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Diversification, risk reduction, competitive yields, biological growth, increased demand for raw material, appreciation in value of a finite commodity, and preserving land for enjoyment and recreation.
According to The Rocky Mountain Elk Foundation, about 2,500 acres of wildlife habitat are lost every day to urban sprawl. West Palm Beach, Florida, reports over 3,500 people moving there each month. Every day we drive past office buildings and shopping centers that were vacant lots only a few months ago.
As population expands, the value of land goes up. It makes sense to own land. It makes better sense to own land with timber on it. Why? Because you receive profits from growing timber in addition to the appreciation of land.
Timber increases in value two ways. First, timber growth will annually compound your dollars at 10% or more. Second, as timber grows, it changes in product class (grows from pulpwood to sawtimber). This change in product rewards you by making big jumps in unit price. One year you may have 10" trees worth $5 per ton; next year the same trees may grow to 12" and be worth $40 per ton.
The USDA reports Arkansas land is increasing in value over 6% per year. Timber grows in volume at 10% or more each year.
In 2006 it takes about $300 to plant one acre of southern pine trees. You will receive a 13.82% return over a 33-year period based on today's prices.
John Hancock's Timber Resource Group states that as of December 31, 2004, their timberland investment portfolio had produced an average annual return of 13.9 percent, after fees, since inception (1985). www.htrg.com.
I have clients who bought timberland from me and sold it in less than a year and received over a 15% profit.
A complete growth cycle for southern pine timber is 33 years. However, based on current land appreciation and timber growth, there are significant reasons to expect a 5 or 10-year exit strategy with healthy profits.
It takes 17 years for a southern pine tree to grow large enough to sell for pulpwood which is used for paper. It takes 24 years to grow large enough for Chip-N-Saw, which is used to make 2x4s. It takes 33 years for a tree to become large enough to sell for lumber, telephone poles and plywood.
Institutions like pension funds, corporations, foundations and endowments looking for low risk investments with competitive yields. Also, individuals who understand population pressure and "urban sprawl" have pushed the performance of timberland beyond the returns from the stock and bond market.
As mentioned above, it takes $300 to plant one acre in pine. You can typically expect:
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$216 from thinning in the 17th year
$825 from thinning in the 24th year
$2,881 from harvest in the 33rd year |
Since this growth and harvest projection is based on reliable historical information, it is an example of what is possible under good weather and market conditions.
Like the Stock Market, there are fluctuating prices (the market), and they can affect the ability to accurately predict the value at any given time in the future. Next, there are weather concerns such as ice storms and tornados. Finally, the buyer must consider the threat of insects, disease and forest fire. However, John Hancock's Timber Resource Group states on their web site "...less than 0.5% of commercial timberland (in the United States) owned by institutional investors has been damaged annually by fire, insects, disease and other natural hazards..." www.htrg.com.
Yes. However, timberland is like any other real estate. The price received depends on supply and demand, need for raw material, who wants it and what a buyer is willing to pay.
It has been my experience that a typical timberland transaction of less than 1,000 acres will take 30 to 90 days to complete. Sales over 1,000 acres will take 90 to 180 days.
"Site Index" determines timber growth. It is defined as the ability of the soil (site) to grow a tree in feet over a 50-year period. Soil with a Site Index of 70 will grow a southern pine tree 70 feet tall in a 50-year period. A timberland buyer should buy land with a Site Index of 70, or more. This will generally assure 10% growth, or more, per year.
Any competent forester can determine the volume and growth rate of timber by measuring the trees. I require foresters to break down the growth rate by product class (pulpwood or sawtimber, etc.) and species (pine or hardwood). I use this information to show my prospective buyer how many dollars are currently growing each year, and how many dollars they can expect to grow in the future.
If you want to "grow money" with trees, make sure your timberland has a Site Index of 70 or more, which should indicate your trees will grow volume of 10% or more per year.
A typical purchase is 5% of a buyer's investable funds. Most Registered Investment Advisors and Certified Financial Planners seldom recommend using more than 20% for any asset class.
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