*by Jeff Duda President of Panama Teak forestry*

Timber is one of the safest and steadiest growth investments available, protecting an investor in times of inflation and providing returns that have beaten almost every other investment sector over the past 40 years. Teak is one of the best values with the highest yields in the timber sector. It is a small niche segment of the timber industry and is managed by smaller, privately owned companies rather than by big institutional operators.

There are a number of ways to invest in teak with small very reputable timber companies. How you invest and with which company can have a significant effect on your returns. The key question you must ask is: "What assets am I buying with the funds that I invest?"

As you research the returns and opportunities in teak investments, you will find that companies use many different ways to calculate return on investment. As you compare investments and predicted returns, be sure that you apply the same standards to each investment opportunity. There are different ideas concerning what teak will be worth in 25 years, as well as many different predictions of how much teak will be available and what condition it will be in over time. Therefore, the most useful investment comparisons consider what assets you´re getting for your investment dollar rather than what your dollar will be worth at some point in the future. To put it another way, determine how much of your investment is actually going into the company´s products and assets.

**(Please note that in some countries Panama, for example, there are resident visa packages related to timber and teak investment. In these cases you are really buying a resident visa and not investing only in teak. Clearly, you do get a teak investment with the resident visa, but there are many extra expenses for companies involved in such programs. The teak resident visa packages normally cost about $20,000 to $40,000 per hectare. These are NOT teak investments: these are teak resident visa packages. For the sake of simplicity, this article will not consider these teak resident visa packages.)**

When evaluating a return on a timber investment, it is important to understand what data the company is using and how it is using the data. Such data may include price per unit and growth rate.

Teak is a commercial wood, which means the price per unit is pretty well fixed at different sizes and ages of the stand and at different points of being processed, i.e. price of trees on the stump, price of logs FOB (freight on board), and price of cants, (square sawed logs) or the price of rough cut lumber. The average sale price of mature teak in 2009 is about $500 US dollars per cubic meter for raw logs; rough cut lumber will wholesale at around $1,200 to $1,800 per cubic meter. As the timber is further processed by a company, the fewer middle men are involved and the greater the overall return on investment will be.

Most well managed and well located teak plantations have comparable growth rates. Teak has been cultivated in plantations for over 1,000 years; therefore, proper management techniques and typical growth rates are well documented. Companies that claim to be able to grow trees faster than anyone has ever grown a teak tree over the past 1,000 years are likely to disappoint investors over time. Minimum rotation for teak is 20 to 25 years. Growth rates on average over a plantation run from 10 cubic meters to 20 cubic meters per year with an overall average of 12 to 14 cubic meters per year. After thinning, yields after 25 years of growth in a properly managed plantation will be about 200 to 220 cubic meters per hectare (one hectare is approximately two and one-half acres).

With prices and growth rates roughly comparable for well managed and well located plantations, return on investment (ROI) is based largely on the cost of purchasing and managing the teak plantation. Cost for land, planting, and management for a full 25 year rotation in Panama, for example, runs about $8,000 per hectare ($3,300 per acre). The land costs about $3,000 per hectare, while the cost of planting and management runs about $5,000 to $6,000 per hectare, as teak is very management intensive, especially to produce the highest quality wood. In Ecuador, costs run about $6,000 per hectare because of lower land prices. Coast Rica´s costs are about the same as or a little higher than Panama´s. If the investment costs more than $8,000 to $10,000 per hectare for newly planted trees, the amount over this base cost may be going in other directions and the return on investment will be proportionally less for the investor.

How much does an investment in teak cost? This may sound simple, but there are a number of different ways to invest in teak and a number of different ways to present the numbers.

There are opportunities that allow investors to buy managed parcels of teak by the hectare within a larger plantation. It is then relatively easy to determine how much the investment costs per hectare. These investment opportunities typically sell from $20,000 to $50,000 per hectare, which means the ´promoter´ is charging $12,000 to $38,000 per hectare over and above the realistic cost of the teak. This is a hefty premium to pay for getting into an investment and will significantly reduce the investors ROI. At $20,000 per hectare, the investor has to wait for an increase in value of more than 100% to be at the breakeven point; at $40,000 per hectare a 400% increase in value is required to break even. On top of this, some companies add management fees after 5 to 10 years, further reducing any potential return on one´s investment. Another disadvantage of investing in small parcels of teak relates to the economies of scale. Selling a few hundred cubic meters of wood individually will net far less than if a company can provide a continuous supply of teak to buyers. In addition, overhead and management costs can erode returns and the investors will never gain the returns possible from setting up a mill and processing the wood; therefore, this method of investment is not ideal.

Another method of investment available is to invest by the tree. It is critically important with these investment schemes to evaluate exactly what you are paying for and what you actually get. Teak does not tend to grow tall and straight. Therefore, 1,100 trees are typically planted per hectare **initially**, but the stand is periodically thinned for quality and to maximize growth rates, resulting in only 260 or fewer trees per hectare by harvest time. About four trees must be planted for every tree that will be still there at harvest in a properly managed plantation. The information on the investment and the investor´s contract should specify whether the per-tree investment is in trees planted or trees to be harvested. Because four trees must be planted for every tree to be harvested, what appears to be an investment in100 trees may actually be an investment in fewer than 25 trees by harvest time. This will significantly affect the investor´s return. With all timber investments plans, the investor also needs to see if there are any future management fees to factor into the overall cost of the investment.

With some detailed investigation, the actual cost per hectare is relatively easy to determine. Figure out the purchase investment required per mature harvestable tree and multiply by 260. If the promoter is selling a total number of trees planted, then multiply the cost per tree by 1,100 to get the per-hectare cost, but remember that in this case you will only be getting about 260 harvestable trees at the end of the rotation. As mentioned previously, the cost per hectare for a well-managed teak plantation over a 25 year cycle, including land and management, is about $8,000. Anything over that figure is going into other aspects of the company´s operation and is not being invested in the plantation.

Some privately held timber companies offer shares in the company for one´s investment much the same way that publicly held companies are structured. This is by far the safest and most logical way to invest. Panama Teak Forestry is such a company. **(Again when dealing with resident visa teak investments, this structure does not qualify for the resident visa in Panama.)** In this case, the investor owns a portion of the company, has voting rights, and receives income from all income streams the company has or may develop in the future. As the company develops its marketing strategy for the timber, adds a mill and drying facility for processing the timber, and practices co-cropping to maximize the health and yield from the land, all income streams go to the investor. The investor owns part of all of the assets of the company; tractors, mill equipment, cattle, and raw land. When the company processes its own wood, the returns per cubic meter of wood produced will be much greater than what could be obtained from selling raw logs.

When evaluating the value of a share-based investment, the prospective investor has to consider that shareholders own a percentage of all of the assets of the company, including the entire infrastructure.

One way to measure this added value is to put conservative estimates on all the non-teak assets and calculate their total worth. Calculate how many shares this represents and then back that out of the total outstanding shares, before calculating the cost per hectare of the teak assets.

To illustrate this point, consider the example of an established teak forestry company that owns multiple plantations and practices "whole land management".

In this scenario, the investor will own a multi-aged stand of timber. Although one hectare of newly-planted teak may have a value of $8,000, teak that is 11 years old is worth considerably more. A technique for estimating this added value is to calculate the average ages of the timber stand. For example, if a plantation has 500 total hectares planted in teak with 66 hectares of 11 year old teak, 34 hectares of 7 year old teak a, 200 hectares of 3 year old teak and 200 hectares of 2 year old teak, this plantation would have an averages age of approximately 4 years. Often a forestry company does not have just one species of trees. Other valuable hard tropical woods may include Cedro Espino and Mahogany which are also common in Panama. For example, the company may have 15 hectares of 14 year old Cedro Espino, which would have a value of about $450,000.

Next, consider the total value of any other assets of the company.

The company may own, for example, 200 hectares of land that is not suitable for teak. In this example, the land will be valued at a conservative $900 per hectare, which adds another $180,000 to the shareholders core asset holdings. If the company also owns cattle, take the total number of cattle and multiply by the local value per head. For example 140 head of cattle with an average value of $400 per head would add another $56,000 to the core assets of the company. Tractors, trucks, and tools also have value, particularly in allowing the company to operate efficiently. A mill is much more difficult to value because rough cut, kiln dried lumber is worth much more than what raw logs sell for. A mill set up may have a replacement value of $150,000 but the real value is in the increased yield from the company´s timber as it is harvested. A mill can actually double the return from the timber holdings of the company over time.

The final number that you need to factor in when assessing the value of a share-based investment is the total number of outstanding shares issued by the company. If the company described above had 12,300 outstanding shares and new shares were being offered at $900 per share, you would calculate 929 shares for the base value of non teak assets ($836,000 divided by $900). That leaves 11,371 outstanding shares invested in planted and managed teak **with an average age of four years**, so that the per hectare price would be 22.7 shares or $20,430 per hectare for trees with an average age of four years. This is one calculation that can be used to compare a share-based investment with other investment opportunities, but it does not take into account the value of owning a part of a whole company. A key factor would be ownership of a mill, which allows investors to get twice the return they would get from owning hectares of managed teak and selling logs. The investor would have to be able to buy a hectare of four year old teak for $10,215 (half price) elsewhere to get the same ROI.

Another measure is to look at how much new land is purchased, planted, and managed for each incremental investment in the company. Is one hectare being added to the company´s overall portfolio of planted teak for every $8,000 of new investment? This gives a simple cost per hectare of planted and managed teak. Keep in mind that it does not take into account the added value of owning a share of the whole company rather than simply the core plantings.

Some investment proposals will add significant appreciation and inflation factors into their ROI calculations. When comparing investment opportunities, start the comparison without these factors included in the calculations. Base the calculations on today´s prices. Appreciation and inflation can then be added back in. If the calculated ROI (without appreciation and inflation) is 12% and if it is projected that teak prices increase at 7% per year over the next 25 years on average, then the inflation adjusted return will be 19%. (Over the last five years, teak prices have been increasing at about 7% per year.) Use $500 per cubic meter for the price of mature raw teak logs today. If you get more than that it´s great, and you will get a nice upward surprise.

But this is the reality of teak raw log prices today. Processing the logs into lumber will significantly increase the return.

In summary, timber is one of the safest and highest yield long-term investment classes available, and teak is one of the best timber investments available. An investor´s ROI is greatly affected by the initial cost of the investment and by the investment structure. Evaluating each timber investment opportunity with the same projections will give you a true indication of which is the best investment for you. Extensive research has indicated that using a growth rate of 10 to 12 cubic meters per year is a safe, conservative projection. A Final harvest yield of 200 to 220 cubic meters per hectare after 25 years on average is a good conservative estimate. The price of mature raw logs today is about $500 per cubic meter.

Look for a company with a full disclosure policy, so that you can determine where your funds are going. Make sure your investment is going into timber and not simply investment promotion activities. If more than 10% of the investor´s funds are going into marketing, you may want to move on. Ask for the bylaws of the company and become educated about what is actually being offered. If the company cannot provide the information and data you need to evaluate the investment, keep looking. Find a company that is truly committed to providing an investment opportunity structured to provide the most for you, the investor.

*Jeff Duda is the president and a managing director of Panama Teak Forestry. He is also involved in other asset class investments: Jeff is the founder of Maricuda Services, a private asset management company and Panama Casa, the most well-established property management company in Panama City. He has over 25 years of experience in the timber investment and real estate industries.*