Timberland Investment

The Oregon Court of Appeals ruled today that the 2014 sale of the 788-acre East Hakki Ridge tract on the 93,000-acre Elliott State Forest east of Coos Bay was illegal. The ruling, which overturns the sale of the public land to a private timber company, marks a major win for the state’s public lands.

“This is a huge victory for public lands enthusiasts who were locked out of the forest after the state of Oregon recklessly sold this tract to the timber industry,” said Josh Laughlin, executive director of Cascadia Wildlands and an individual plaintiff in the case. “Privatizing public land would have been a disaster for imperiled salmon and wildlife that rely on clean water and old forests to survive.”

Cascadia Wildlands, Audubon Society of Portland and Center for Biological Diversity brought the lawsuit under an Oregon law, ORS 530.450, which states that it is illegal to sell the Elliott State Forest. State officials defended their decision to dispose of the parcel in court saying the State Land Board should not be required to follow the law.

“The decision by the state to sell off portions off the Elliott State Forest and avoid its legal obligations to protect imperiled marbled murrelets and the forests in which they depend was fundamentally flawed from the start,” said Bob Sallinger, conservation director for Portland Audubon. “It is now time for the state to step up and manage this amazing forest in a way that truly protects murrelets, spotted owls, coho salmon and other species that depend on our older forests.”
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Sold to Seneca Jones Timber Company, the East Hakki Ridge parcel was one of a handful of forested tracts the state sold to the timber industry in 2014. Another parcel, the 355-acre Benson Ridge tract, was sold to Scott Timber Company and is also currently subject to litigation.

The different state sales were looked at as test cases to sell off the entire Elliott State Forest to the timber industry. The State Land Board, made up of the governor, secretary of state and treasurer, oversees management of the Forest and was ready to sell the entire forest in 2017.

Sustainable forestry represents a major portion of conservation finance’s investable landscape. According to a 2016 Forest Trends report, “State of Private Investment in Conservation 2016,” sustainable timberland investments accounted for approximately 34 percent of all private conservation investments from 2004 to 2015.

Also, according to a 2017 report by Credit Suisse AG and McKinsey Center for Business and Environment, “Conservation Finance from Niche to Mainstream: The Building of an Institutional Asset Class,” sustainable forestry is among the most well-developed conservation finance markets. With the maturity and scale needed to attract higher volumes of private capital, it resembles a mainstream investment product.

However, according to speakers at the 2018 RISI Forest Investment Conference, timberland has matured as an asset class. Financial returns have fallen dramatically, particularly since the mid-2000s, making timberland investments less attractive. As a result, timberland investment managers will feel pressure to differentiate their products and increase returns.

This may lead managers to adopt innovative models such as well-managed conservation strategies. Because such strategies can increase returns through creating additional revenue streams such as the sale of carbon credits, they will likely become more common in timberland investing. Thus, the maturation of the timberland asset class could prove to be a catalyst for the growth of conservation finance.

The National Council of Real Estate Investment Fiduciaries (NCREIF) has released second quarter 2018 results of the NCREIF Timberland Index. The index returned 0.48 percent for the quarter, down from 0.92 percent last quarter and 0.70 percent in the second quarter 2017. The EBITDDA return, at 0.75 percent, was lower than 0.87 percent last quarter but higher than 0.62 percent a year ago. Appreciation in the second quarter dropped by 0.27 percent.

The Total Timberland Index had a 3.57 percent trailing year return, with 1.41 percent as the 2018 year-to-date total return.

The Northwest led regional returns for both the second quarter and for the trailing year. The total quarterly return for the Northwest was 2.49 percent, fairly evenly split between appreciation and EBITDDA return. The South dragged the index in the second quarter, with a total quarterly return of -0.35 percent, driven by a negative appreciation return of -0.94 percent.

Timberland market value per acre, at $1,804 as of the second quarter, has slightly decreased from $1,824 over the past year. Within the regions, the Northwest region continues to climb higher with a 5.78 percent increase year-over-year in the market value per acre. Market value per acre for the South region continues to follow closely with the Total Timberland Index market value per acre.

The NCREIF Timberland Index consists of 453 investment-grade timber properties with a market value of $25.3 billion. This includes 307 properties in the South, 93 in the Northwest, 35 in the Northeast, and 17 in the Lake States. This data enhances the ability of institutional investors to evaluate the risk and performance of timberland investments across the United States.

In the American Transportation Research Institute’s annual industry issues report for 2017, driver shortage topped the list of critical issues facing the industry for the first time since 2006. The industry was around 51,000 drivers short in 2017 - up from 36,000 in 2016 - and that number is projected to increase to a whopping 174,000 by 2026.

As virtually every segment of the economy grows, and online sales continue to soar across many industries, the demand for truck drivers is extreme. Shipping expenses are at an all-time high: it costs more than $1.85 a mile to ship a dry, non-refrigerated good. That's an increase of nearly 40 percent from a year ago, according to data from DAT Solutions.

Businesses are compensating by increasing driver wages and getting them home more often.

"It's as bad as it's ever been to find drivers," Bob Costello, chief economist at the American Trucking Association, told the Washington Post. "Companies are doing everything they can to make drivers happy: increasing pay and getting them home more often, but that means they aren't driving as many miles."

Many wood products companies have reported that the shortage of drivers is directly responsible for their own fourth-quarter shortages, according to the Hardwood Distributors Association (HDA). Some are seeing significant impacts to capacity levels due to inability to efficiently transport materials.

Montreal-based Resolute Forest Products' lack of drivers impeded its ability to ship lumber from its sawmills to its paper plants, said now-retired CEO Richard Garneau. Garneau said truck driver shortages caused production slowdowns, which along with restructuring in its specialty operations, reduced volume and increased distribution costs.

Arkansas-based Anthony Timberlands CEO Steve Anthony told Arkansas Business that its product is just sitting on the shelf. Anthony said he can't find any trucks. Anthony said that despite seeing the strongest market in his lifetime - with robust prices and surging demand - he has been unable to reap rewards.

Low unemployment, uninterested young people, the advent of self-driving trucks, and new and required implementations all seem to be factors.

Prices for wood to build and renovate houses have as much as doubled over the past six months, increasing costs for consumers but boosting Maine’s softwood sales and signaling a turnaround in that segment of the forestry market, industry experts say.

A number of factors drove up the price of wood. They include pent-up demand for new houses or additions following the recession, forest fires last year in western Canada that destroyed prime forests and shuttered mills for up to two months, a trade dispute between the United States and Canada, and hurricanes and other weather that created demand for repairs and new homes. A shortage of railcars and trucks also made it more difficult to transport lumber.

That all translates into a tight supply of wood.

To meet demand, mills in the state are boosting production, adding jobs and raising wages. Some lumber yards are giving materials quotes to builders that are valid for only one week because prices are fluctuating so dramatically. And builders are seeing strong demand from home buyers, who will have to pay an extra $7,000 to $15,000 for a new house.

The New Hampshire Fish and Game Commission has voted unanimously to appropriate $500,000 from its wildlife habitat account toward the purchase of two parcels comprising roughly 3,200 acres in Newport, Croydon and Grantham from William Ruger Jr.

One parcel, the 1,253-acre Loverin Tract, straddles the Croydon/Grantham town line, and the Brighton tract of 1,967 acres sits on the Croydon/Newport town line. Both parcels abut Corbin Park, the private, fenced game preserve that encompasses more than 20,000 acres in five Sullivan County towns.

Fish and Game Wildlife biologist Jim Oehler told the commission at its meeting last month that the purchase, when combined with other open land nearby, would create nearly 50,000 acres of an “unfragmented block” of wildlife habitat, the largest tract south of the White Mountains.

Additional funding for the $3.25 million purchase price will include $2.43 million, or 75 percent, from the U.S. Fish and Wildlife Service’s Wildlife Restoration account and another $312,500 in grants from the state’s Land and Community Heritage Investment Program, or LCHIP. Fish and Game’s cost is equal to the required 25 percent match of federal money.

Institutional investors historically have been relatively slow to embrace public real estate1 as a significant part of their allocation to real estate. Real estate allocations of most pension funds and other institutions are overwhelmingly, and in many cases entirely, invested in private real estate vehicles such as open-end funds, closed-end funds, joint ventures, and separate accounts. But have these large institutions been remiss in their reluctance to invest in public real estate? More importantly, has this been a conscious decision or simply a lack of action due to inertia?

In the first section of this article we examine (i) reasons why institutions have generally declined to utilize REITs; (ii) recent studies that may help lessen concerns over the correlation characteristics and volatility of public real estate; and (iii) the growth of the overall public real estate investment market and its emergence as a new industry class. In the second section, we discuss what including REITs as part of a real estate allocation could mean for institutional investors. We conclude that there are powerful arguments for institutional investors to re-examine any long-standing views they have regarding investment in public real estate.

Buying timberland for sale as an investment takes careful study, patience, professional assistance, and, of course, money. Because most land does not service debt well, many (if not most) land transactions are cash deals. Purchase funds come from a variety of sources – personal wealth, the sale of another property, or the wise investments in traditional assets (stocks, bonds, mutual funds). A lesser known, but steadily growing source of funds for timberland and other real estate investing, is the self-directed Individual Retirement Account (IRA).

Self-directed IRAs are similar to standard IRAs with the key difference being that the investor has much greater flexibility to invest in alternative or “non-traded” assets. While this investment vehicle has been available since 1974, only 2% of the nearly $7 trillion in total IRA balances is held in self-directed IRAs. Much of the reason why those with retirement funds haven’t heard of this option is that most IRA custodians/financial advisors focus solely on the standard investments like stocks, bonds and CDs. However, given the volatility of the stock market, although presently at all-time highs (for now), an increasing number of savvy investors are seeking alternatives that can provide greater diversity, and thereby greater stability, to their total retirement portfolio.

For the vast majority of Americans, the IRA is the largest amount of money they may ever hold in their lifetime. While diversifying assets is important to long-term growth, so too is protecting the principal and balancing risks against the reward. Therein lies the second most likely reason why many have avoided tapping their retirement funds to diversify into less well-known alternatives. The benefits of owning timberland via a self-directed IRA are well-documented, but the asset class and the IRS obligations must be fully examined and understood well before deciding to crack open the retirement nest egg for acquisition funds.

Socially conscious investors who seek to diversify from the traditional non-renewable industries are also turning to the self-directed IRAs. A professionally managed timberland investment provides a renewable, sustainable product made from trees. In addition, well-managed forests provide clean air, clean water, wildlife habitat and local jobs for foresters, loggers and mill workers.

Timberland is a unique type of real estate that is well-known for its advantages including inflation protection, wealth preservation, biological growth and reasonable tax status. For instance, due to biological growth, timber volume increases annually regardless of economic conditions. Potential losses due to fire, insects and disease can affect growth to varying degrees in different regions of the U.S.

Digital technology is revolutionizing industries around the globe, from manufacturing to healthcare. Even agriculture is undergoing enormous change due to technologies like variable-rate fertilization and automated harvesting. Forestry, on the other hand, has lagged behind most other industries in the adoption of digital technology. This, however, is finally starting to change. Studies are already showing productivity increases in general agriculture at rates of 5 to 25 percent annually, with returns on investment of one to two years for digital technology (depending of course on many factors, such as farm size, crop selection, and other conditions). Analogous gains are not merely on the horizon for forest products but are also being realized by some pioneers today. The size of these gains is comparable only to the shift from animal-powered to mechanized processes and, in food farming, the Green Revolution of the 1960s.

That said, in forestry-management science, digital solutions currently confront a system that still operates largely on the basis of fundamentals developed by Hans Carl von Carlowitz more than 300 years ago.1 Processes are highly manual and analog, with “broad-brush” management prescriptions. Introducing advanced technology in forest management faces several challenges:

• There is little corporate involvement in forestry; 76 percent of forests globally are publicly owned,2 and most of the remainder are held by small private owners (who typically hold, on average, less than one hectare, or roughly two-and-a-half acres).
• State and other public forest owners tend to be relatively conservative in their management style and, to a greater extent than private enterprise, need to balance diverse objectives for commercial performance with social and environmental goals.
• Many private forest owners have operations characterized by a lack of scale and expertise required to adopt the latest technologies.
• Large-scale commercial forests, from eucalyptus plantations in South America to managed natural forests in Europe and North America, are in remote and rugged terrain, presenting many challenges for adoption of new technologies.
• While a wide range of precision forestry technologies exists, relatively few practical examples are up and running, and few understand how the technologies translate into real use cases.

High-net-worth investors now will have access to alternative investment strategies due to a new agreement between Barings and iCapital Network, the financial technology platform. iCapital has provided Barings with a customized platform to offer alternative strategies to individual clients, including RIAs and their clients.

About 20% of Barings $306 billion in assets under management is in alternative strategies, defined as private credit, private equity, real assets (such as commodities, timber, energy) and real estate.

“Clients are looking for a diversified set of solutions that can help them meet their investment goals,” said Duncan Robertson, head of Asia and global head of distribution and marketing for Barings, in a statement. “Increasingly, alternative investments are an important component of a balanced portfolio, and both our high-net-worth and institutional clients will now be able to leverage the full capabilities of our global investment platform.”

iCapital CEO Lawrence Calcano added that “This agreement with Barings is an exciting step forward in our mission to democratize alternative investments for the high-net-worth community.”

A paper mill in Port Hawkesbury, N.S., is celebrating a decision by the United States Department of Commerce to end countervailing duties that were imposed in 2015 on its glossy paper.

Some American companies had complained that several Canadian mills, including Port Hawkesbury Paper, were receiving unfair subsidies.

The tariff against Port Hawkesbury Paper was 20.18 percent.

Mill officials won't say exactly how much the tariffs cost the company over the past 36 months, but co-manager Mike Hartery said the impact was significant.

"It had strained our business significantly, to the point where there would be a concern as to whether it would be an ongoing operation in the area," said Hartery.

The decision to end the duties came Friday, after the last remaining U.S. producer of glossy paper involved in the complaint, Verso Corp., withdrew its objections.

Verso reached a settlement with Port Hawkesbury Paper and J.D. Irving of New Brunswick this spring, which will see the two Canadian companies pay Verso up to $42 million.

That money will come from the duties that the Canadian companies will be refunded, dating back to 2015.

Port Hawkesbury Paper officials will not say how much they expect to get back, but they said the ruling will also allow the mill to ramp up its sales in the U.S., which traditionally has been its largest market.

Forest-products companies plan to increase their investments in digital technologies over the next three years, in part to protect their market share and competitive advantage, according to a new report from Accenture.

Based on a survey of 200 executives at forest-products companies in 10 countries, the report, “Forest Products: The shift to digital accelerates,” also found that cybersecurity remains a concern for these companies, with only a minority able to counter attacks effectively, thereby prompting data-security concerns.

The study focused on forest-products companies with global annual revenues greater than US$500 million and that currently leverage digital technologies and/or are pursuing digital transformation. The survey was fielded between October and November 2017 and included executives from companies headquartered in Australia, Brazil, Canada, Finland, Indonesia, Malaysia, Norway, Singapore, Sweden and the US.

Among the report’s key findings:

• More than four-fifths (82%) of the executives surveyed said their organizations are investing more or significantly more in digital technologies than they did in the previous financial year.
• An even greater number (88%) expect to increase their overall digital investment over the next three years.
• Among the top three technologies cited for digital investment, the most popular were: big data/analytics/edge computing; artificial intelligence (AI) / machine learning (ML); and advanced process control, cited by 46%, 41% and 38% of respondents, respectively.

Southern yellow pine (SYP) lumber prices are at record highs. While this trend is benefiting southern sawmills, many timberland owners operating in the US South are asking the obvious question: Why are log prices in local markets not reflecting those of a surging lumber market?

The answer to this question is not as straightforward as it may seem. While log prices are to some degree tied to lumber prices, the association is a loose one. There are a number of mutual factors that affect both lumber and log prices, but each market also has independent drivers that do not overlap, which is why we see a disconnect in the markets.
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The two primary factors that drive lumber price are housing starts and lumber inventory.

Housing starts: Historically, the main driver of SYP lumber prices has been the larger US housing market, which has experienced slow, continuous improvement since the great recession that began in 2007. Total starts are currently around a seasonally adjusted annual rate of 1.3 million units, which is slightly higher than the 1.2 million total starts of 2017. While there is still room for improvement (1.5 million starts is the historical average), demand remains strong as more millennials are transitioning into homeownership.
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Lumber inventory: The market’s capacity to produce lumber is the other key factor that drives price. Many mills were shuttered in the aftermath of the great recession as lumber demand all but disappeared. This correction in capacity has remained largely unchanged for several years. However, mills are currently scrambling to keep up with demand, which has resulted in tight inventories and upward price pressure.

The southern sawmill industry is reacting, however. We continue to see large capital investments at facilities across the South, as well as new facility announcements and expansions from Canadian forest products companies. As more capacity comes online in the coming years, the inventory strain will likely diminish and allow lumber prices to settle. This added capacity will also help to reduce the large oversupply of standing timber throughout the region, and the surge in log consumption will slowly begin to affect prices at the mill gate and on the stump.
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The two primary factors that drive log prices at both the mill gate and on the stump are the general economic principles of supply and demand.

Supply of logs (as standing timber): While many mills were forced to adapt and improve efficiences in the immediate aftermath of the great recession, many landowners simply pulled their timber off the market in hopes of driving prices higher in the future. This combination has caused the total volume of logs on the stump throughout the US South to rise unimpeded for the last decade. This oversupply combined with improved mill efficiencies is keeping log prices low, even as demand for lumber and sawmill production increases amid an improving housing market.

Demand from mills: Over the last decade, demand from mills has not tracked with the rising demand for lumber. During the years immediately following the great recession, the surviving mills became much more efficient at sawing timber, which ultimately allowed them to use less wood in the lumber-producing process. These mills adapted to the market and learned to do more with less, which has kept log demand down despite an improving housing market.

Pine log prices have remained pretty steady across the US South over the last decade. There was a slight uptick in prices during 2009/2010 that coincided with the first-time homebuyer housing tax credit policy, but log prices dropped again in 2011 before showing slight appreciation from 2012 to 2014.

Swedish self-driving truck startup Einride is out with another eye-catching prototype. Much like the company’s first autonomous offering, the new T-Log is all-electric and completely driverless, and it completely lacks a front cab for human drivers. But unlike the T-Pod, the T-Log comes equipped with off-roading capabilities and is designed for one specific purpose: hauling tons of gigantic tree logs.

Unveiled on Thursday at the UK’s Goodwood Festival, the T-Log is more powerful than the T-Pod, and it’s designed to carry up to 16 tons of cargo. It can also navigate dense, uneven forest roads, the startup claims, making it ideally suited for logging purposes.
"Self-driving on dirt and gravel roads"

How exactly this truck with no human driver can handle unmarked, often dirt and gravel roads is pretty interesting. Most self-driving vehicles rely on a suite of sophisticated sensors, mapping data, and deep learning capabilities to handle the driving responsibilities. But even then, a majority of operators will stick to highly predictable environments, like suburban communities with robust roads and signage. (MIT recently proved that self-driving cars can successfully navigate rural, unmapped roads.)