Timberland and Farmland | CFA Level I Alternative Investments

In this lesson, we’ll discuss timberland and farmland as alternative investments.

Timberland and Farmland as Investments

While timberland and farmland are considered natural resources, they can also be viewed as real estate investments. The primary income components for these investments come from sales of timber and agricultural products. Let’s look at their unique characteristics:

• Timberland income: Historically, not highly correlated with other asset classes due to the ability to grow and store timber by delaying harvests. This flexibility allows owners to harvest more trees when timber prices are high and wait when prices are low.
• Farmland income: Less flexibility as farm products must be harvested when ripe. However, agricultural commodity prices are closely correlated with inflation, making farmland investments a viable hedge against inflation.

Factors Influencing Land Value

• Location: Proximity to infrastructure and marketplaces significantly impacts land value.
• Soil Quality and Water Access: Essential for farmland productivity.
• Timber and Crop Prices: Influence the valuation of timberland and farmland.

Sustainability and Investment Attraction

With a growing emphasis on ESG and sustainable practices, timberland and farmland adhering to eco-friendly practices are becoming increasingly attractive to investors.

Ownership and Investment Vehicles

While farmland remains largely in the hands of individual owners, timberland attracts institutional investors. For those lacking direct expertise, Timberland Investment Management Organizations (TIMOs) offer a pooled investment opportunity.

Financing Options and Emerging REITs

Financing for these investments is typically through bank loans or private lending, with farmland-specific REITs emerging as an option for smaller investors.

Risks of Investing in Timberland and Farmland

There are several risks associated with investing in farmland and timberland, including:

• Low liquidity
• High fixed costs of production
• Variable cash flows depending on weather
• Potential losses from natural disasters (e.g., wildfires)