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2012 FLM JULY / AUG [Free Version] Page 46 Thoughts on Investing in Southern Timberland p1
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Thoughts on Investing in Southern Timberland

Trees, Contrarians, and Common Sense

 

 

For the first time in my career, I am getting a sense of hopelessness as I talk with foresters, landowners, and others involved in our business. This hopelessness comes from six years of falling prices and from the dry weather and fires we have experienced recently. In my career, the previous long spell of falling prices was from 1983 to 1989 — a long six years — but that time the drop for pine sawtimber was $3, from $23 to $20 per ton. This time the drop in pine sawtimber prices has been precipitous — from $44 in 2005 to $24 this summer.

 

Just writing that is enough to get me worried! The only thing that has buoyed forestland owners during this period has been the volatile performance of the stock market, and the fact that the trees keep growing. Even the euphoria we all had in the mid-2000s about ethanol and other new uses for our wood has worn off in the face of one failed “new use” plant after another.
When things get this bad, sometimes it helps to back away and look at the facts, instead of the emotion, and see if the pessimism is really warranted. Here are the factors I believe

 

to be pertinent to financial returns on forestland:

1) Stumpage prices in constant dollar[1] terms are as low as they have been in 60 years. In nominal terms, the last time sawtimber prices were this low was in 1991/92. Worse yet, a landowner selling pine sawtimber in 1982 actually received nominal sawtimber prices comparable to today. Low prices mean low income — one part of the financial return equation.

FIGURE 1. CHART SHOWING CONSTANT DOLLAR STUMPAGE PRICE TRENDS OVER TIME

 

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