Performing Department
School of Forestry & Natural Resources
Non Technical Summary
The United States has abundant forest resources. About one third of the country's land area, or 751 million acres, are forestlands. Within that, 514 million acres with an estimated market value of $460 billion are considered as commercial timberlands, which are mainly used to produce timber (Newell and Eves 2009; Oswalt et al. 2014). As such, the US is considered to be one of the most competitive timber markets in the world with a large number of private landowners and wood users on the supply and demand sides of the market. A number of factors contribute to the overall strength and competitiveness of the region's timber market, such as tree species, climate, infrastructure, and land ownership. According to the most recent Food and Agriculture Organization of the United Nations' yearbook of forest products (FAO 2014), the US is responsible for roughly 20% of all industrial roundwood, sawn wood, and wood pulp production. Timber production and related industries are also economically important in this country. According to the US Bureau of Economic Analysis (US Bureau of Census 2012), the forest industry accounts for about 2% of the US's GDP. The South alone holds 41% of the US timberland and accounts for 60% of the country's total roundwood production, or 10% of the world's total (Brandeis and Hodges 2015). Over 90% of southern timberland is privately owned and pine plantations cover 33% of the total 205 million areas of timberland in the region (Hartsell and Conner 2013). Regarding the output, pine (softwood) products represent more than 60% of the total harvest (Wear et al. 2007). Thus, the US South plays an important role in the global timberland market.In the early 1900s, most industrial commercial timberland in the US was held by forest products firms. With vertical integration, firms ensured a significant amount of internal timber supply and reduced price risk, thus alleviating their dependence on the open markets for timber, the crucial raw material for manufacturing. However, in the past several decades, forest products firms have been divesting their timberlands and outsourcing the business of growing and harvesting timber. Drivers for this trend include: 1) shift in production from diversification to specialization to exploit the "returns to scale" rather than "returns to scope"; 2) reduced "insurance" value of internally owned timberland of forest products companies due to expanding and reliable timber supplies from the open market; 3) fall in raw material costs caused by new timber production technologies; 4) increased specializations of manufacturing based on comparative advantages resulting from globalization; 5) double taxation for forest products companies structured as "C-Corps"; and 6) significant undervaluation of timberland assets under the generally accepted accounting principles, where book values reflect historical acquisition costs rather than current fair market values (Mei et al. 2009; Wear et al. 2007). Moreover, recent mergers and acquisitions in the forest products industry have left substantial amounts of debt on the acquirers' balance sheets. These firms chose to liquidate their undervalued timberland assets and use the proceeds to lower their debt levels.On the demand side, institutional timberland investors have been unprecedentedly active buyers over the past 30 years. According to a recent survey on top corporate and public pension funds, endowments, and foundations, institutional commitments to the US timberland assets have increased tenfold since the early 1990s, and the growth in such investments remains strong with endowments being the most common form of institutional investors (Corriero 2005). One major motivation in timberland investments dates back to the implementation of Employee Retirement Income Security Act in 1974, which required pension fund managers to diversify into non-financial assets to minimize the risk of large losses. Thereafter, institutional investors began to consider a wide range of assets including timberland (e.g., Binkley et al. 1996; Conroy and Miles 1989).As a result of the interaction between timberland sellers and buyers, over 40 million acres of timberland nationwide has changed hands in the past decade, more than 70% of which were transacted in the South (Clutter et al. 2005). Since this first foray into timberland as an alternative asset class, institutional investment in timberland via timberland investment management organizations (TIMOs) has developed rapidly. At the end of the 1980s, TIMO assets totaled merely $1 billion; in 2015, this number exceeded $40 billion (Hood et al. 2015; Zinkhan 2008). In addition, public timber firms controlled another $35 billion of timberlands. In recent years, transactions between TIMOs and public timber firms have been widely observed (Hood et al. 2015). With timberland, as an alternative asset class, having come of age, I aim to examine various facets of timberland investment in this research proposal.
Animal Health Component
0%
Research Effort Categories
Basic
(N/A)
Applied
100%
Developmental
(N/A)
Goals / Objectives
The objectives of this research project are to:Evaluate the role of farm real estate in a mixed asset portfolio;Test integration of farm real estate market with other asset markets;Investigate timberland investment decision making under biophysical and financial risk; andExamine factors of a forest-related CE that affect surrounding property values.
Project Methods
1.Mean-variance and mean-conditional value at risk (CVaR) efficiency framework.2.ICAPM and the seemingly unrelated regression method.3. Real options approach.4. Hedonic pricing model.