External risks of forestland ownership

This is the third article in a series of articles designed to educate forest landowners about some of the basic principles involved with owning and investing in forestland. The motivation to begin this series comes from conversations with forest landowners and investors. I realize that some of the principles may be simple and straightforward, while some principles may be extremely complex and may require more explanation. I would like the topics in this series to be timely, relevant and dynamic, so I would appreciate your feedback. Please send feedback on the articles and suggestions for future articles to rhutchins@agcenter.lsu.edu.

By Robbie Hutchins

One of the major external risks associated with forestland ownership is market risk. The recent unexpected decision of Georgia Pacific to close their communication paper division, wood yard, and pulp mill and consequently discontinue accepting pine and hardwood roundwood deliveries at the GP Port Hudson facility will affect mill workers, loggers, forest landowners and foresters across a large geographic area for a long time. This closure is a close-to-home example of market risk for those of us in Louisiana. For forest landowners with property in the affected area, the only local market for their pine and hardwood pulpwood literally disappeared overnight. Unfortunately, there is nothing landowners and investors could have done to minimize the effects of this decision on their investment. Thankfully, this degree of catastrophic sudden market disruption is very uncommon.

However, risk involves more than the potential complete closure of markets. Investors and landowners sometimes forget that timber is a commodity, and as a commodity its price fluctuates daily depending on supply and demand. Contrary to some investor presentations, stumpage prices do not increase each year in a straight line. Future increases in stumpage prices are not guaranteed, and there is a possibility that prices will not be at some previously predicted level when a tract is ready to harvest. Market risks and risks to profitability resulting from pricing pressure often go hand in hand. Risks related to pricing pressure that often result in lower-than-average stumpage prices can be impactful to forest landowners who own small acreages and landowners whose holdings are concentrated in a single geographic area.

Another one of the major external risks of forestland ownership and investment is the risk of losing standing timber from natural factors, which often cause catastrophic losses of timber and other property in a concentrated geographic area. Natural factors can also temporarily disrupt markets by causing mill closures or transportation issues, and they can also cause downward pricing pressure because of the large amount of salvaged timber forced into the supply chain in a short period of time. A host of weather-related events that could damage tracts of timber, such as hurricanes, tornadoes, ice storms and floods, are examples of natural factors. Insects and diseases that cause widespread timber losses are also substantial natural risks. The southern pine beetle, the emerald ash borer and the gypsy moth are prominent examples of destructive insects. Examples of diseases include oak wilt, chestnut blight and Dutch elm disease. Fire, whether started naturally or by man, can also damage or destroy large tracts of timber and cause widespread property damage.

The final type of external risk factor we will discuss is political risk, which is associated with political decisions or disruptions that result in financial or market losses. For forest landowners and investors, political risk most often materializes when local, state or federal agencies attempt to increase their jurisdiction and scope of their regulatory authority or make government regulations more restrictive. However, political risk is not limited to bureaucratic agencies. Political risk can also include the risks that new legislation or tariffs can negatively affect operations or markets. Government shutdown is another type of political risk that could affect forest landowners or investors. Thankfully, political risk is extremely low in the United States compared to other countries.

In this series of articles, I have attempted to explain some of the primary risks involved in owning and investing in forestland and ways to help minimize those risks. Even though there may be risks involved, owning and investing in forestland is a great way to diversify your investment portfolio while enjoying the all benefits of the American dream of land ownership.

— Robbie Hutchins is an associate area agent specializing in forestry for the AgCenter in the Central Region.

Photo info: A cherrybark oak (Quercus pagoda) forest in Northwest Louisiana. Photo by Michael Blazier, LSU AgCenter.