Whilst forestry investments are seen by many institutional and private investors as a potential safe haven from the volatility associated with traditional assets like equities, at the same time there are a number of variables linked to the general economy that do have a significant bearing on the performance of the asset class.
For the most part, current market demand for timber in any given location is the biggest influence over timber prices. As with any commodity, when stocks of the product are high and demand is suppressed then prices fall as assets are sold off at knockdown prices to create revenue. Likewise, when supplies are limited and demand is high, then we see the opposite happen; commodity prices rise as buyers compete for the best quality and indeed quantity.
In fact, it is worth touching on the cyclical nature of any commodity market, but especially soft-commodities. If a poor global harvest causes a shortfall of wheat, then prices rise, as the price rises, farmers plant more of the crop the next year as the higher price makes it more profitable. So the next year you have a surplus of supply as more acres are sown to wheat and subsequently the prices fall. And there you have it! A beginner's introduction to the basic rule of commodity price cycles.
So we have ascertained that demand affects prices, but what impact is that likely to have on the performance of forestry investments? Well the answer in short is not as much as one would expect. A number of credible academic studies have revealed that forestry investment returns are driven by the biological growth of the tree into valuable timber stands (responsible for 60% of financial returns), whilst timber price appreciation accounts for just 6%, and besides, when prices are depressed, timber growers simply leave their trees to grow, getting bigger and offsetting any drop in timber prices, a strategy known as storing value 'on the stump'.
One must also consider that demand for timber is regional, which effectively means that a forestry investment in one area might perform markedly better than a timber investment in another area, simply because demand for wood products in region A is much higher than in region B. I for one have always found it to be quite misleading to use global statistics to define the potential performance of a local property-based investment such as forestry. Let's look at it like this; housing starts in the USA are low because the economy is depressed so timber prices are low due to a low demand (fewer people and businesses are building or remodelling homes), whereas in China, India and Central America, demand is increasing daily as these countries enter into their most resource-intensive phase of growth, building houses, infrastructure and demanding more biomass for energy production. It goes wi thout saying then that a timber investment in Florida might produce less revenue today than a forestry investment in Latin America where demand is much higher and the property is better positioned geographically to participate in the supply chain in the region, (not to mention the climate in emerging economies tends to lend itself to timber growing).
In summary, a range of factors affect demand for wood products and therefore the potential performance of forestry investments, and these variables are not global but local, so one must look to the dynamics of the market most relevant to the location of a particular forestry investment if one is to plan and project effectively and accurately.
