Timber Investment Blog

Over the last decade prices for gold and copper have risen by 300% while timber prices have fallen by 32%. By the looks of it timber is set for a growth spurt and a number of factors, not least the mass urbanisation of the Chinese economy will contribute towards this.

Residential construction is soaring in China with 20 million people moving from the country to the city each year. So it isn’t surprising that China has reserved almost £90bn from its economic stimulus plan for low cost housing and the majority of that will come from wood frame construction. Experts predict that China’s demand for timber will grow by one-third over the next five years. China’s myriad infrastructure projects have been heavily reliant on imported wood since it passed a widespread logging ban in 1998 following disastrous floods.

The Chinese demand for timber is equally strong away from the construction sites. Rising living standards have meant a growing appetite for processed forestry products such as toilet paper, cardboard and paper.

Timber has also benefitted from a new enthusiasm in more developed countries; this is partly due to the fact that it is easier to recycle than steel or concrete. As an added benefit there is a flourishing interest from developed countries in second generation biofuels that bolsters this trend.  New techniques have been developed to produce bioethanol from wood fibres by extracting cellulose.

As governments seek to reduce carbon emissions pressures on commercial forestry will mount. The brake on supply is likely to become very significant leading to forced up prices. Case in point would be that countries in the tropics are using environmental legislation to restrict logging in primary forests.

The advantages to timber investment are its low correlation with equities that provides a useful diversification benefit. In addition over the last century timber prices have risen at 3.3% above the rate of inflation, indicating that the commodity is an excellent potential hedge against rising consumer prices.

While growing trees is good for the planet, cutting some down is important to provide for global economic health. Investors can enter this market through specialist funds and maybe branch out (forgive the pun) into a new area of investing.

Marks and Spencer is looking to become the world’s most sustainable retailer by developing a sustainable forest programme for cardboard. They have also introduced ‘age neutral’ packaging as part of their extended Plan A environment scheme.

M&S announced on Monday (1^st March) that it has 80 commitments to make all its products ‘Plan A Products’. Within the next five years M&S aims to help its staff and customers live greener lifestyles. Already M&S is giving every member of its staff one paid day off a year to work in local communities.

Together with Help the Aged, M&S is investing in local authority recycling to help boost the recycled content used in its packaging and plans to launch a range of ‘age neutral’ packaging.

It has also been reported that M&S will develop with its suppliers a sustainable forest programme to source all its cardboard packaging from.

“We will work with the forest’s owners to deploy ‘gold standard’ forestry management practices, including going beyond replanting and investing in the area’s biodiversity,” M&S said in a statement on Monday.

Chairman Sir Stuart Rose said the retailer was looking to “lead the way in making a positive contribution to the environment and society across everything we do and sell. Our extended Plan A will reach further and move us faster – covering every part of our business and reaching out to forests, farms, factories, lorries, warehouses and into our customers’ and employees’ homes.”

A few of the other commitments announced were to use palm oil and coffee from sustainable sources, offer free home insulation to eligible employees and increase the amount of clothing that is recycled.

The Indonesian Ministry of Forestry said on Monday that in order to meet its ambitious emission reduction targets it plans to issue a new regulation that will allow commercial forestry companies to plant palm oil crops in new concession areas.

This mixed forest regulation is intended by the Ministry to help those companies survive the low timber prices at present and enable them to grow biofuel to alleviate the country’s current energy shortage.

As expected environmental groups are angered and dismayed at this news as they warn that the plan would accelerate deforestation, which contributes to global warming.

In its defence Hadi Daryanto, general director of forest protection at the ministry, said that the regulation would be issued soon but would only apply to forestry concessions granted after it took effect.

Currently the Indonesian government holds 44.3 million hectares of forest with a further 36.8 million hectares of commercial forest. The new regulation would stipulate that a minimum of 49% of forestry concessions would be used for planting commercial forests and up to 21% could be used to plant crops. The left over 30% would be set aside for conservation and for the use of local communities.

This isn’t the first time this plan has been thought up. In 1999 a similar regulation was issued and then swiftly withdrawn after the majority of forestry companies used the land to plant more commercial forests than permitted. Due to the ministry’s advanced monitoring system Hadi is optimistic that the companies will adhere to the rules this time around.

Elfian Effendi, the executive director of Greenomics Indonesia, disagrees and said that the group strongly opposes bringing back the failed regulation.
“The ministry will repeat the failure, since forestry companies will prefer to plant palm oil because it’s more profitable than planting commercial forests,” Elfian said.

Elfian went on to stress that even without the regulation most forestry companies had illegally planted palm oil plantations. 

South Carolina’s ArborGen LLC, a joint biotech venture between US forestry leaders International Paper and MeadWestvaco want to find out if fiddling about with the genes of trees can rescue America’s forestry sector. They hope to plant large areas of genetically engineered eucalyptus trees in the Southeastern United States.

Eucalyptus is native to Australia but owing to its rapid, dense growth and the size it can grow to it has been widely cultivated elsewhere, particularly in Brazil. Due to these sterling qualities eucalyptus has enjoyed huge commercial success and now dominates the tropical timber industry.

Typically the eucalyptus thrives only in tropical or subtropical climes so no surprise why it is popular in Brazil. But ArborGen has introduced a new genetic trait to help the tree withstand mild freezing conditions such as frost. This will (they hope) allow it to be grown as far north as the Carolinas. The company is hopeful that it will provide a substitute for the native pine, which can’t compete with the higher yields and quick rotations.

In South Africa eucalyptus plantations have already been establish but the species became invasive and critics warn that this could happen in South Carolina. To prevent this ArborGen has already introduced another new trait, which inhibits pollen production and will (hopefully) neuter the trees.

To date the company’s experimentation has been limited but the US Department of Agriculture is now considering if ArborGen should be allowed to conduct a broader ‘controlled field release’ in which cloned plants will be allowed to flower. Either way the project is unlikely to affect the forestry industry for some years to come.

In 2007, biofuel enthusiasts were promoting jatropha as the answer to the looming energy crisis and the product to wean us off our dependence to fossil fuels. As a tough, drought resistant weed that thrives on marginal land and is able to produce a vast amount of useable oils, jatropha seemed just too good to be true.

And to be honest it was. Although producing biofuel from jatropha doesn’t require sacrificing food crops such as oil from soybeans and corn based ethanol problems with inconsistent yields, production and land allocation saw support for the tough, little plant wane.

Tony Wood, president director of the P*yry Forestry Industry, admitted that large-scale operations have little chance of developing in the future, Wood stands by his earlier statement that Indonesia is ideal for small-scale jatropha production.

“Jatropha fits the Indonesian model of many small-scale producers quite well and should not be given up on,” he said. “Small to medium-sized operations producing biodiesel for local consumption makes much more sense and it is this model that I think we may see in the future.”

In 2006 no one would have been able to predict that the growth estimates for the jatropha market in Indonesia would drop off so suddenly after only a few years. Indonesia is Southeast Asia’s biggest oil producer and user and for years has faced mounting pressure from the international community to reduce its carbon emissions and to make attempts to mitigate the impacts of greenhouse gases.

Indonesian scientists working in the biofuels industry immediately recognised the potential possibilities of jatropha. Government officials and investors were fascinated by jatropha’s unique ability to adapt to its environment and produce 30-40% oil content from its seeds. Practically all the plant is used: the oil is processed for biofuels, the trunk is manufactured for fertiliser and the by product forming glycerine is used in organic soaps. The potential in Indonesia is enormous with 22 million hectares of unused marginal and critical land, varied climate, massive labour market and diverse investment channels.

Despite this by April 2008 only 120,000 hectares of land had been cultivated for jatropha. In 2009 global oil prices dropped significantly and with the onset of the financial crisis investors and the government lost interest and the economic desire to continue pushing forward with the advancement of biofuels. Indonesia was left with a sector lacking in profits, structure and political will to survive, whilst Brazil and Europe surged ahead with their biofuel development. Those who were still interested in continuing the development of jatropha in Indonesia were left struggling against bureaucratic, red tape, convoluted land ownership laws.

While land may be abundant in Indonesia one of the major problems facing the expansion of the jatropha market is land availability. The procedure behind gaining the rights and certification to develop biofuels is incredibly long and complicated, sometimes dragging into years.

Even though the Indonesian government has agreed that biofuels can improve economic stability, create jobs, reduce poverty and dependence on fossil fuels it is still reluctant to fully support the industry after its initial setbacks. Campaigners for biofuel argues that the government still favours fossil fuels. The facts seem to collaborate this as in recent years the Yudhoyono administration has given more than Rp 120 trillion in subsidies to the fossil fuel industry. In comparison the biofuel sector is still waiting for promised funding.

According to Maxensius Tri Sambodo, an economic researcher at the Indonesian Institute of Sciences (LIPI) “The government still provides subsidies for fossil fuels. Studies also show that there is lack of coordination between central and local governments in promoting biofuels.”

However the biggest obstacle standing in the way of jatropha development in Indonesia is inconsistent yields. While thousands of homes across Belgium are powered on jatropha purchased from Thailand, Indonesian scientists have been battling uneven ripening times and variations in seeds and oil content.

“What it all boils down to I think is that while jatropha remains a strong potential crop for Indonesia,” Wood said, “right now few people are achieving even close to the yields required to make projects economically attractive on a large scale. I believe that this will come as some good work is being done, but it will take time.”

Due to its low profits, a practically nonexistent export market and inadequate infrastructure for production, Indonesia’s confidence in jatropha is not high. Currently the government is dealing with the commercial side of jatropha so companies investing now should find a stable situation by the time plantations start producing even yields.

Dr. Endang Warsiki, coordinator of the Research Center for Jatropha Research and Development in Indonesia, said the focus right now is on ongoing collaborative research with the government and with laboratories in Japan and Singapore.

I have said it before and I will say it again timber is the number one commodity in a recession.

In early February the stock market was trading off its recent highs and most commodities were taking a hit as the US dollar rose. Not timber though as it shrugged off the selling and hit a fresh two year high.

The price of timber is at its highest since August 2007, rising above $280 per 1,000 board feet. In 2009 timber was up by approximately 60%, which is slightly ahead of US equities. This might be a little confusing to most as according to the Western Wood Products Association the housing sector, which is responsible for 45% of timber demand, has yet to show sustainable recovery signs. This could be down to one of three options.

The first is that the rise in timber could be an early indicator that the housing market is about to make a recovery. The second reason could be that due to a drop in supply; as less was produced during the recession and some producers have gone out of business. Lastly it could be that timber is rising with every other commodity and asset class off the March lows after investors priced in a depression scenario that never occurred.

What you need to ask yourself now is how to take advantage of the rise in timber prices. You could for example buy into the companies that produce timber for the construction sector. Or you could put your investment towards the DIY stores that supply timber for homeowners. However before doing either of these options you have to ask yourself these two important questions. One – will the housing market improve? And two – will the economy help the home improvement business?

A microbe has been developed by the US Department of Energy’s Joint BioEnergy Institute or JBEI if you prefer the abbreviation. This microbe is reported to produce an advanced form of biofuel that comes directly from biomass. The JBEI researchers discovered it by deploying the tools of synthetic biology to engineer a strain of Escherichia coli (or more commonly known as E. coli) bacteria. This is able to produce biodiesel fuel and other important chemicals derived from fatty acids.

“The fact that our microbes can produce a diesel fuel directly from biomass with no additional chemical modifications is exciting and important,” says Jay Keasling, the Chief Executive Officer for JBEI, and a leading scientific authority on synthetic biology. “Given that the costs of recovering biodiesel are nowhere near the costs required to distill ethanol, we believe our results can significantly contribute to the ultimate goal of producing scalable and cost effective advanced biofuels and renewable chemicals.”

The results of this research were published in the 28^th January 2010 edition of the journal Nature. The paper is titled ‘Microbial Production of Fatty Acid-Derived Fuels and Chemicals from Plant Biomass.’

There is increasing global demand for renewable and sustainably produced fuel. This and many other studies have shown that liquid fuels derived from plant biomass are one of the best alternatives. The only problem with this method is that for now it is produced on a small scale and will continue to be until a cost-effective means of commercial production can be found.

To this end research has centred on energy rich molecules in living cells that have been dubbed nature’s petroleum or fatty acids to you and me. For over a century fuels and chemicals have been produced from the fatty acids in plant and animal oils. Now these oils are the key ingredient for biodiesel fuels as well as a wide variety of other chemical products.

“The increased demand and limited supply of these oils has resulted in competition with food, higher prices, questionable land-use practices and environmental concerns associated with their production,” Keasling says. “A more scalable, controllable, and economic alternative route to these fuels and chemicals would be through the microbial conversion of renewable feed stocks, such as biomass-derived carbohydrates.”

E. coli has a natural ability to synthesize fatty acids and has an exceptional amenability to genetic manipulation, which makes it an ideal target for biofuels research. It was the combination of E. coli with new biochemical reactions realised through synthetic biology that allowed the JBEI researchers to produce biodiesel, alcohol and waxes directly from sugar.

“Biosynthesis of microbial fatty acids produces fatty acids bound to a carrier protein, the accumulation of which inhibits the making of additional fatty acids,” Steen says. “Normally E. coli don’t waste energy making excess fat, but by cleaving fatty acids from their carrier proteins, we’re able to unlock the natural regulation and make an abundance of fatty acids that can be converted into a number of valuable products. Further, we engineered our E. coli to no longer eat fatty acids or use them for energy.”

After successfully diverting fatty acid metabolism toward the production of fuels and other chemicals from glucose, the JBEI researchers engineered their new strain of E. coli to produce hemicellulases — enzymes that are able to ferment hemicellulose, the complex sugars that are a major constituent of cellulosic biomass and a prime repository for the energy locked within plant cell walls.

“Engineering E. coli to produce hemicellulases enables the microbes to produce fuels directly from the biomass of plants that are not used as food for humans or feed for animals,” Steen says. “Currently, biochemical processing of cellulosic biomass requires costly enzymes for sugar liberation. By giving the E. coli the capacity to ferment both cellulose and hemicellulose without the addition of expensive enzymes, we can improve the economics of cellulosic biofuels.”

Currently the JBEI researchers are working on getting the most out of the efficiency and the speed by which their engineered strain of E. coli can be directly converted from biomass into biodiesel. In addition they are looking into ways of maximising the total amount of biodiesel that is produced from a single fermentation.

“Productivity, titer and efficient conversion of feedstock into fuelare the three most important factors for engineering microbes that can produce biofuels on an industrial scale,” Steen says. “There is still much more research to do before this process becomes commercially feasible.”

The Californian redwood tree is under threat, claims a study published in the Proceedings of the National Academy of Sciences. The scientists who conducted the research assert that a drop in coastal fog could endanger the state’s famed giant redwood trees.

The study found that fog in that area had decreased markedly in the last 100 years. Research co-author Professor Todd Dawson said that “Fog prevents water loss from redwoods in summer and is really important for the tree and the forest.”

Using the weather records from the US National Climate Data Centre the team at the Berkley University analysed how the fog was involved in climate changes on the coast and noticed a significant drop in levels. This drop, they believe, could have had an adverse affect on the trees.

The California redwood is located along coastal areas mostly because unlike other trees in California they are not as well adapted to deal with California’s hot summers.

The scientist who led the research Dr James Johnstone from Berkley University examined the redwood tree rings and found signs that the reduced fog had an effect confirming his theory. “The evidence that you see in the tree rings is consistent with drought stress produced by drought reduction,” he said.

In addition Dr Johnstone thinks that the growth of new trees and plants could be affected by drought stress. However it should be noted that the negative impact on the tree population is still unproven.

“We’re concerned for certain, we expect some impact on the ecology but we don’t have clear evidence that the redwoods are about to go extinct in the near term. We need further analysis to find out whether the effects are as we expect,” said Dr Johnstone.

Good news from Australia. The assistant treasurer Senator Nick Sherry has announced that the government will amend the tax law in order to protect 19,000 forestry investors from an adverse tax outcome.

Last year the liquidation of Timbercorp and Great Southern lead to a number of forestry MIS being wound up and/or restructured. This caused a large percentage of investors to fail the requirement of having held their interest in the MIS for four years as a condition of the up front tax deduction.

The Australian government has decided to amend this four year holding period rule for forestry MIS to ensure that an investor does not lose out due to reason genuinely outside their control.

“Under current law, investors in forestry MIS managed by Timbercorp and Great Southern may have previous years’ deductions clawed back because they haven’t held their interests for four years,” Senator Sherry said.

“The four-year holding rules were introduced in 2007 as part of a package to regulate secondary trading of forestry interests. Many of the investments in question were made before this holding requirement was put in place – at the time they decided to invest, these investors had no way of knowing that their deductions were at risk. The Rudd Government doesn’t consider that to be a desirable outcome, as it unduly penalises investors for events outside their control. Accordingly, we will amend the tax law to allow an investor’s deduction to stand where the four-year holding rule is failed due to events beyond the control of the investor. These events include insolvency of the MIS manager, the death of the investor or where an MIS interest is cancelled, for example because of trees being destroyed by fire, flood or drought.”

A draft of this legislation will be made available from the government for comment.

More information on the tax implications for forestry investors can be found at the Australian Taxation Office website: www.ato.gov.au.

For years farming has been the rainforest’s biggest enemy but that looks like it is about to change.

The Brazilian government are setting up experimental farms where it is hoped that crops, cattle and timber can coexist together. The system is modelled on the US practice of rotating crops and revitalising pasture instead of the usual practice of chopping down the forest and planting new grasslands. The US have been using this system for years but in the state of Mato Grosso, where ranchers and farmers have destroyed more of the Amazon than anywhere else the concept is a relatively new idea.

Up till now the order of the day has been to take an area of forest, cut down the trees and remove the vegetation, plant pasture and let cattle graze there for approximately 20 years or until the land becomes barren and useless. The process is then repeated. As you can tell this is definitely not sustainable and to me it seems very short sighted.

The new scheme encourages farmers that by diversifying and renewing the nutrients in the soil the same piece of land can be farmed for generations and even more crucially to them it will make more money.

“Our integration system rapidly increases the efficiency of crop and pasture land, allowing, for example, ranchers to graze as much as five times more cattle on the same piece of ground,” Wruck said during a recent visit to the 1,850-acre Fazenda Gramada farm run by Brazil’s agricultural research agency Embrapa. “That means we can break the cycle of ranchers needing to deforest to create more pasture.”

It is agreed by both environmentalists and the Brazilian government that cattle ranching is the biggest cause of deforestation to the Amazon. Already an estimated 20% of the Amazon has been destroyed, putting that in relative terms that is an area roughly twice the size of France.

According to the government deforestation is slowing down thanks to their stepped up policing approach. They claim that since they started keeping records 20 years ago there has been a drop of 2,705 square miles from August 2008 to July 2009, which is 46% down on the previous year.

Environmentalists however are not convinced and claim that the real reason behind the slow down in deforestation is because of the economic downturn and the drop in demand for cattle, soy and timber.

The government has pledged to reduce deforestation by 80% within a decade but with only 1,400 agents overseeing about 2 million square miles of the Amazon with the majority of those bunched in targeted areas. The challenge now is to foster smarter farming.