Timber: How to Play It and Why

The benefits of commodity investing in asset classes including timber has become a more widely accepted part of every investor’s portfolio. The reasons why investors hold these assets include their appeal as inflation hedges as well as their low correlation to the overall stock market. Timber has proven its worth over time, with the price of timber rising an average of 5 percent. Rising demand for timber is expected to grow on a global scale, giving investors the potential to profit on a developing trend. Here we look at timber from the investor’s perspective and suggested ways to play for investors who want to add a timber commodity to their portfolio:

The Investor’s Perspective

Here we list the major reasons why investors should be interested in timber as an asset class.

Timber does not really correlate with equities

The reasons why timber is a good asset for an investors portfolio is that it combines with other assets to make money over the long run, but do not correlate with one another, lowering overall volatility and increasing return per unit of risk.

Timber has interesting cash flow properties

Timber is similar to a long-term zero-coupon bond. You plant the trees with little money, wait a long time for the trees to mature, and then sell them for a lot of money. By rotating timber stock or an investors cash flow can be steady and predictable.

Wood is a commodity

Wood acts as a hedge against inflation. As prices rise over time, so does the value of your timber stock. Any periods of deflation are usually a short-term problem. Other reasons for investor’s managing inventory with a 15-30 year life cycle is that if there’s a year of poor timber prices, you can let your trees keep growing and harvest them when prices have recovered.

Ways to Play

There are a different ways to play timber investments, each geared towards different investors:

Random length timber

Offered on the CME, these futures, which are also optionable, represent 110,000 board feet of wood. The contracts are quoted per 1,000 board feet and trade in the months of January, March, May, July, September and November.

Softwood Pulp

Also offered on the CME, these futures represent 20 metric tons of softwood pulp. Quoted per metric ton, these futures will trade in all twelve months of the year and also offer options.

Weyerhaeuser Co

WY dwarfs the size of the other stocks on this list. According to its business summary, the firm grows and harvests trees, builds homes, and manufactures forest products worldwide.

Plum Creek Timber Co. (PLC)

One of the most popular timber stocks, PLC is a Real Estate Investment Trust (REIT) known for having an attractive dividend yield. Plum Creek has over 7 million acres of forestry that has outperformed the market. olum

Rayonier Inc. (RYN)

RYN is an REIT that operates in four segments: timber, real estate, performance fibres and wood products. Although half the size of PLC, from an investor’s perspective this more diversified group may be more attractive.

Deltic Timber Corporation (DEL)

A small-cap option for those investor’s interested in smaller firms, this company grows, harvests, and markets lumber out of its Arizona headquarters. S&P Global Timber & Forestry

Index Fund (WOOD)

This ETF measures the performance of companies engaged in the ownership, management or upstream supply chain of forests. With approximately 35 holdings, this fund splits its assets evenly between domestic and international stocks.

Guggenheim Timber ETF (CUT)

CUT invests in companies that own or lease forested land and harvest the timber around the world.