Forestry Investment Opportunities

Timber Investment as an Historical Asset Class

Timber investment or forestry investment as a sustainable investment class has one main difference to other sustainable investment categories. It has a long history. Timber has been a resource and commodity since the dawn of civilization. Other industry sectors in the low-carbon economy are new, and very much in the development phase. Forestry investment became a sustainable investment by chance having existed long before anyone had ever heard of global warming.

Timber Investment as a Sustainable Investment

And yet, forestry investment has a legitimate claim to be one of the most sustainable of all sustainable investments. Illegal and unsustainable commercial logging has devastated the world's natural forests, both ravaging ecological and biodiversity. Lost forestry through logging is attributed as the single greatest cause of carbon emissions globally, accounting for 20% of the total emissions volume.

Timber investments in commercial forestry plantations are valuable as the alternative to logging natural forest. In Europe and North America timber investment in commercial forestry is more developed, but in the tropics is nowhere near the required scale. International pressure means that illegal logging which until recently constituted up to 40% of tropical timber product exports, has been severely restricted and reduced. For that to be sustainable, commercial forestry investment must take up the slack which is currently effecting supply chains.

As well as being a crucial factor in preserving the remaining natural forest, timber investment in commercial forestry plantations produces as effective carbon sinks as natural forestry. A single hectare plantation absorbs annually between 10 tons CO2 and 100 tons CO2, varying according to tree varieties.

Timber Investment as a Low-Risk/High-Return Inflation Hedge

So, as a sustainable investment, investing in forestry has a lot of positives and no obvious disadvantages. In terms of business sense, it also ticks the boxes. Historically speaking investments in forestry have provided attractive returns at a low risk factor. Over the past two decades timber investment would have outperformed more typical investment vehicles such as shares, bonds, stocks and commercial property funds.

Timber Investment is also an excellent inflation hedge as part of a sustainable investments portfolio, or any investment portfolio. Forestry investment is intrinsically tied to land, which is strong hedge against inflation. Timber prices have also performed strongly over periods of high inflation, with timber investment showing negative correlation to other investment classes and providing stability to a portfolio in such conditions. As a stand-alone investment, for the low-risk level, returns have also been shown to be remarkable high.

Future Variables Likely to Affect Timber Investment

Future variables also indicate strong future potential for forestry investment. The restriction of illegal logging of natural forestry will only become tighter. The 2010 ITTO annual review and analysis of the tropical timber market highlighted restrictions on illegal logging as a major factor impacting decreased processing of timber products and exports. Many timber mills were simply struggling to find enough of the raw product on the market. The shortfall has to be made up by timber investment in sustainable commercial forestry.

Demographics and economic development in the world's emerging economic powers is also expected to lead to a surge in demand for timber products over the coming years increasing the need for intensive timber investment globally. China has already overtaken the USA as the world's largest importer of timber products. This is with a per capita consumption of timber products 9 times less that of the US.

Timber consumption per capita is strongly correlated to both GDP per capita and urban populations. The percentage of China's population living in cities is currently around 40%, which is expected to rise to 60% by 2030. GDP per capita is also growing fast. India is behind China in terms of economic development but is on the same route with regards to urban demographics and increasing living standards. It has already entered the top ten importers for certain timber products, and with a similar population to China's it won't be too long before India also begins to dominate global timber market dynamics in the same way.

Demand for timber is also set to increase significantly. With the emerging economies of Asia such as China and India overtaking the west as the world's largest consumers of timber products future supply will be a major issue. China currently has a per capita consumption of timber products nine times less than the USA. And yet, it has already overtaken the USA within the past two years as the world's largest importer. As GDP per capita rises so will the consumption of timber products, which statistically have a strong correlation. Although India has not quite shown the same explosion in its imports, the same variables are reaching a level where that is expected to happen.

Summarised Pros for Timber Investment

Forestry investment has proved to be a strong sustainable investment in the past. Unlike other sustainable investments, it has a long history and is more predictable as a result. Current trends and future variables suggest an even more profitable future than past for timber investment with supply and demand predictions favouring rising prices. And as a sustainable investment, forestry investment has a lot going for it in terms of its positive impact on our environment.