Wall Street and Woodlots

In looking for interesting content for Northern Woodlands’ biweekly e-newsletter, I'm constantly scanning the Google news feed for articles related to forests and forestry. Not surprisingly, most of those I find have an environmental focus, though I’ve also noticed growing media coverage of the physical and mental health benefits of spending time in forests. (Here’s one), which more than anything taught me that there’s such a thing as a “certified forest therapy guide.”)

Last week, a different type of forest-related article caught my attention in The New York Times. What set it apart was the fact that it was not in the science section, or even the health section, but rather in business – specifically in the mutual funds sub-section. The headline of the article both made a statement and posed a question: “Forests are a Treasure. But Are They Good Investments?”

“Trees don’t watch the stock market. Forests keep growing — and potentially increasing their value — even when inflation surges or the market swoons,” the writer, Tim Grayjan, begins. He notes that investments in forestland are nothing new – it’s long been the practice of big institutional investors (pensions and the like). But these mega-million dollar deals largely left out smaller investors.

Grayjan explains that there are now new ways for smaller investors to take part, thanks to the relatively recent introduction of timber-focused ETFs (exchange traded funds) – including the iShares Global Timber & Forestry ETF and the Guggenheim MSCI Global Timber ETF – as well as the transition of some large, traditionally forest products-oriented companies like Weyerhaeuser into real estate investment trusts (REITs) that concentrate on managing forestland. “Ordinary investors can now put money into timber without venturing into the woods. Buying shares of an ETF or a REIT won’t replicate the benefits of directly owning vast timberlands, but it does enable one to bet on timber,” Grayjan explains.

Brushing aside the implication that not having to venture into the woods is a sign of progress, I was happy to see that the article acknowledges that there’s an “old-fashioned” alternative to investing in timber on the stock market: “buying a little woodlot of one’s own.” The article states that owning a small piece of forestland “is more akin to a part-time job than a passive investment, but it can yield financial gains.” That’s something that tens of thousands of small woodlot owners in the Northeast know all about. They also know that there are many benefits beyond financial return that come from owning forestland.  

The remainder of the article does a deeper dive into these two very different types of timber investing. It talks about the risks of investing in REITs, the importance of diversification, and the average annual returns of the timber ETFs (not as good as the S&P in recent years, it turns out). It spends just as much time looking at the personal stories of a few small woodlot owners, the investments they’re making in their land, the value of working with a forester on a forest management plan, and the returns they’re seeing. “You’re not going to fund your kid’s education or retire at 55 this way…but you can supplement your income,” says one. “Where you’ll make the money on is reselling the land,” says another. “The memories and the wildlife are the richest return,” adds a third.

The juxtaposition of these two very different worlds – Wall Street and woodlots – got me wondering, which group is more in-tune with the forest products industry? The woodlot owners, at least the ones in the article who have a personal connection to their woods and are actively managing their land with a variety of objectives in mind, almost certainly know more about the forest than the average timber ETF investor. But what about the larger forest industry as a whole? Woodlot owners happily enjoying their land may not be paying as much attention to the latest home construction data, figures on the decreasing profitability of paper manufacturing, new trends in biomass energy markets, or competition from China or Canada as an investor who’s researching whether putting money in a timber ETF makes financial sense and then monitoring share prices constantly on their smartphone. There’s something about seeing your account value going up or down on a screen in real time that really gets your attention and makes you focus.

Woodlot owners should be just as interested and focused on what’s going on in the forest industry as a whole. It’s easy to read a story about a pulp mill going out of business or a biomass plant going offline and not recognize how these developments relate to a 50-acre woodlot in a neighboring state. But if mills go out of business or home construction tanks, there are fewer markets for wood; lower demand means lower prices paid and longer hauls; that makes it tougher for loggers and truckers to stay afloat. Not only might the value of the timber in your woodlot decrease, you might have a harder time finding anyone to harvest or haul it. Conversely, if markets expand or new avenues for wood open up, prices go up and everyone down the supply chain stands to benefit. All of this is a gross simplification, of course, but the point is that even small, rural woodlots are not immune to the ups and downs of the larger marketplace. We might not see it expressed as a share price every day on our computer screens, but that doesn’t mean it isn’t happening.

At this point it seems like I should add some disclaimer, like the talking heads on CNBC, that this blog should not be taken as investment advice and I am certainly no financial advisor. I do have a small woodlot, though, and right now I’m going out for a walk in the woods with my dog. I believe on Wall Street that’s what’s called a dividend.

 
Discussion
  1. Carl A Strand Jr → in Mystic, Connecticut
    Jan 22, 2017

    Once in a while, something comes along that’s a game changer for the small woodlot owner(s). In the case of Southern New England, it’s the Great Thicket National Wildlife Preserve. The program will purchase outright, purchase easements or accept donations of parcels within the area of the Preserve that are deemed of value to the program.  They will manage these parcels and take the burden/responsibility off the individual owner(s), while maintaining accessibility. To some of us, it appears to be a win/win opportunity.

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