The long and short of boom in timber

TONIGHT'S Academy Awards gala likely will show film clips of sylvan vistas in New Zealand, drawn from the The Lord of the Rings: The Return of the King.

Investors have their eyes on the Kiwi forests for a different reason.


The Harvard University endowment recently acquired 408,000 acres of timber rights in New Zealand, the biggest commercial forest in the nation.

The investment by America's largest university endowment ($20 billion) is helping create an unlikely group of tree-huggers.


Reacting to the global plunge in stock prices in 2002-2003, Wall Street is promoting investments that don't rise and fall with stocks.

The quest for diversification has led investors into commodities, including timber.

The case for commodities as a portfolio diversifier, and not simply a bet on higher prices, remains an issue.

"We haven't seen it," said Brian Birnbaum of the pension consultant Ennis Knupp & Associates. "We don't think there is a panacea asset class that offers you low correlation with stocks and high returns."

Nonetheless, three current factors - hope for economic growth in China, fear of inflation and pessimism toward the dollar - have sparked a global fire under timber that has little to do with the long-term investment properties of the asset.

"Lumber prices are going through the roof again," The Wall Street Journal trumpeted Thursday.

The strong housing market, recent forest fires, a rail strike in Canada and a reduction of lumber imports have prompted substantial gains in lumber futures prices. Futures hit a 4 1/2 -year high at the Chicago Mercantile Exchange on Wednesday.

Rayonier Inc., a forest products real estate investment trust, rose 87 percent in the past 12 months, handily beating Nasdaq stocks.


Commodity prices come and go. But the surge of interest in timber presents a timely metaphor for a perennial clash of investment philosophies.

In New Zealand, publicly traded companies that manage timber acreage have been a losing bet.

Like publicly traded corporations, forests generate a long-term internal rate of return, called the biological return in timberland, and a "stumpage" return, based on short-term supply and demand for lumber.

In simple terms, short-term investors watch stumpage prices; long-term investors watch biological growth.

"We ask our investors for a 10-year commitment," said Eva Greger, managing partner of GMO Renewable Resources, which made the New Zealand investment on behalf of Harvard.

"I would see more of our return driven by biological growth," she said. "A listed share company needs to focus on their quarter-to-quarter earnings, and a lot of what we're doing is focused on growing better timber."


Managers of publicly traded timber companies often enter a vicious circle, especially when the company is heavily indebted. They often sell young trees for cash flow when stumpage prices are falling, Greger said.

"The average price per tree goes down, and things get worse and worse from there."

Gee, I think she just explained Enron.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at