The benefits of commodity investing have been well-documented in recent years, as this asset class has become a more widely-accepted part of every investor’s portfolio. These assets are typically used for their appeal as inflation hedges as well as their low correlation to the overall stock market. When most investors think of these kinds of assets, big name commodities like gold and silver come to mind, yet their are a number of other options that present equally compelling investment theses. One of those investments is timber, a commodity that has proven its worth over time [for more commodity news subscribe to our free newsletter].
At first, timber may seem like an unorthodox idea, or a commodity that has little investment potential, but both of those assumptions would be false. Others may ward off this asset given the recent weakness in global housing markets, but this isn’t true either. In fact, timber’s performance has been very strong throughout its history. The price of timber has risen by an average of 5% for the past century, and those gains include strong performances during some of the worst markets in U.S. history. “During America’s last major inflationary period – from 1973 to 1981, when inflation averaged 9.2% – timberland values increased by an average of 22% per year” writes Larry D. Spears.
Since the beginning of the 20th century timber has outpaced the S&P 500 and has risen by approximately 15% each year since 1987 (save one bad year during the U.S. housing crash). During the Great Depression, when stocks fell roughly 70%, timber investments soared by more than 200%. Moving forward to the most recent recession, the S&P dipped more than 35% in 2008 while the wooden commodity actually gained 9.5%. At a time when investors are starting to lose faith in stocks in general, those numbers are very enticing. It seems that with each passing day analysts and individuals are calling for the next stock market crash, giving timber’s proven track record some added flash as far as investment potential is concerned [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].
Another major draw to timber is its rising demand all around the world. For now, the U.S. is the largest consumer, but that is predicted to change as emerging markets are stepping up their needs for wood-based products. The next three decades are predicted to see timber use double on a global scale, leaving investors plenty of opportunity to cash in on a developing trend. Another boost for timber is the shrinking supply of forests around the world. Though wood is a renewable resource, global forest lands are dropping on an annual basis, making wood more scarce and its respective price jump.
Ways to Play
There area wide variety of timber investments out there, each of them geared towards different investors. Below, we outline some of the most popular ways to make a play on this enticing commodity.
- Random Length Lumber: Offered on the CME, these futures (which are also optionable) represent 110,000 board feet of wood. The contracts are quoted in dollars per 1,000 board feet and trade in the months of January, March, May, July, September, and November [see also The Ten Commandments of Commodity Investing].
- Softwood Pulp: Also offered on the CME, these futures represent 20 metric tons of Northern Bleached Softwood Kraft pulp. Quoted in dollars per metric ton, these futures will trade in all twelve months of the year and also offer options.
- Weyerhaeuser Co. (WY): Another American producer, WY dwarfs the size of the other stocks on this list with a market cap of $12.5 billion and an average daily volume of 4.6 million. Though its yield is not quite as high as PLC or RYN, an annual payout of 2.5% is still enticing. According to its business summary, the firm grows and harvests trees, builds homes, and manufactures forest products worldwide.
- Plum Creek Timber Co. (PLC): One of the most popular timber stocks, PLC has a market cap of over $6.5 billion and exchanges hands over 900,000 times per day. The stock is a REIT and is based in Seattle. Income investors will rejoice at its juicy dividend yield topping 4%. It should be noted that recent quarters have been tough for the lumber producer as the construction industry has been dragging [see also 25 Things Every Financial Advisor Should Know About Commodities].
- Rayonier Inc (RYN): A comparable company to PLC, this stock has a market cap of just over $5.7 billion and a current EPS of 2.15. RYN is also a REIT and its handsome dividend yield accurately reflects that. The company operates in four segments: Timber, Real Estate, Performance Fibers, and Wood Products, so it is not a pure play on the timber industry.
- Deltic Timber Corporation (DEL): A small cap options for those who like to shy away from bigger firms, this company has a market cap of just $800 million and a rather disturbing P/E ratio of more than 300. The company grows, harvests, and markets lumber out of its Arizona headquarters.
- S&P Global Timber & Forestry Index Fund (WOOD): This ETF measures the performance of companies engaged in the ownership, management, or upstream supply chain of forests and timberlands. With approximately 35 holdings, this fund splits its assets evenly between domestic and international stocks. The fund is home to over $150 million in assets and trades around 9,300 times per day. WOOD pays out a dividend yield of 2.3% and has gained more than 35% in the trailing three year period [see also Five ETFs To Own During The Next Market Collapse].
- Guggenheim Timber ETF (CUT): Another cleverly-tagged ETF, CUT invests in companies who own or lease forested land and harvest the timber around the world. It has just over 25 total holdings and $116 million in assets. That being said, the fund is more popular among traders as it has an ADV of over 33,000.
Disclosure: No positions at time of writing.