Timberland Investment
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Timberland Investment
Timber Industry | Deals & Transactions | Investment Rationale | Financial Performance | Investors | Asset Managers
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Asset Class Battle: Timberland Vs. Farmland

Asset Class Battle: Timberland Vs. Farmland | Timberland Investment | Scoop.it

This is why I believe farmland is a better asset class than timberland for addition to a portfolio of traditional assets:

  • The long term fundamentals of farmland for future land value appreciation are stronger than timberland. The value of timberland is highly correlated with the housing industry, and building materials can be replaced with substitutes in case of high increases in wood prices. However, corn, soybeans or wheat can hardly be replaced and are indispensable. Simply put, farmland produce more of a vital necessity than timberland.
  • Farmland owners enjoy more stable cash flow than timberland owners. 
  • Expected demand growth for primary crops is stronger than for wood due to the rising incomes in the emerging economies that causes a change in people's diet. As income increases, people's diet tend to change as they increase their consumption of protein… As more livestock is needed to satisfy the increasing demand for protein, more feed grain especially corn and soybeans are required. 
  • The farmland universe is much larger than the timberland universe. It is an untapped market by institutional investors compared to timberland which is already a well represented asset class in institutions' portfolios. ... Since institutional investors are less active in the farmland market, there are likely to be more opportunities to purchase farmland from unsophisticated farmers at discount prices to market value. 
  • Farmland is less exposed to the risk of fire than timberland. 
  • Farmland is less sensitive to the general economy than timberland. Eating habits will not drastically change in a recession, however construction activity can completely stop.

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... in my opinion the best approach to gain exposure to the farmland asset class is through the purchase of REITs. This also applies for Timberland for the same following reasons:

REITs are able to mitigate the investment risk by being widely diversified.


An internally managed REIT possesses all the advantages of private partnership including professional management, but with less conflicts of interest and no management or incentive fee structure.


It is a liquid and cost efficient way of participating in the returns of a diversified portfolio of farmland or timberland assets with yearly dividend distributions and good long term capital appreciation potential. Shares can be sold anytime, in one click of a mouse, and with only minimal transaction cost.


From a return performance perspective, it could also be argued that REITs have the capacity to achieve higher returns thanks to their access to a wider range of potential deals and a broader access to capital at a lower cost than most individual investor. The historical performance proves this statement as on average REITs have returned 14% yearly from 1975 to 2010.

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GA Forester's comment, July 21, 10:02 AM
Where does the author get information supporting Farm cash flows being more consistent than timberland cash flows? That is not my experience. Farmland can be an effective asset class, but this seems like a sales pitch rather than a dispassionate analysis.
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Institutions raise exposure to renewables

Institutions raise exposure to renewables | Timberland Investment | Scoop.it
The proportion of European institutional investors with exposure to renewable energy assets has almost doubled over the last year, according to research by alternative asset manager, Aquila Capital.

The survey carried out in February this year found 39% of European institutional investors now have some exposure to renewable energy assets or infrastructure, up from 21% last year. The proportion investing in farmland has also risen sharply, to 14% from only 3% last year.

In general, of the 61 institutional investors surveyed across Europe, 73% said they were optimistic about real assets, compared to 41% a year ago. Furthermore, the proportion that were “very positive” nearly doubled.

Aquila Capital’s research says real estate is the most popular type of real asset, with 86% of investors in the survey holding some exposure to it.
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Time to Buy the Farm?

Time to Buy the Farm? | Timberland Investment | Scoop.it

Investing in farmland and forest tracts is sometimes described as "gold with a coupon"—a hedge against inflation, because land prices tend to rise along with overall inflation, that also pays a steady income. Small investors have access to these markets through publicly traded real-estate investment trusts. Share prices of REITs that buy farm and timber land have dropped in recent weeks, but most of them yield dividends well above the current yields of about 0.95% on the three-year U.S. Treasury note and 2.11% on the seven-year Treasury.


For farms, there are two relatively new REITs.  Gladstone Land  raised $57 million in its January 2013 initial public offering and now owns 6,833 acres on 28 farms in California, Florida, Michigan, Oregon and Arizona, according to securities filings. Its dividend yield was about 5.82% in recent trading.  Farmland Partners, meanwhile, had a $53 million initial public offering in April and owns 41 farms with 23,630 acres in Illinois, Nebraska and Colorado, along with three grain-storage facilities. Its dividend yield is about 0.90%.


Publicly traded timberland REITs have been around longer.
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Weyerhaeuser converted to a REIT in 2010 and recently completed a spinoff of its home-building division. It is one of the biggest forest-products companies, with seven million acres of timber in the U.S. Weyerhaeuser recently raised its dividend to 29 cents a share from 22 cents; its yield is about 2.80%.


Plum Creek Timber owns 6.7 million acres in the Northwest, Northeast and South—and six wood-product conversion facilities in the Northwest. Its dividend yield is about 4.35%.


Rounding out the biggest timberland REITs are  Potlatch Corp. and  Rayonier, with dividend yields of about 3.20% and 5.78%, respectively.

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Farmland posts highest returns since 2006

Farmland posts highest returns since 2006 | Timberland Investment | Scoop.it

Farmland returned 20.9%, its highest annual return since it posted a 21.2% return in 2006. According to NCREIF, last year's return for its farmland index was up 233 basis points from a year ago, with the total return split between appreciation (11.5%) and income (8.7%).


The index was up 9.26% during the fourth quarter (5.02% appreciation and 4.24% income), down slightly from a year ago (9.56%). According to NCREIF, the fourth quarter almost always has the highest income return due to the conclusion of the sale of crops during the year.


In a news release, Christopher Jay, chairman of the NCREIF Farmland Committee and director of financial analysis with Prudential Agricultural Investments noted “eight of the past 10 years have also seen returns of more than 15% on a total farmland basis. Global macroeconomic trends are continuing to shape demand for agricultural products with favorable results for both income and asset values.”

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Carlton Holloway's curator insight, January 25, 2014 12:48 PM

Farmland is going to continue to play a vital role as a major investment category as international economic trends merge to support and grow global demand for quality commodity products.

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Global farmland offers potential for asset deals

Global farmland offers potential for asset deals | Timberland Investment | Scoop.it

As the world’s population swells beyond seven billion and emerging markets’ appetite for food grows, Canadian institutions are getting increasingly hungry for agribusiness and farmland acquisitions abroad.

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Canadian institutions, tired of the lacklustre returns in the market, are seeking options with better yields than gold and government bonds, such as agriculture, experts say.

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This year, Canada Pension Plan Investment Board launched its agriculture investment program, and made its first direct farmland investment in a portfolio of U.S. farmland.

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CPP’s initial focus will be the U.S., Canada, Australia and New Zealand, it added.


Meanwhile, the Ontario Teachers’ Pension Fund at the beginning of this year created a “natural resources” investment asset class. Teachers says it will look for “new opportunities in oil and gas and agriculture.”

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Last year, Caisse de dépôt et placement du Québec and British Columbia Investment Management Corp. joined with U.S. financial services company TIAA-CREF to create a global agriculture investment vehicle, with $2-billion earmarked to buy farmland in the U.S., Australia and Brazil. In 2011, Alberta Investment Management Corp (AIMCo), joined a forestry management firm in a $415-million acquisition of Australian timberlands — options for which chief executive Leo de Bever said included reverting it to agriculture.


Farmland, with its steadily rising prices, is a tantalizing investment option – and one that provides interim income by leasing it to agricultural operations, says Mr. Barnes.

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Farmland values across the globe between 2002 and 2010 have risen up to 1,800%, according to the Global Farmland Index compiled by U.K.-based real estate firm Savil.

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But the fact that prices have escalated so rapidly is a problem for potential investors, says AIMCo’s Mr. de Bever. He wonders whether the investment potential for farmland has run its course.


He explains that the rationale for investing in land is that, with rising demand for protein in the Far East, existing landstock will become more valuable. Yet he points out that land values operate on a long cycle, and that the recent run up in value has been compressed into a short timeframe. “It’s not clear to me that any increase in farm prices is going to be rewarded with an appropriate return.”


Still, Mr. de Bever says AIMCO, and other investors, will keep an eye out for farmland acquisitions — albeit a cautious one. “My guess is that there is still going to be quite a bit of demand. My concern is that I would be very picky and make sure that you’re buying right.”

Sam Radcliffe's insight:

A lot of parallels between this demand for farmland and the demand for timberland, and a lot of the same players. It will be interesting to see if the structural changes in farmland investment (e.g. TIAA) get adopted for timberland.

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Jack D Bridges's curator insight, September 30, 2013 11:24 AM

Great find from Mr. Sam Radcliffe, of Prentiss & Carlisle (http://www.prentissandcarlisle.com/).

 

If Mr. Radcliffe is right, and the same trend follows apace for global timberland markets--look out. I can think of a few established firms who will gladly sell to the many new buyers who will be forced to chase prices higher still....so much for efficient markets, huh? 

josh dekoning's curator insight, October 3, 2013 1:15 PM

The people of Canada are starting to buy up more farmland becuase the value is increasing and they can see the amount of potential money they can make.    With more land available we will be able to provide food for the 7 billion people on the world.  Hopefully the price will not continue to grow otherwise people will not be able to afford to buy it because they won't be able to make their money back and will lose money.

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Farmland Suddenly Attractive to Investors

Farmland Suddenly Attractive to Investors | Timberland Investment | Scoop.it

In Callan’s Ask the Expert research paper “Investing in Farmland—Looking to Buy the Farm,” Jamie Shen, senior vice president and head of Callan’s Real Assets and Alternative Investments consulting groups, reveals that farmland investing has reached an unprecedented level of interest among institutional investors looking for higher returns on their investments.


Though farmland investing has been around for more than 20 years and Callan has covered the asset class for more than 12 years, it was only within the last 2 years that Shen saw an explosion in client interest.

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Interest in farmland is also up because the asset class is no longer considered a standalone investment or part of a real estate allocation— which usually required a meaningful portfolio allocation of approximately 5%. Now that farmland has been re-categorized to the real assets category (which includes timber, infrastructure, private energy, real estate, commodities and TIPS), a 1% allocation to farmland is considered notable.

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Farmland continues to outperform timber

Farmland continues to outperform timber | Timberland Investment | Scoop.it
Since 2007, the NCREIF Farmland index cumulatively has returned more than 200%. Farmland’s return significantly outpaced both the NCREIF Timberland index and Bloomberg Commodities index, which returned 77.11% and -52.66%, respectively. In the first quarter of 2016, timber returned -0.26%, while farmland returned 1.38%.
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Investors bet the farm on agriculture

Investors bet the farm on agriculture | Timberland Investment | Scoop.it

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The Renewable Resources fund at GMO started adding agriculture to its timber portfolio in 1998. This is a big advantage in marketing terms, since it has an established record, unlike many funds. “When you look at the universe of managers, the first challenge is the lack of record, the lack of clarity about whether they can actually manage operationally,” says Ms Zinurova.


Although timber and agriculture have many similarities, with both depending on biological growth for the larger part of the yield, timber is much less vulnerable to price volatility, as the trees can simply be stored “on the stump” if prices are unattractive. A further significant difference is that the returns on forestry investment have been driven almost entirely by biological growth, with just 8 per cent driven by changes in the value of the land, according to Olivier Lebleu, head of non-US distribution for Old Mutual Asset Managers, whose subsidiary Campbell Global manages $7bn of forestry and natural resources.


That is very different from farmland, where the returns historically have been driven equally by biological yield and capital appreciation.


However, like timberland, farmland is a long-term investment. With 15 years regarded as a short lifespan for a fund, this makes private equity and property seem like short-term investments. In this time horizon, it is inevitable that sustainability becomes an issue. There is an increasing awareness of the pressures on the environment, as well as the near certainty of big increases in the global demand for food as the population grows, and demands a higher standard of living.

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GMO - A Farmland Investment Primer

GMO - A Farmland Investment Primer | Timberland Investment | Scoop.it

Farmland is a real asset that combines solid investment fundamentals with the potential for attractive cash yields, inflation hedging, and consistent returns from biological growth. Furthermore, farmland total returns tend to be uncorrelated with financial asset returns, offering genuine portfolio diversification for institutional investors. While institutional ownership within the asset class has grown steadily over the past few years, it still accounts for less than 1%1 of total global agricultural land ownership, presenting significant opportunity for sustainable yield enhancement through targeted farmland investment in certain regions.


The pages that follow present an overview of the key characteristics and potential risks of farmland investing, consider the routes for implementation, and make the case for a diversified, cross-regional approach to the asset class.

Sam Radcliffe's insight:

Great read to become acquainted with the ag investment sector.

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In central Minnesota, potatoes are pushing out forest land

In central Minnesota, potatoes are pushing out forest land | Timberland Investment | Scoop.it

Agriculture is eating into central Minnesota’s forests so aggressively that state regulators and a prominent legislator are sounding the alarm about threats to wildlife habitat and a large, sensitive aquifer that stretches below parts of four counties.


The latest case is a 1,500-acre project in Cass County, which triggered a contentious legislative hearing last month over the owner’s plans to grow potatoes for McDonald’s and other customers on land that was covered with trees just 10 years ago.


In recent years, 5,000 to 6,000 acres of pine forests in Cass, Wadena and neighboring counties have been cleared for chemically intensive row-crop agriculture, and state officials say nearly 100 square miles of timber land now owned by Potlatch Corp. is at risk as the company divests itself of commercial forests in Minnesota.


Similar tensions could face the entire state faces as it copes with persistent water contamination and overuse, regulators say. The risk is especially worrisome along the border between traditional farm lands and the forested areas in central Minnesota, where contaminants can percolate straight through sandy soils into groundwater, and from there to trout streams and popular lakes.

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REIT goes shopping for farmland

REIT goes shopping for farmland | Timberland Investment | Scoop.it

An investment firm wants to buy farmland on the West Coast and elsewhere with more than $50 million raised through the initial public offering of its stock.


The Gladstone Land Corp., based in McLean, Va., is launching a real estate investment trust for farmland, a concept that has previously been applied to commercial buildings and timber properties.

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The firm's "sweet spot" for acquisitions will be parcels in the $8 million-$10 million range, Gladstone said. A secondary stock offering is likely to raise funds for further takeovers after the IPO money is spent.


The company is also looking to hire more employees to oversee purchases in California, Oregon and Washington, he said. It's also looking at parcels in Georgia, New Jersey, Michigan and North Carolina.

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The company plans to buy land and then lease it back to farmers who want cash but don't want to take out mortgages, he said. It will pursue such deals with large independent growers and "corporate farms" that already have access to national produce distribution channels.


Most leases will have to be renewed every two to five years, which makes some investors nervous but allows for quicker increases in rents, Gladstone said.

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Big pension funds plough money into farmland

Big pension funds plough money into farmland | Timberland Investment | Scoop.it

Some of the world's biggest pension funds said they have been ploughing money into farmland around the world as they seek to diversify portfolios andgenerate stable returns at a time of market volatility

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