The investment landscape of the 21st century has become increasingly inhabited by short-term thinking. Instant messaging, high-speed wireless stock flippers and day-trading speculators who must take their Blackberries to the beach in the summer so as not to miss a minute of the action. In this crazed quest for fast, easy money, the path is littered with losers, the occasional successes overshadow the more steady drip of losses, much as a gambler slowly going broke at the one-armed bandit.
But there are some investors who pay scant attention to the bungee-like stock market, patient enough to be able to filter or ignore the constant media barrage in order to remain focused on still far away goals. Many of these have found solace from the market frenzy by investing in trees, and we can look to countries like New Zealand for innovation in forest ownership and management. This should have particular relevance for those of us who live here in British Columbia.
Here’s the basic idea. Purchase or plant a stand of trees, wait for them to grow, then sell your stake in the maturing trees or harvest them when your long-term retirement needs come calling. No Blackberry required. No looking up stock prices every day. Heck, you can even go see your trees, hug them if you must, or picnic under one with your family. The Kiwis have put in place the legal and financial structures to facilitate this kind of ownership.
One such example is Greenplan, which has around 7,500 mom and pop investors with units in more than 60 forest partnerships. Their investors put in capital to plant a forest, which can be as little as NZ$5000. They own the crop of trees not the land, and need to spend on average around NZ$7 per tree to manage them through to harvest some 25 or so years later.
Under the management contract between the partnership which owns the forest and the land owner on whose land the forest grows, the land owner is required to ensure that the forest is developed and managed according to clear requirements. They contract with a forest manager who is responsible for carrying out the work involved in developing and managing the forest, and independent professionals are employed to audit the forest’s development at critical times.
Another example from New Zealand is that of Onslow Carbon Forest Limited, which differs in one primary respect from the Greenplan model in that investors own both the trees and the land that they are growing on. Onslow Carbon Forest Limited is one 83 managed forests developed and administered by a New Zealand investment group with over 28,200 ha of land and more than 2,500 investors in their partnerships, including many from overseas.
Onslow Forest has ambitious plans to sell internationally tradable carbon credits in order to diversify and supplement income for its partners while the trees mature, and to allow these credits to be `banked` for future years as the market for carbon credits evolves.
These ventures are not free of risk of course. Market prices for timber will vary, and forests may be subjected to natural disasters such as fire, disease and pests. Costs may change. Because of the long duration of the projects management may change. But there is much to be said in favour of owning a ‘hard asset’ like a tree as a way to diversify paper-thin assets that can be inflated to oblivion.
The big forest owners around these parts are Hancock Timber Resource Group (a subsidiary of Manulife Financial), and TimberWest Forest Corp. Hancock is currently the largest timber management investor in the world, overseeing 4.6 million acres in the US, Australia, New Zealand and Brazil, and roughly 50,000 acres here on Vancouver Island. As of April 2008, they had pegged their historical returns from managing timberlands at 13.9% a year. Canadian studies have estimated returns on forestland since 1970 to be around 10% a year. Virtually every study I;ve run across puts timberland investments ahead of historical stock market returns. Pension funds (including the Ontario Teachers Pension), foundations, university endowment funds, and an assortment of publicly traded companies are taking notice.
TimberWest is western Canada’s largest private timber and land management company. The company owns approximately 796,000 acres of private land and is in the business of selling timber products and real estate. In my opinion, their business model has recently benefitted short-sellers (who profit when the stock price falls) and occasionally perhaps, one of those Blackberry day traders who hit a lucky bet. Faced with record low margins, TimberWest has continued with its harvest deferral strategy in order to preserve share value. Their real estate arm, Couverdon, is actively unloading land all over Vancouver Island, much of it easily accessible and providing excellent growing conditions.
I visited the woodlot of well respected forester Harold Macy, steward of a 1000 acre parcel of Comox Valley forestland on the way to Mt Washington. I asked him to consider how a forestland investment pool might be directed here in our own backyard. Here is his response.
1.Stakeholders would recognize that the primary objective of such an investment would be to provide a reasonable and sustainable long term income through the growing of forest products.
2.The primary accretion in value of such an investment would arise from increases in the quantity of harvestable timber; improvements in the quality of harvested timber; and increases in the value of the land itself.
3.A forester should be hired to manage the lands under the general guidance of a directorate (but not to micro-manage).A time schedule with measurable goals should be established, i.e. site preparation, planting, thinning, harvesting.The manager will be expected to obtain outside funds when available to help with the up-front costs.This person needs practical skills more than paper qualifications.If professional designations (i.e. RPF) are needed, they can be at the Board level.
4.Other non-timber income sources can be identified and explored if they do not compromise the primary goal of growing trees. Greenery picking, commercial berry or mushroom harvesting, hunting rights, recreation, tourism, and various outreach opportunities are examples of interim income generation possibilities that could alleviate expenses while a forest is established.
5.Stewardship agreements of varying lengths may be entered into for the purpose of cost neutral enhanced silviculture operations and the above non-timber enhancement. For example, on a ten hectare unit, either recently harvested or understocked, the goal of the investment structure would be to get a new forest growing well, in as short a time period as possible.A stewardship agreement will state that at the end of the contract term, the block will have a certain number of appropriate species of trees, well-spaced and above all brush competition (free-to-grow). In the interim, the owner will be able to intensively manage the space between these designated crop trees.There is the possibility of producing cut or live Christmas trees, semi-domesticated wild berries, edible mushrooms, medicinal herbs, and ornamental plants. An access policy must be established initially to forestall negative uses such as dumping or vandalism.
6.Lands purchased by the investors could be repackaged, amalgamated or combined with other tracts to make viable units which then might be re-sold.
7.Environmental Goods and Services (EGS) such as carbon sequestration should be examined as a possibility for interim income.Maintaining or obtaining Managed Forest Status from BC Assessment would be important.
8.Whatever legal form is undertaken, the fund should have a directorate with professional investment acumen as well as forest management experience.
I wonder if the will exists among British Columbian investors to take ownership in at least some of our neighbouring forestlands? Why can’t we improve upon the New Zealand partnership model? Mr. Macy’s approach to mixed-use agroforestry could help allay ongoing costs for stewardship of the lands while the trees mature. Yes, there are hurdles to be crossed in terms of economies of scale, tax considerations, and lack of clarity over who owns carbon credits and how to aggregate them for sale. And I think we have to get over this immediate gratification craze that is infecting society. But in an age of fragile stock markets the concept of growing a forest for retirement, and having it managed by a team here in the Comox Valley rather than a boardroom in Toronto or New York, sounds like a very good idea to me.