

Here are the rough numbers on where timberland returns come from:

1% Land value increase6% Biologic growth of the trees3% "Stumpage" price increase (the price of the actual wood)

Timberland can be a good alternative investment in a bear market. One of the worst-ever bear markets in stocks began in the late 1960’s and lasted until 1980. An investor in stocks during that time lost money, due to inflation. However, as the graph shows an investor in timberland during this period never had a losing year. More often than not, the returns were in the double digits.

Managed timberland according to a study conducted by the University of Georgia generates returns four times higher than non-managed lands. Managed timberlands have professional managers who cultivate the trees, look after them, and harvest the trees and their products at the right time. They look to earn extra cash by selling hunting rights, harvesting straw and a good manager will look to sell some land when property developers offer sky high premiums for the land. The forest manager takes a cut of everything that the forest earns. However, this cost is comparable in magnitude to brokerage fees.

As an added bonus wealth held in the form of a commercial forest becomes free of inheritance tax (IHT) after you have owned it for two years because it qualifies for business property relief.

Investing in forestry will not give the overnight returns that trading will. However, as a long term 10-20 year investment it is almost unbeatable. Investing a forestry company could be a perfect investment for a student that is saving for the long run and wants to go to sleep without having to worry about risky investments.