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Small beetle with a big lesson for investors

Small beetle with a big lesson for investors | Timberland Investment | Scoop.it

The mountain pine beetle is about a third of an inch long and probably not endowed with advanced powers of financial analysis, but it has something important to teach investors about how environmental risk is changing.

 

In the past decade, the beetle has killed millions of trees from New Mexico to northern Canada. For investors in North American timber, the obvious response to an outbreak in one place would be to diversify into assets unaffected in other areas – but the beetle has spread so fast that such a strategy was doomed to failure.

 

What the beetle is telling investors is to stop viewing environmental risk in terms of isolated events.

 

There is increasing evidence that extreme weather, resulting in floods in the Somerset Levels or drought in California, is posing systemic financial risk, not just affecting a single asset at one time but large swathes of portfolios over time. Similarly, government initiatives to reduce environmental impact, for example by developing regulations to limit pollution, can also create widespread financial risk that is impossible to mitigate. Asset owners should pay more attention to these developments, improving their analysis and seeking out suitable hedges or mitigation steps.

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Drought Hurting Timber Industry

Drought Hurting Timber Industry | Timberland Investment | Scoop.it

State forestry officials say Georgia’s ongoing drought is hurting Georgia’s timber industry by putting pine trees at risk.


Rangers with the Georgia Forestry Commission tell WALB-TV that the drought is making pine trees more susceptible to disease and insects.


Pine beetles feed on trees that are left in bad shape as result of dry weather. The insects can penetrate the bark and kill the tree.


Officials say Timber in Georgia is valued at more than $500 million a year.

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Insect Whittles Down Timber Supply

Insect Whittles Down Timber Supply | Timberland Investment | Scoop.it

The tiny mountain pine beetle is creating huge problems for lumber producers in the U.S. and Canada and contributing to the rising cost of new homes.


The tree-killing insect, dendroctonus ponderosae, is only about five millimeters long. But some analysts say the pest poses the most serious threat to the timber industry since the spotted owl, which the federal government named a threatened species 20 years ago. That designation curbed logging on millions of acres of federally owned timberland in the West and resulted in the loss of thousands of timber jobs.

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The U.S. Forest Service estimates that in the past dozen years, the beetle, which thrives in the mountain forest areas of the West, has chewed through between 40 million and 45 million acres of timber, or about 12% of the forested land west of the Mississippi. The infestation, which first became serious in Colorado, has moved to other states, including Montana, Idaho and Wyoming.


That is exacerbating a lumber shortage that is acute in places such as British Columbia, Canada—a major source of wood for U.S. builders.


A recent report by lumber-industry consultant International Wood Markets Group estimates that the beetle will have killed as much as 58% of the pine in the region by the time the infestation has run its course over the next decade.


While it is unclear how much the beetle has caused prices to rise, the cost of framing lumber is up 27.4% in the past two years.

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Analysts at U.S. Trust wrote in a research note that the lumber harvest in British Columbia could decline 50% for the next half-century because of the pine beetle. The insect's impact could prove a more significant supply shock than that of the spotted owl in the 1990s, the bank said.

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