Thursday, October 31, 2019

Who Will Own the Forest? 15 - The Premiere Timberland Investment Conference in the Pacific Northwest

by Byron P. Krempl, Headwater Forests Program Manager, Tuolumne River Trust

Joseph Furia, Executive Director of the World Forestry Center,
giving welcome remarks at WWOTF15

We are arguably facing some of the most rapid and profound change ever seen in human history. Population growth, climate change, demographics, and technology are changing at an unparalleled pace. If today’s forest professionals want to be able to succeed tomorrow, we need to be aware of these changes. With change comes uncertainty; with uncertainty comes risk; with risk comes opportunity. If we understand our context (where we’re at), our desired future condition (where we want to be) and our decision-making process (how we’ll get there), we can take advantage of this change to ensure our continued success. Whether an institutional investor, a logger, or a professor, we have a unique opportunity to make a difference, and inspire others while doing so. The Who Will Own the Forest? 15 convention highlighted these changes that we need to be aware of and set the context that surrounds our decision-making processes.

Diversity was highlighted in every aspect of the WWOTF? 15 convention. Diversity of forest types, of products, of location, demographics, and of thoughts and ideas. There is no one solution to modern problems in the timber space. There is no cookie-cutter answer to the problems of tomorrow. There is only opportunity for today’s leaders to rise up, take initiative, and try. We must try to slow deforestation, to create new markets for our forest products, to learn how to utilize private finance for conservation, and to become aware that the three pillars of the triple-bottom line (economic, social, and ecologic) are not separate, but instead uniquely intertwined. Rather than focus on any one pillar of sustainability, the convention highlighted the need for diversity in thought process, approach, and solution.

Eric Freed, keynote speaker at WWOTF15
Eric Freed, the Keynote Speaker for the 15th WWOTF convention, se the stage for the convention by highlighting that, “the modern environmental movement has failed us”, and by instilling a sense of urgency around climate change. In the face of such a global challenge, he presented a simple solution: trees. With forests being the only scalable challenge to combat climate change, and the ability to remove up to 50% of carbon from the atmosphere every decade, we have the tools needed to address the problems of our own making. Mr. Freed also highlighted the value of mass timber—buildings constructed from mass timber sequester carbon instead of releasing it, outperforming modern technologies such as carbon and steel. Mass timber, be it cross laminated timber, mass plywood panels, or any other engineered wood product, is gaining popularity. It can be produced at a lower cost, with minimal environmental impact, have high fire resistance, and can be cost competitive. While there are barriers such as antiquated building codes, rapid growth has been seen in this sector. Given the technologies of today, Mr. Freed presented the case that we have the ability to leave our planet a better place for tomorrow’s generations.

Mr. Freed’s point was further highlighted during a panel session on mapping risk in the face of climate change. Reforestation as a cost-effective natural solution to climate change was highlighted, as well as the need to slow deforestation in tropical forests. As environmental stewards, managers need to “play both defense and offense”, leveraging, conserving, and restoring our natural resources, and creating innovative ways to bring private equity to the table. Highlighting the value of environmental and social goods (ESG) and products, divesting from fossil fuel investments, and utilizing timber as an investment opportunity are key components to the large-scale approach we need to undertake to address climate change.

Panel at WWOTF15 focusing on the social aspect of ESG
Within the framework of forest management, it is important to keep in mind the social in ESG. Social dynamics are proving to be major drivers of the financial sector; Diversity, Equity, and Inclusion (DEI) are topics that are integral to the decision-making process and should be at the forefront of any decision maker’s mind. Thomas RaShad, the Assistant Dean of Community and Inclusion at the Yale School of Forestry and Environmental Studies, went one step further by highlighting Access as a key component of the DEI framework, creating the useful acronym, ‘IDEA’. This highlights the significance of this topic for any context and group; whether a small firm or a large corporation, ideas should be formed while considering IDEA.

Climate change and ESG weren’t the only topics discussed during the convention. The impacts of changing demographics on the timber industry along with a generational shift in priorities are affecting consumption. With massive demographic shifts and changing fiscal and monetary policy explaining the two inflation regimes of the last 60 years, new approaches to fiscal and monetary policy and a shrinking labor force suggest the market’s complacent consensus about inflation is too low. While regional supply and demand will continue to be a key factor, timber income streams suggest a positive outlook for timber as an asset class overall.

Regionally, the U.S. South has begun to see a plateau in sawmill investments. Trade dynamics have injected uncertainty in the market, and while regional employment has proven to be stable, the microeconomy has proven to be a significant scale in the South. Workforce, access to mills and ports, and timberland has allowed some areas to see continued growth, while other areas in the South lagging. Maintaining relationships and making decisions on a risk-adjusted basis are key to continued success in the U.S. South.

Even with this plateau in sawmill investments, it is still possible to mitigate the risks of forest investments in the U.S. South. By capitalizing on concentrated regions and microeconomies, efficiencies and economies of scale can be achieved in the South. Georgia, while undergoing social and demographic transformations, still produces the higher timber volumes of any state. A strong representation from groups such as the Georgia Forestry Association ensure that the forest sector continues to have a voice in the legislature and among consumers, creating a comparative advantage against many other states and regions.

Likewise, the U.S. hardwood universe is currently a mixed bag, with high value species such as hard maple and yellow birch continuing to appreciate, but with a general shift from grade product to industrial product overall. Hardwood prices have decoupled from housing starts since the Great Recession and are now increasingly dependent on export markets. Due to this, volatility created from tariffs has impacted this market. The U.S. hardwood markets have also been losing share internationally, with China, Russia, and neotropical countries beginning to inject more supply into the global market.

Globally, China’s economy is slowing, but is still outpacing the U.S. China is shifting from a manufacturing to a service-based economy and is transitioning to utilizing domestic forest products for production and is increasing its utilization of Russian forests. While transportation of forest products continues to be a limiting factor for Russian forest products, China is actively leasing large tracts of Russian forests, allowing for value to be unlocked in this forest landscape. China is continuing to ramp up production of pulp and paper and is turning to Vietnam for materials to meet this upscaling. Other nations, such as Thailand, may also benefit from China’s increased appetite for forest products.

Russia still faces bottlenecks in its production system, such as distances between forests and mills,
but continued investments will allow for growth through 2030 in this market. Likewise, India is poised to see an increase in demand for forest products. With a rapidly expanding middle class, India can become a large demander of North American Exports. While barriers such as certification currently exist, major companies are promoting their products to the Indian market and are capitalizing on increased urbanization and a current housing shortage.

While timber markets in Russia and China are seeing new growth, countries like Japan have poorly performed. An aging workforce coupled with small private lots and steep slopes has caused timber markets within Japan to lag. However, new policies and tax advantages have created opportunity for the timber sector to be revitalized.

As timber markets internationally continue to develop and change, foreign investors continue to find foreign direct investment in the U.S. timber space to be attractive. While there are many complexities involved in tax-efficient investing, investors typically want to ensure that by investing in the timber space they do not subject any additional unrelated non-U.S. business activities and investments to U.S. tax jurisdiction. As markets continue to change, foreign direct investments will continue to be a strong part of the story.

Joseph Furia presents the Award for
Forest Investment to Bill Bradley
Domestically, investments through Real Estate Investment Trusts (REITS) are a prominent strategy. Timberland as an asset class has grown, and while most commercial timberland remains in private markets, it can be publicly traded. Valuing REITs can be challenging, with contrasting approaches to determine the ‘true’ value of a share. This is accentuated by the fact that the timber space is still relatively small, and most analysis that occurs is conducted by forest products and packaging analysts. This uncertainty highlights the fact that we are still unsure whether timberland belongs in the public markets, creating risks and opportunities for REITs as an asset.

Whether through the lens of REITs or private ownership, timberland valuation is an evolving field. As George Box famously said, “All models are wrong, but some are useful”, raising the questions of how wrong the models are, and how useful they can be. As such, we shouldn’t expect the truth from models—instead they provide us with useful information to help facilitate decision making. Static variables and dynamic variables should be analyzed, and sensitivity analysis can be utilized to ensure that risk is appropriately accounted for. By utilizing the data and processes we have, such as an array of site-specific growth and yield models, as well as forecasting, we can know all knowable information, ensuring the most accurate valuations for timberland can occur.

The 15th WWOTF convention focused on change and diversity, preparing forest professionals to solve unforeseen problems in new and innovative ways. Both domestically and internationally, forest professionals must continue to adapt and grow, anticipating unforeseen changes to forestry, valuation, products, and markets, guiding our planet toward a healthy and sustainable future. To learn more about forest finance, changing environmental, social, and economic factors, domestic and international market trends and drivers, and emerging markets/market products, come to the WWOTF? 16 convention in Portland next year.

No comments:

Post a Comment