Timberland Investment

Corn, coffee, cattle, and other crops can be raised on land that also supports cultivated timber. This symbiotic approach, known as agroforestry, has clear ecological benefits – and it could become a new asset class for timberland investors. The opportunities and obstacles to expanded agroforestry are explored by the Global Agroforestry Review, a new report from RISI, the leading information provider for the global forest products industry.

 

"Public concern about environmental impact is mounting on agribusinesses, and on the pension funds and others who invest in them," said John North, RISI International Timber Economist and co-author of the report, along with RISI Director of International Timber Bob Flynn. "Timberland investment management organizations (TIMOs) and other investors should recognize the risks of current 'monoculture' approaches, and the potential for agroforestry to mitigate those risks."

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Agroforestry is an accepted practice throughout much of the world. Important cash crops, such as corn and rice, are planted in rows among eucalyptus trees in Brazil, India, and other major agricultural exporters. Coffee and cacao are harvested from timber-producing forests in Latin America and Asia, and cattle graze among cultivated pines in Argentina – a practice called "silvopasturing." Researchers and landowners in the US and Brazil, among others, are exploring how agroforestry methods can be scaled up worldwide.

 

Promising agroforestry projects include a recent investment by PSP, one of the largest pension funds in the timberland space, in a Brazilian coffee producer that integrates timber and coffee operations.

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Benefits of agroforestry can include:

• Diversification of revenue: Cash crops harvested annually can support farmers, landowners, and investors while trees mature.
• Environmental sustainability: Trees can prevent erosion and provide shade, while benefiting from the water/fertilizer applied to other crops.
• Social responsibility: Institutional investors face growing scrutiny of their practices, especially in the developing world. Agroforestry programs can demonstrate active support for the well-being of vulnerable farmers and ecosystems.

 

Agroforestry has yet to attract significant investment from TIMOs, but North and Flynn believe that the conditions are right for growth. "In our research for the Global Agroforestry Review, we found that the investment community believes that agroforestry is fine for farmers but very difficult to do on a large scale. It seems to complicate forestry operations, and there's uncertainty around valuation of land that's managed for multiple crops and end-users," said North.

 

"Based on our review of agroforestry worldwide, we believe that this concern about scale somewhat misses the point," North said. "It doesn't have to be all or nothing. Agroforestry could comprise only a small portion of a timberland fund while adding considerable value, both through mitigating risks on-site and by improving relationships with farmers, communities, investors, and other stakeholders throughout the supply chain."