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Forests, Reforestation and Financial Maturity

Research published in April 2015 in Forest Science further de-feathers the canard that institutional timberland investors fail to replant forests. In fact, according to “Timberland Ownerships and Forestation in the Southern United States” by Daowei Zhang, Xing Sun and Brett Butler, “the probability of reforestation was higher for institutional and industrial owners than for nonindustrial private forest owners and was the highest for timberland investment management organizations” (TIMOs).

The logic behind the findings remains compelling.  Both industrial and institutional investors find that reforestation creates value and improves investment returns.  In addition, institutional investors – those whom the TIMOs count as clients – often have lower costs of capital and beneficial tax treatments.

The article has additional force when considered in light of traditional arguments for reforestation. Maximizing returns from forest investments requires focus and a clear understanding of financial maturity.  Optimizing forest growth differs from maximizing financial returns.  If investors were unconcerned about costs and time, than increasing forest volumes would be straightforward.  However, these investors explicitly care about returns.  In fact, we might view forest growth and health as a consequence of optimizing returns.

When is a forest mature?  For investors, a forest reaches financial maturity when its annual growth rate in value equals the target rate of return. While small trees have little value to mills, they grow and add size rapidly, increasing in value. Then, eventually at some point, forest growth slows down, as does the annual increase in forest value. At some point, we have a mature, valuable forest full of logs that’s increasing in value at a slower rate. Investors focus on these numbers, relative to market prices for timber, to harvest, replant, and grow a new forest with higher returns.

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