Timberland is a strong hedge against inflation
Inflation has become a major concern in recent months. Central banks around the world are adding to the existing money supply at unprecedented rates to offset the economic impacts of Covid-19. The short- and long-term implications of these policies have been fiercely debated; however, one result is indisputable – this unprecedented quantitative easing will eventually result in currency depreciation. In other words, some level of inflation is inevitable.
In this environment, many investors are turning to alternative assets to hedge against inflation, from gold to real estate to ETFs. As many alternatives are beginning to appear overbought, investors are branching out into less-common asset classes.
One such asset class is timberland. A strong inflation hedge due to its positive correlation with inflation, long-term appreciation potential, and eventual cash yields, the timberland space has been cited as one of the best-performing inflation hedges available.
Let’s explore some of the benefits of timberland, as well as how it holds up compared to other asset classes.
It’s low season for Treasury bonds
Inflation is an incredible equalizer. The average consumer, mom-and-pop shops, and investment bankers all experience it. Any reasonably constructed portfolio considers the projected rate of inflation and attempts to, at a minimum, outperform it.
This is often easier said than done. Treasury issuances are known as “risk free investments” due to their backing by the full faith and credit of the issuing country. In the United States, this promise is ironclad.
But despite the stable nature of payment, the current yields from Treasury issuances are meager compared to the current rate of inflation. Currently, a 10-year treasury bond will net you anywhere between a 0.5% and 0.75% return. With the average annual rate of inflation at 1.71% since 2010, Treasury issuances may beat burying your money in your backyard, but not by much.
Time to branch out?
While it might not be a good idea to bury your money, dirt holds one of the secrets to hedging against inflation. Timberland investments are at the perfect crossroads of economical and ecological. They serve as an excellent hedge against inflation, have the potential to protect the environment by enriching biodiversity and sustainable harvesting, and are roundly supported by most governments and forward-thinking private enterprises.
Timberland has strong roots to survive stormy economic times.
Private timberland has a very high positive correlation with inflation, making it one of the best performing assets during periods of sudden (and often unexpected) consumer price increases. For the 30-year period of 1978 to 2008, private timberland saw a positive inflation correlation of 0.2, nearly twice that of commercial real estate. Investment giant J.P. Morgan recently praised timberland as an excellent addition to a diversified portfolio, stating: “Timberland correlates highly with inflation and is therefore an effective investment for preserving capital. It has outperformed other commodities in both high and low inflationary environments.”
Timberland appreciates on its own.
Another fantastic benefit of timberland investment is the sector’s ability to weather poor economic conditions. Unlike other commodities such as oil or sugar, which need to be consumed expediently lest they become worthless, timber can be stored indefinitely. Simply don’t harvest the timber, and nature preserves the asset on your behalf.
This process, known as “storing on the stump,” not only allows investors to avoid harvesting and selling in undesirable economic conditions, but also adds value to the underlying investment. After all, trees are living organisms and the longer they grow the larger they become. By staying off the market and growing for an extra year or two, a healthy amount of additional biomass is achieved. A few years can mean a material difference of 10% or more when it comes time to bring the product to market.
Timberland Can be Sustainability Balanced
Ecologically, the forest industry has taken immense steps to assure that logging is not only sustainable, but a net positive for the overall ecology of the area. Best Management Practices (BMPs) are governmentally enforced in the United States and other nations with robust timber industries. These practices help minimize soil erosions and watershed damage while reinforcing methodologies that assure good stewardship of the land. As a result, places like Michigan are now more forested than they’ve been since the 1930’s.
The enforcement of sustainable logging practices, coupled with a rise in overall forest coverage, is occurring at a perfect time. Covid-19 has set off a wave of do-it-yourself building booms that recently sent lumber futures to a new all-time high. Given that trees take decades to grow to a point of viable harvest, this is a welcome move for many industry participants.
It’s true that money doesn’t grow on trees. Nonetheless, timberland can certainly help preserve the integrity of your portfolio in the face of inflation and beyond. Sustainable, perfectly preservable, and highly correlated with inflation, timberland is a spectacular addition to any portfolio.