First, from a “nature” point of view, investment forests come in two varieties. “Natural” forests are forests that the Germans had in mind when they coined the phrase, “no one has it as good as the forester, the trees grow by themselves”. They occur naturally and have had a wide range of human intervention, but will continue to be forests until a catastrophe or a determined human effort makes them into something else (a housing development for example). In many places, even when these forests burn in hot fires, they come back over time to cover the same area with trees. The other kind of forest, and one becoming rapidly more popular, is referred to as a “plantation” or planted forest. These may be on the site of earlier natural forests or on land that hasn’t had trees on it, at least recently. Each has contrasting advantages and disadvantages for investors, which we will describe in later articles.
Plantations and natural forests do share some investment characteristics. First, the trees in the forest are capital, or the means of production, and the product, at least when the desired product is wood for the market, which it most often is. When a tree grows, new wood is put on over the old wood in the trunk as the cells in a layer under the bark (called the cambium) divide and expand. This process is driven by photosynthesis, the sunlight- driven creation of carbohydrates in the leaves and the water and nutrients taken up by the roots. Thus, as the trees grow, both capital (the whole tree and whole forest) and product (wood) are increased. This is somewhat like having a factory that makes it own machines while making other saleable goods, and is one of the investment advantages of forestry. If no trees are cut, and the forest remains productive (more about this in a later piece), the forest goes on increasing in value because of wood growth and increased productive capacity, at least up to the limits imposed by the environment. So, unlike agricultural products which must be harvested when ripe, the forest owner can choose a harvest time that best fits the market and his objectives.
But when trees are cut and sold, both capital and product are gone, at least to the degree the trees are removed. Natural forests and plantations both vary greatly in the time it takes for trees to become large enough to sell. In most “commercial forests”, those intended to produce economic returns to wood production, this varies from a few years to a century. Almost invariably, however, it is a multi-year process, meaning that the initial amount invested has to be “carried” for a fairly long time, at an appropriate interest rate, before any return at all is realized. Thus if an investor purchases a natural forest just after most of the trees are cut, or a plantation at the time of establishment, some considerable amount of time will pass before any return on the investment is available.
So, in simplest terms, the natural advantage of forests for investors is that they grow continually if managed and protected, and marketing them can be done at any time after they are large enough to sell. The natural disadvantage is that they can take a long time to be ready to sell.
Clever investors will avoid conditions that make it necessary to sell at the “wrong” time (when the market is down or when maximum value growth hasn’t been achieved) and will minimize the ‘carrying time” until payoff by buying forests with trees nearer maturity or by investing in intensive practices that shorten the time the forest needs to grow before revenue comes in.
Later in this space we will discuss other aspects of forests that should interest investors, including differences between plantation and natural forest investments, forest productivity, wood and non-wood forest products, and structures for investing in forests.
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