“We will be planting the least number of trees that we have in the past 40 years, at a time when there is an absolutely massive need for investment in replanting,” Macdonald said.

At the moment the forests in B.C. have already suffered with one million destroyed by forest fires and an additional 15 million by pests (largely the mountain pine beetle). This year the government is planning to plant 190 million trees, which is down from 225 million in a typical harvesting year. The biggest planting year in B.C. was in 1989 when a further 300 million trees were planted. Next year the number of trees planted is expected to decline further to 175 million.

According to Bell the majority of the planting is as part of reforestation obligations by logging companies harvesting Crown land. At the moment there is a two year lag between logging and replanting so the current planting decline reflects the downturn in the industry set off by the collapse of the US housing construction market.

The government’s pine beetle and fire reclamation programme has a budget of $42 million this year, with $400 million allocated over the next five years. So far 20 million trees have been planted this year. Bell this programme, called Forests for Tomorrow a ‘good, solid programme’.

To bring attention to the issue the Western Silviculture Contractors Association has launched a website at www.forestfacts.ca. In 2008 the association says that there were 6,000 tree planters working in B.C. and Alberta this year that number fell to 4,000 despite the widespread fires and beetle epidemic.

Unfortunately Bell said that the solution to the pine beetle epidemic wasn’t as simple as just replanting the affected areas.

“What we’re finding is stands that were killed 10 or 15 years ago have developed a relatively large understory, and that understory offers greater potential for the mid-term timber supply than going in, taking down the dead pine that’s left, damaging the understory that was in place prior to that, and replanting,” Bell said.

“The chief forester’s office has done a lot of work on this, and we analyze each stand individually before making a decision on whether to allow the stand to remain and the understory to survive, or knocking it down and replanting. And that’s what the Forests for Tomorrow program are all about.” He concluded.

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

Why invest in forests

The main attractions of forestry investments follow:

· Competitive returns– Over longer time periods, forestry has outperformed the major asset classes. Going forward, a diversified forestry portfolio could potentially deliver 5% to 7% per annum real returns. Active management could increase this return further, making real return expectations between 5% and 10% per annum (gross) reasonable.

· Inflation protection – Historically, forestry investments have exhibited significant correlation with inflation. It is widely seen that timber will continue to provide a degree of inflation protection due to the link between inflation and timber product prices.

· Return diversifier – In the past, forestry has shown a low-to-negative correlation to the major asset classes. Trees grow regardless of the economic and capital market conditions; investors have the option to either harvest today or allow the trees to grow larger in response to price expectations.

· Stable income stream – The long-term nature of forestry investment and its reasonably stable income stream are attractive characteristics for an investor looking to approximately match liabilities without locking into current bond yields.

· Opportunities for active management– Forestry offers significant opportunities for good active managers to enhance returns. For instance, active managers can increase returns through market timing, careful merchandising, silvicultural techniques, and releasing parts of the land for higher and better use. The potential for trading in carbon credits is an area that may lead to additional returns from forestry investing. Thus, the ability to identify a timber investment management firm run by experienced professionals, with established intelligence networks, deal flow and due diligence capability, is extremely important.

· Environmentally friendly – Timber is an example of a renewable asset. In addition, the majority of forestry investments are well-managed and sustainable.

Risks

There are a number of risks associated with forestry investing in addition to its primary one of illiquidity. These are summarized as follows:

· Demand fluctuations cause volatility in timber product prices, resulting in the greatest risk to forestry investments. When GDP growth slows, demand for timber used in paper mills, housing construction and furniture manufacturing also falls and timber prices come down. Demand can also be affected by the development of synthetic materials as substitutes for timber. However, the effects of short-term price fluctuations can be managed as forestry investors can successfully time markets for timber prices. As timber continues to grow regardless of the underlying economic conditions, harvests can be delayed until more favorable pricing returns. Risk is also mitigated in a diversified portfolio of forestry as it is unlikely that suitable substitutes will be developed that will replace wood across its variety of uses.

· An increased supply of forestry from South America and Australasia could be detrimental to timber prices. Although the forestry universe is widening, it is believed that the additional supply will primarily be used to meet increased local demand in these high-growth areas due to the transportation costs involved.

· Government regulations, such as those concerning environmental protection, may place restrictions on land usage, impeding timber production efforts. Whilst this could be a concern, at the same time it presents opportunities as increased scarcity will add to the value of timber.

· There are physical risks associated with owning forestry that can affect its biological growth. These can be for example; fire, insects, disease and weather can all damage the value of a forestry investment. However, the physical risks are substantially reduced through diversification, both geographically and by species, and through active forest management.

How to invest in forestry

There are two main options for investing in forestry:

· Direct ownership and management of forestry Property

· Indirect ownership through segregated accounts or pooled funds which are managed by specialist forestry managers

For the majority of investors, the second option will typically be the most appropriate as it will give investors a means to cost-effectively access forestry with a specialist firm dedicated to the day-to-day management.

The majority of vehicles and managers have historically been US based, however over the past year a number of European based companies have started to appear. Therefore, potential investors will need to consider any currency or tax issues that may arise from overseas forestry investments.

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

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