Barron's 8/10/09

COMMENTS ON

Trouble in the Forest

By ANDREW BARY

01:22 pm ET August 8, 2009

Augustus Kinsolving wrote:

On PCL (Plum Creek). I have owned a lot of shares, by my standards, in this Company over the last seven years-- have never lost money on it-- and keep watching for the time to go back in. Maybe when your this-weekend's article drives the share price down. Remember: Time is on PCL's side. They are really a solar-energy company. Sun plus good land plus rain plus time, plus a little management, make trees: and trees don't just go away: PCL can watch for the right time to market them. Regards
Augustus Kinsolving Fishers Island NY


09:35 pm ET August 8, 2009

David Boren wrote:

I agree. Good news - trees grow regardless of price on the street.


11:13 pm ET August 8, 2009

Gary Miller wrote:

It's unsurprising that this article is written after years of falling home prices. Possibly this is a bottom "tell" for housing. Even if the premise is correct, that timber prices may fall, I have to wonder about a countervailing source of demand, and that might be foreigners who hold US dollars. I wonder how many of them would rather own a source of pulp that grows vs a product of pulp that shrinks in buying power?


07:24 am ET August 9, 2009

Scott Talkington replied:

That is a great point Gary Miller. I have asked that same question for the last five years, and believe, in the end, that foreigners will indeed want to own U.S. real estate as opposed to shrinking dollars. Scott R. Talkington.


09:39 pm ET August 9, 2009

Thomas P. Dupree Jr. wrote:

Reminds me of the horse business a few years ago; high prices for stallions but declining purses at the track.

The article doesn't mention timber's potential as a fuel source.


10:53 am ET August 10, 2009

James Rinehart wrote:

Mr. Bary’s article brings this discussion into the financial open. Just prior to the collapse of Lehman, as a speaker at the “Who Will Own the Forest” conference in Portland, I expressed concern that timberland was overvalued in the face of declining product prices and with too little regard for its inherent risk, asking for a “reset.” There has been some downward correction since – but not much. Why?

First, perhaps I was wrong…Second, the value of timberland relates only in part to the current price of paper, lumber, and logs – enough to generate 1% return, by Mr. Dillon’s analysis. Timberland value has much to do with assumptions about an unknowable and distant future. Basing discount rate merely on spreads against T-Bills downplays the inherent risk of an asset whose product cycle transcends business cycles…Third, the industry practice of mark-to-market is linked to an appraisal process that relies on current market comparables. Where there are few, it turns to older, less comparable “comps.” So valuations remain high. This can’t last forever.

There are some risks to this view. To Gary Miller's point, foreign investors are drawn to US real assets, and European pension funds are precisely the source of recent new capital. Further, what we do know about the future is that it is likely to bring today’s unimaginable. Who knows – with the right adjustment to subsidies, perhaps renewable energy will prove to be tomorrow’s high-value forest product. Maybe.


11:35 am ET August 10, 2009

Charles R. Ryan replied:

Thanks for the insightful comments. I'll keep my (small) PCL/POPE holding for the time being but be open to profit taking.


12:54 pm ET August 10, 2009

Denise Davis wrote:

It's interesting that Mr. Bary gives only a sentence to the bull case for Timber. In his opening comment, he states that Southern timber properties more than doubled since the mid- 1990s, which if my elementary math is right, is 100%. The S & P 500, on a closing price basis, also moved over 100% (from August 1994, through the close on Friday.) Furthermore, we like timber because it has a low correlation with stocks and bonds and the recent market drop of 35% he alludes to in the U.S. stock market, in my opinion, supports holding timber for precisely the reason we like it so much. That the decline in housing starts and the deleveraging of the U.S. consumer, along with a demographic trough in the numbers of wealth accumulators, roughly $41 million gen x's adults, will have some impact on the U.S. market demand for timber, does not preclude global growth and demand. PCL might very well be over valued at this point and we could see a drop in price, but that does not mean that an investment at the right time is misplaced. On the contrary, such an investment, for the right reasons, seems prudent to the manager or investor seeking diversification, long term growth and a hedge against inflation. We want lower volatility and that is exactly what we have gotten with timber investments over long periods of time, going back to 1934, and even considering the 20 year period from 1987 - 2007. So my point to Mr. Bary, is "what's the real point of your article?"

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