For information on share availability, contact company president Jeff Duda by email (invest@PanamaTeakForestry.com) or by phone: 702 505-4494 (U.S.) or +507 6581-4520 (Panama).
Why Choose Timber over Other Types of Investments?
- Historically, timber is a better investment than stocks. Managed timber, as professional investors call it, has actually beaten the U.S. stock market over time, with less risk. From 1973 to the present, for example, managed timber has returned approximately 15% annually, a significantly better return than for U.S. stocks over the same period. Over the last few years, stocks have been extremely volatile, while timber has generally continued to increase in value.
- Timber is not correlated to other investments. Trees don’t know about political unrest, currency fluctuations, industry news and trends, or the price of oil; they just keep growing, year after year. In fact, timber tends to move counter-cyclically with stocks, and timber has never had a losing year. A timber investment is an excellent way to balance your portfolio, since its value rises even when the value of stocks is falling.
- Agro-forestry land has steadily increased in value over the past decade, despite the recent downturn in the value of other types of property, such as residential real estate.
- Timber has proven to be an excellent hedge against inflation. According to legendary investor Jeremy Grantham, timber investments in the U.S. have risen in value 6.6% a year, on average, over the past century. Add a 5% average annual dividend in the form of income from the harvest proceeds of a timber investment, and you have an asset that has provided a total return (value increase plus income) of 11.6% per year. This return compares very favorably with returns on stock investments, particularly in the current economic climate.
- Timber is recognized around the world as an attractive investment opportunity. Over $12 billion dollars is currently invested in timber holdings by institutions such as banks, insurance companies, pension funds, and universities. Analysis has shown timberland to be a relatively low-risk investment; it has little correlation with the real estate market and a negative correlation with stock and bond returns. Rates of return on timber investments have historically been excellent, with nominal rates of return averaging 9 to 12 percent. Although teak represents a small niche market in the timber industry, it is the highest yielding timber investment available.
The Easiest Way to Invest in Timber
The most direct way to add timberland to your investment portfolio is to purchase the land outright. However, the cost and overhead of direct ownership of timberland is simply too onerous for most individual investors to consider. Buying stock in a timber company is the best way for the individual or institutional investor to enjoy the safety and high returns of timber without the problems inherent in buying and managing timber property directly.
One option is to buy stock in a publicly traded timber company, but these stocks typically pay dividends of around 4%. A smaller company that manages high-value tropical hardwoods, such as Panama Teak Forestry, can offer much better returns. Even though teak requires more intensive management than woods such as pine and fir, teak has a growth rate twice that of pine or fir and a value of more than twice that of those two woods. The value of Panama Teak Forestry stock has risen more than 15% annually since the company was established, exceeding our 12% annual value growth projections.
The Demand for Timber Remains Strong
Every American "consumes" a 100-foot tree every year. Picture yourself looking through paper documents, sitting at a wooden table, in a wooden chair, in a room trimmed with wood, in a home or office that is probably framed in, well, wood. Are there alternative materials that could be used? Of course. But the use of wood around the world is increasing, not diminishing, despite the availability of alternative materials.
There is no reason, however, to picture large timber companies leveling the world’s forests with abandon. Although slash-and-burn and clear cutting still occur around the world, this practice is discouraged by progressive governments and by responsible forestry companies. Today’s forestry science is highly advanced, allowing companies to manage timber as a sustainable, ecologically sound crop. Well-managed timber companies can create jobs and provide excellent returns to investors while helping to sequester carbon and preserve the environment.
Instead of chopping down a forest and moving on, it is in the best interest of today’s timber companies to plan for the long term and to plant, maintain, and harvest trees using sustainable resource practices. In the U.S. state of Washington, for example, timber companies essentially cut and replant approximately 1/40th of their forests every year. In Panama, we can responsibly harvest 1/25th of our teak forests annually, producing almost twice the volume of wood per hectare produced by timberlands in the United States.
What Type of Investment Is Timber?
As a well-tended tree grows, its value as a product rises. Even if the stumpage price (the value of standing timber) remains constant over time, a tree becomes more valuable as its volume increases.
These are the characteristics of timber as an investment:
- It requires an investment in land as well as in the planting and maintenance of the trees.
- It is typically a long-term investment because of the time required for the trees to reach maturity. However, the length of time an investor must wait to realize a cash flow can be shortened by purchasing existing stands of timber, either directly or through shares of a company such as Panama Teak Forestry.
- Disease, insect damage, and fire could potentially cause a loss, but mortality from all causes is, on average, less than 1 percent in large timber holdings.
- Timber can be an illiquid investment. However, this creates buying opportunities for investors who seek to purchase quality stands of timbers at favorable prices.
- Timber harvests can be timed to take advantage of fluctuating market prices.
What Factors Influence the Rate of Return?
These factors affect the rate of return on a timber investment:
- Changes in timber prices: Since the middle of the twentieth century, pine timber prices have exceeded inflation by 2 to 3 percent annually, while pine pulpwood has kept up with inflation. U.S. Department of Agriculture Forest Service projections are for continued price increases. Of all types of woods, tropical hardwoods such as teak have shown the greatest increases over time.
- Tree growth and yield: Tree growth is affected by how good the site is and how well the forest is managed. Forestry science is very advanced and tree growth can be predicted accurately using computer models.
- Changes in tree value: Management practices influence the number, size, and health of trees on a tract of land and thus the value of the final product. The value of a timber stand can be maximized through good management.
- Changes in land value: Increases in land value increase the rate of return on a timber investment. After final harvest, the company may choose to sell the land for another purpose if property values have increased in the area.
- Costs: Cost-effective management will result in higher rates of return to the investor.
What Rates of Return Can Be Expected?
University studies show that timber investments have historically earned real rates of return in the 10 to 12 percent range. A leading timber index based on actual returns shows rates varying from 11 to 16 percent, depending on region. Since 1986, the major timberland property index has returned just over 16 percent annually; 40 percent of the return has been from income and 60 percent from capital appreciation. Teak timber properties have shown some of the best rates of return in the industry when managed properly.
How Predictable is the Cash Flow from a Timber Investment?
Depending on how the investment is structured, timber can provide a manageable cash flow. The age mix of the timber holdings largely determines the cash flow of the investment. If the timber property includes trees of different ages, the investment can provide income to investors every year. And if the market is down as harvest time approaches, the company has the option of delaying the harvest and, in essence, “storing” the timber to wait for prices to rise. In the meantime, the trees continue to grow.
Why Choose Panama for a Timber Investment?
An investment in Panamanian teak offers the potential for excellent returns. The worldwide demand for teak is high, and the supply of wild teak is quickly diminishing in traditional teak-producing areas such as India, Myanmar (formerly Burma), and Thailand.
The soil and climate of Panama are well-suited to teak cultivation. In addition, the Panamanian government encourages reforestation, and the tax system is quite favorable to timber investors.
- All wood harvested from timber projects that were certified by the government before 2004 are completely exonerated from any taxes, including export taxes, for 25 years. (The terms of harvesting are spelled out in the management plan provided by the project’s forestry expert.) All capital gains on timber are also tax-exempt in Panama.
- Equipment used for a reforestation project—including vehicles, heavy equipment, and any other items that represent a direct investment in a reforestation project—can be brought into Panama virtually tax-free.
So What Are the Numbers?
In each plot of one hectare (about 2.4 acres), Panama Teak Forestry plants approximately 1100 teak trees. At about 4 years, our forestry engineers identify the weaker trees, and the stand is thinned to about 900 trees per hectare. At 7 to 8 years, the trees are thinned to about 700 to 800 per hectare, depending on the stand. At about 12 years, they are thinned to about 400 to 500 trees per hectare, and at 18 years, they are thinned to about 220 to 260 trees per hectare. Final harvest is ready in about 25 years. If market conditions are not optimal for selling the mature teak in year 25, management may choose to allow the timber to continue growing, waiting for the most profitable time to sell.
Some of our competitors factor in profits from the sale of year 7/8 thinnings; however, since the value of these thinnings is disputed, we do not include any income from the sale of year 7/8 thinnings in calculating our return on investment. The 12-year thinning will yield about $2,000 to $6,000 per hectare based on today´s price of teak. The 18-year thinning will yield a net profit of about $10,000 per hectare based on today´s teak prices. At 25 years, the remaining trees will produce a harvest with a net profit of about $130,000 per hectare based on today´s teak log prices. This is an annual yield rate of 12 cubic meters per hectare.
In inflationary times, both the price of teak and the value of the land will appreciate, providing additional protection for the investor’s return on investment (ROI). Dividends will be paid out as Panama Teak Forestry’s stands of timber reach maturity and are harvested. Note that the ROI (reflected in increasing share value and future dividend payouts) of 12% does not include any increase from rising prices of teak over time. If we assume a 3% increase in the value of teak over time, the projected annual ROI will be 15%.
The ideal investment is one that provides an excellent ROI but is also environmentally beneficial. Panama Teak Forestry offers an ecologically sound investment. Its well-managed tropical timber properties bind carbon dioxide, which helps reverse the damage from carbon dioxide pollution. By practicing responsible reforestation, we are helping to meet the world’s demand for commercial hardwoods while aiding in the preservation of native tropical forests.
Timber Investment Articles
For more information about timber investments, see the articles listed below. Keep in mind that teak, one of the highest value commercial timbers available, grows faster than the types of timber described in these articles and therefore provides an even better ROI.
Nuwireinvestor.com: Top 5 Recession Investments
InvestmentU.com: Timber Investment