Forestry Investment Blog

In the past this blog has looked at the benefits to forestry investing but has been negligent in talking about the risks associated with forestry. I aim to correct that, but first it is worth noting why forestry investments have become so popular.

In recent years the number of investors acquiring timberland solely for investment purposes has risen significantly. There are three key reasons for this: competitive returns, low risks and it adds diversification from financial assets. Several studies have proven that forestry returns are not correlated or negatively correlated with returns of financial assets such as stocks and bonds. Therefore the inclusion of forestry in a portfolio can reduce the volatility of portfolio returns.

However as with any investment there are risks involved in forestry, not many it is true, in fact I know of only two real risks.

The first is the risk of natural disasters. These could be anything from fire, storm, insects, etc. However, all forestry investment companies should have some sort of insurance to cover their investors should something of this nature happen. Other than that there isn’t a great deal that can be done to mitigate this risk besides making sure that before you commit yourself that the plantation isn’t located in an area that is prone to natural disasters.

The other danger is market risk. There is the risk that the price paid by loggers for the wood on the stump (also known as stumpage prices) could be depressed at the time of harvest or prices could increase at a slower pace than general inflation. Despite this investors need not worry as the great advantage to forestry is that trees, unlike other crops, do not need to be harvested at a particular time. They are able to be left to grow until the markets are more attractive.

So compared to the volatility of stocks and bonds this type of investment may sound like a breath of fresh air.

The Forestry Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here.

This entry was posted on Thursday, July 29th, 2010 at 11:11 am and is filed under Environment, Forestry Investment, Forestry Research, Forestry Trends. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.