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 is a 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 is a list of 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
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.