My stock portfolio has certainly taken a hit to the downside. The housing market has tanked and the values of many houses and rental units have gone down with it. Stocks of the publicly traded timberland owners have gone down 20 to 60% in the last year or so. The logic is that the decline in housing has caused a drop in lumber price which has created a drop in timber (stumpage) price which has resulted in a corresponding drop in timberland prices. So logically my portfolio has taken a hit on the tree farm side too. But has it?
I do some consulting with market analysts and hedge fund managers interested in valuing timberland and the drivers behind it. The most common question that I have heard recently surrounds the declining value of timberland and just how great that decline is. How can a company like Weyerhaeuser or Plum Creek be properly valued given the logical decline in timberland values? I could give my opinion (and I always do!) but that is not enough.
I have been maintaining a database of the major timberland transactions for over a decade so I wanted to quantify the change for 2008. Below is a chart showing the $/acre sale price trend for the last decade.
This is pretty interesting. Nationwide, it appears that prices have dropped about 21% following a year where they gained 60%! BUT… it is important to understand the data and what is happening. This database is composed of transactions that total between one and seven million acres in any given year. Also in the database is a “REGIONS” field. Price distortion occurs between years due to the variation in the percentage of sales occurring between regions ($/acre varies significantly between regions). So how does the price per acre change if we just look at a single region? Let’s look at the South.
Within any particular region, individual transactions will impact any given years weighted average price. In spite of that, the trend is clear and it is difficult to find any argument in the data that supports a decline in timberland pricing – at least in the South. The first reported sale for 2009, Potlatch to RMK, was at $1,745/acre, right in the ballpark.
The Northeast is the only region that did show a drop last year. The acreage sold in the NE was not particularly large (meaning most of the variability was probably due to the variability between tracts) so I would be reluctant to attribute much significance to the decline. There was one significant datapoint though. The Essex Timber to Plum Creek transaction (at $267/acre) pulled the average down. It is important to note that there was a conservation easement on this tract. We should expect to see significantly lower transaction values as more sales occur on tracts with existing conservation easements. The sale of a conservation easement provides revenue in the form of an early payment for HBU land but it can also have a negative impact on future forestry based revenues as well.
So…, what does all of this mean? I can see little or no decline in timberland values. I’ll be curious to see what the NCREIF index on timberland values has to say. The index is based more on appraisals than actual sales but the appraisals SHOULD be based on comparable sales and comparable sales just do not support a decline in appraisal values. If sale prices are not declining, what is wrong with the logic expressed in the first paragraph – declining housing starts means declining timberland values?
Here is my take. First, buyers are “looking through” current timber prices. Sophisticated timberland investors use appraisal techniques that look at cash flow from timber over the planned life of the investment. Those timber values are based on their view of the future, not just today’s market.
Second, more money is chasing fewer acres. A significant amount of timberland is being pulled from the market. Example: almost all of the 161,000 acres of Finch and Pruyn timberland in the Adirondacks will ultimately be withdrawn from production and become a part of the Forest Preserve. An example from the other side of the equation: this week the United Nations announced that its pension fund would diversify its portfolio and seek to acquire timberland. More money chasing fewer acres. Institutions want to diversify their portfolios, particularly by acquiring hard assets.
Third, future wood demand will be impacted by both renewable energy and global warming concerns. We are already seeing pellet mills being built to export pellets to Europe where they are mixed with coal to reduce the amount of carbon tax the utilities must pay. Most forecasters expect to see a similar tax in the U.S. soon.
Fourth, there is evidence that declining interest rates are impacting the discount rates used by institutional timberland purchasers. A declining discount rate drives value up!
These are my thoughts, these are my numbers, and these are my opinions. Comments are welcomed. --Brian