Forestry Investment Risks
By David Garner – Managing Partner, DGC Asset Management
Forestry as an asset class has outperformed global equities for twenty years, and growth in timber prices due to ever increasing demand and depleted raw material supply have led to Forestry performing at an average return of 15% per annum.
The emergence of South American economies however has led to UK timber prices falling, and according to IPD (www.ipd.com), UK Forestry performed at just 7% for 2008, as supply from sustainable projects in the likes of Costa Rica and Panama offer end users better value.
Despite the overall sterling performance of Forestry investments in general there are of course risks however with the application of a fixed structure around the investment, most of these risk can be mitigated and some eliminated entirely, lets look at some of the risks involved in Forestry investment and what can be done to mitigate them.
According to the United States Department of Agriculture (USDA), 0.5% of all forestry is destroyed by fire, pests and disease etc. With managed forestry, the risk historically has been a lot lower at approximately 0.3%. Even so, we are happy to promise to restock any forestry that has been destroyed. The lumber at this time will be salvaged and sold on.
There have been very few forest fires in Canada and America; even so, we have special precautions in place to prevent serious damage to our forestry plantations if ever there was a fire. Plantations should be addressed with appropriate fire breaks.
Pests & Disease
There are a few well known pests and diseases that can affect our crops especially in the early years. Different species are planted side by side to minimize the risk of these pests spreading, forest management teams should know exactly what to look out for and how to treat any problems as soon as they occur.
Flooding & Drought
Water is a vital resource in some areas that do not receive enough yearly rainfall and it is the first consideration when constructing a new forestry plantation within hotter areas. There should always be enough water being pumped into these areas to support effective growth.