Forestry as an investment?

Global warming and other environmental problems raise a number of issues for the forestry industry.

Starting with the basics: supply and demand. As far as I can tell from a brief internet search, there is no sign of demand for forestry products abating under environmental pressure and the move to an electronic age. If anything, demand is still increasing with much of the increased demand being led by developing economies. The supply side shows signs of being a similar story to what we have seen with a number of other resources over the last few years - inelastic supply meeting rising demand. Supply and demand would suggest that forestry offers potential as a long term investment.

Regulations make an interesting and complex part of the analysis. The position would appear to be different in different countries. The move to certification programs such as FSC is one issue. The costs seem to be quite nominal and would not appear to have an adverse impact on forestry companies over the longer term. The prospect of increasingly tougher regulations on the cutting and transportation of old growth forests will help the supply side become tighter, although timing and extent remain guesses. The more interesting issue is the regulation of carbon credits. A far as I can tell, some countries have moved to impose a carbon cost on the cutting of forests (even those planted for the express purpose of being harvested) but do not give a credit for the carbon benefits generated by a forest prior to harvesting. Industry lobby groups are trying to address this issue. My guess is that it is only a matter of time before at least some recognition is given to this.

A further variable to consider is whether the investment includes ownership of the land or merely the cutting rights.

The above is no more than some preliminary thoughts and speculations. However, if correct, it would be interesting to look into the economics of an investment in the industry. I would also need to verify whether the preliminary analysis above is correct and complete.

Since I am prohibited from buying listed securities (with very limited exceptions) and would not expect to be able to buy a forest, I suspect I am looking at a share in a forestry partnership. By their nature, I would expect to be looking a a long term, illiquid investment with small negative cash flows until harvesting in the distant future. Tax issues would also need to be taken into account. I would expect gearing to be impracticable.

On the surface it sounds as though the attractive supply and demand situation may be negated by other factors, but I will do some research into it.