Q1 2010 Cambium Timberland

8/9/2019 Q1 2010 Cambium Timberland

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With the close of the quarter we are beginning to seeslight upward movement in prices paid for forest grownproducts. Log prices for US south pine sawtimber were up 2.3% quarter over quarter which was primarilydue to extreme wet winter weather in the region.Housing starts remain well below historical levels butare anticipated to experience a moderate recovery in

the next 12 months which should stabilize and improveraw material prices. Pulpwood prices in the US southwere up 22% for the quarter also due to poor harvesting conditions. Through our close contacts withpurchasers and careful monitoring of the marketplace,we were able to make an opportunistic pulpwood saleat a 70% premium to recent market prices.

Timberland sales in the US for 2009 had a totaltransaction value of about $1.9 billion which is 38% of the 2008 and 23% of the 2007 transaction values.These transactions have occurred at lower price levelsand we anticipate that appraised values in the US willcontinue to have downward pressure as appraisedvalues catch up to current market prices. Goingforward improving product prices and biological growthwill add value to the portfolio. We are cautiouslyoptimistic that pricing across all spectrums of timber will continue slow but steady improvement during2010. As this occurs, we will be able to increasetimber harvest as we move from storing the timber onthe stump to beginning to harvest some of the recentbiological growth. This should translate into increasedportfolio income.

You may have already noticed our most recent changeto the quarterly newsletter. Based on investor feedback, we have incorporated a market dashboardon the front page. In the dashboard, we haveincorporated several key pricing metrics which areparticularly relevant to Cambium investors. Includedare prices for Brazilian charcoal, and US southernpine, two large components of the Cambium portfolio,among others. We will provide this data on currentpricing, along with quarter-to-quarter changes for youto review each quarter going forward. Our hope is thiswill provide you with increased insight into theperformance of timber markets.

In this quarter’s newsletter, we have two articles we

hope you will find interesting. The first takes a look atrecent changes in the wood markets, including theincrease in the plantation market space.

In the second article we evaluate the recentenvironmental regulatory changes in the Californiamarketplace and talk about potential portfolio incomethat can be generated from these changes. Manyanticipate the California changes will be the model for further environmental work in the United States inparticular, and as such it is important to review theseopportunities even though the Cambium portfoliocurrently does not have exposure in California.

MARKET DASHBOARD(% Price Changes)

Product Quarter 12 Months

Pine Sawtimber USSouth

2.3% -7.2%

Pine Pulpwood USSouth

22.4% -0.7%

Charcoal Brazil 8.4% 27.8%

Pine Sawtimber NewZealand

7.0% 10.0%

IntroductionThe Wood Market TodayForest Management Projects

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CP Cogent Asset Management, LP2101 Cedar Springs Road, Suite 1200

Dallas, TX 75201214.871.5400

www.cambiumfunds.com

Q u a r t e r l y N

e w s l e t t e r – M a r c h 2 0 1 0

Cambium Global Timberland Limited

IntroductionBy Matthew J. Haertzen CFA, Cogent Partners,L.P.

Tarrangower: Eucalyptus stand in Australia at 7 months



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Continued population and income growth, particularly

in emerging markets has caused a significant increasein the demand for wood products. This has occurredwhile forest resources have been decreasing.According to a 2007 report on the “State of the World’sForests” deforestation continues at about 13 millionhectares per year. However, reforestation efforts, andthe expansion of some native forests reduces this to anet decline of 7.3 million hectares per year. Theoverall rate of decrease has also declined falling from just under 0.2% per year (on a global basis) from1990-2005 to a slightly lower number post 2005. Theprimary reason for the reduction of forested areascontinues to be for the expansion of crop lands to feed

the ever-increasing global population. A recent FAOreport titled, “World Agriculture: towards 2015/2030”highlighted the need for an additional 120 millionhectares of crop land by 2030, and also indicated that“urban land areas will continue to grow by aconsiderable amount... much of [which] will have tocome from forest clearance.”

In light of these reductions in available land, plantationforestry has become increasingly important. Thesame FAO report forecast that plantation production of round wood will double from 400 million cubic meterstoday to nearly 800 million cubic meters in 2030. At

current levels, plantations are able to meet slightlymore than 25% of the total industrial consumption of 1.5 billion cubic meters, but this number will grow asadditional plantation production becomes available(FAO 2006). This increased use of plantations createsboth opportunities and challenges for the globalmarketplace.

On the challenge front, maintaining forest diversity isparticularly difficult in a plantation environment thattends to be focused on driving higher yields andefficiencies through monoculture plantations. Inaddition, the increased global trade of timber has

increased the spread of various pests from one region toanother, traveling easily with the harvested wood.

The primary opportunity created by the increase inplantations is of course higher, more efficient production

of wood products for consumer uses. From 1983-2005,the international trade in wood products grew more than4x from $60 billion USD to $257 billion USD (FAO 2007).Meeting this type of demand growth from native forestswould be nearly impossible, and lead to significant clear-cutting and illegal harvest. As such, plantation forestryhas and will continue to play a critical role in meeting theglobal demand for timber products.

One of the key areas for increased plantation productionis the tropics. The tropics have abundant rainfall, warmclimates to support faster rates of growth, and in manycases an abundance of cleared agricultural land that is

no longer in production as the soil is not fertile enough tosupport multiple rapid rotations of agricultural crops. Inaddition, many tropical regions, particularly in ruralcommunities away from major population centers havehigh rates of unemployment and poverty. These areas inparticular provide a willing, and affordable workforce for plantation timber production. Figure 1 (shown below)shows the sizable positive impact that the forestry-sector has had on employment in the tropical regions (amongothers). The charts shows that from 1990-2000, forestryemployment has increased by 23% in these regionsaccording to an FAO study.

The increasing demand, coupled with a decreasingsupply of course creates a significant long-termopportunity for the Cambium Fund. As we continue tofocus our plantation efforts on the high value, emergingmarket opportunities, we expect to be well-positioned totake advantage of future market developments. Inaddition, we focus on being a good corporate partner providing safe working conditions and attractive wagesfor the local partners working on our behalf. We arestriving to earn solid returns for our investors while alsoprotecting the environment and the communities in whichwe work.

Quarterly Timber Newsletter

The Wood Market TodayBy Matt Haertzen, CFA, and RichardStandeven Cogent Partners, L.P.

(Figure 1)



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legally, physically and financially practical on a property.

Landowners with stocking density above regionalaverages can receive a significant volume of credits inthe first year, reflecting the difference between currentcarbon stocks and the baseline scenario; thereafter,credits can be issued annually for verified annual growthin carbon stocks.

CAR does not require landowners to place conservationeasements on their property. CAR does requireparticipating landowners to sign a ProjectImplementation Agreement, which states thatlandowners must abide by the Forest Project Protocoland requires that the volume of carbon sold or transferred to another party as offsets be retained ontheir property for 100 years. This carbon does not haveto be stored in particular trees; rather, it is measuredacross the entire property. It is therefore possible tomanage your property for carbon and timber sales.Landowners retain the right to terminate obligationsrelated to the carbon project by returning to CAR avolume of credits equivalent to the volume sold from their property.


Improved Forest Management Projects;Opportunities and Risks for IndustrialForest OwnersBy Dr. David Brand, Managing Director, New

Forests

Discussions about the potential for carbon markets togenerate additional revenue streams from industrialforests have been occurring for years. With acompliance carbon market in California on the horizon,the shape and value of these opportunities to assetmanagers in the U.S. is beginning to emerge. In 2006,California passed a law mandating reductions ingreenhouse gas emissions. Some of these reductionswill be accomplished through a cap-and-trade carbonmarket, which will become operational in 2012. Inaddition, the federal government may pass a law to

reduce greenhouse gas emissions in the next year,which could create a nationwide cap-and-tradesystem. If Congress enacts comprehensive climatelegislation, demand for domestic carbon offsets islikely to exceed available supply when the schemesbegin.

What is driving domestic forest carbon opportunities?

Many analysts expect forestry and agricultural offsetsto supply the lion’s share of domestic offsets in theCalifornia and future U.S. market. These offsets are

often more plentiful and have a lower cost of production than other offset project types. Within theforest sector, we expect “improved forestmanagement” (IFM) projects to dominate in the U.S.Both the California and potential federal cap-and-tradesystems are likely to accept offsets produced under the rigorous Climate Action Reserve (CAR) standard.Speculative investors and entities likely to be regulatedare therefore interested in purchasing forest carbonprojects registered under CAR. The growing interest inCAR forest carbon offsets may create profitableopportunities for industrial forest operators.

What does a forest carbon project entail?

IFM projects under the CAR Forest Carbon Protocolgenerate carbon offsets by increasing the amount of carbon storage in standing forests and harvestedwood products as measured against a “business asusual” baseline. In the context of a working industrialforest, carbon storage generally is increased byextending rotation length or reducing timber harvests.Depending on initial carbon stocks, the baseline canapproach the maximum harvest levels that would be

Tarrangower: Eucalyptus stand in A ustralia at 14 months (16 Feet)



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Is there really a market for IFM carbon projects in the U.S.?

The market for IFM projects is still emerging in theU.S., but significant transactions have alreadyoccurred: the Conservation Fund has sold over $17

million in carbon offsets from its working forestproperties in Mendocino County, California, for example, and Sierra Pacific Industries, one of thelargest landowners and industrial foresters inCalifornia, has entered into a transaction to sell 1.5million carbon offsets from a 60,000 acre project. Newsupply is also coming online from projects outside of California, including Washington and Tennessee.

2009 saw forest carbon CRTs trading at $8.00 -$8.50; recent conversations with carbon brokeragessuggest current bids have retreated to $7.00 - $8.00because of the uncertainty over federal climatechange regulation. Sales opportunities and pricesprobably will rebound sharply in 2011-2013 if federallegislation becomes more likely. At current prices, it isuneconomic to shift completely from harvesting toconservation, but a carbon price does providemanagers with more management options, such asextending harvest rotations, widening buffer strips or practicing selective harvesting in key areas.

What are the risks associated with the U.S.carbon market?

The primary risk associated with CAR IFM carbonprojects today is the chance that a federal market for

carbon offsets may not materialize in the U.S., thuslimiting compliance demand to the California market,capped at 8 million tons of offsets in 2012.

Should a federal scheme emerge, the CongressionalBudget Office has released modeling results suggesting

compliance buyers will purchase 230 million tons of domestic offsets and 190 million tons of internationaloffset credits in 2012, increasing to 300 million tonsdomestic and 340 million tons international in 2020.These projections are well in excess of current availablesupply. Senators Kerry, Lieberman and Graham areactively working on a bipartisan energy bill “package”that is expected to retain provisions for forestry offsets.

Summary

There was unprecedented congressional activitysurrounding federal climate policy in 2009, but continuedlegislative uncertainty at the U.S. federal level will likelydepress carbon prices in the U.S. in 2010 and possibly2011. However, longer term market fundamentalssuggest that forestry carbon is becoming increasinglyvaluable due to continued support for the inclusion of forestry offsets in any eventual market-based approachto climate change policy. The combination of near-termuncertainty and projected long-term demand creates anopportunity for asset managers to take on early projectdevelopment work with exposure to long-term upside.


2101 Cedar Springs Road,Suite 1200

Dallas, Texas 75201214-871-5400

www.cogent-partners.com

1025 Connecticut Ave, NW, Suite 1206Washington DC 20036

202 715 1701 Officewww.newforests-us.com

Manager CP Cogent Asset Management L.P. serves as the fundmanager for Cambium, with responsibility for all investmentdecisions, subject to the overall supervision by theCambium’s board of directors.

The Cogent group is an independent investment bankspecializing in alternative assets. The bank was establishedin 2002 and its initial business was providing research andadvice to investors in private equity funds. Cogent’s assetmanagement business includes funds of hedge funds, fundsof private equity funds, currency and timberland. Recognizedglobally as a leader in traditional and structured private equitysecondary transactions, Cogent has provided advisoryservices to transactions totaling more than US$10 billion inprivate equity commitments.

Investment AdviserNew Forests Inc is the advisor to CP Cogent AssetManagement, L.P. New Forests is a forestry investmentmanagement and advisory services firm currently managingforestry assets of approximately AU$200 million throughoutAustralia, New Zealand and Asia-Pacific. The companybelieves its investment thesis is unique in seeking assets thatdeliver traditional timber returns as well as returns fromemerging environmental markets, such as carbon,biodiversity and water quality.

New Forests was established in 2005. New Forests holds anAustralian Financial Services License to provide advice onand deal in derivatives, interests in managed investmentschemes and in securities on behalf of wholesale clients.

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Q1 2010 Cambium Timberland