Timberland and Farmland | CFA Level I Alternative Investments
Welcome back! In this lesson, we’ll discuss timberland and farmland as alternative investments. Let’s jump in.
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.
Capital Appreciation and ESG Focus
Timberland and farmland returns depend on various factors:
- Timberland returns: Depend on land price changes, expectations of lumber prices, and the volume of timber ready for harvest.
- Farmland returns: Based on land price changes, farm produce prices, and crop quality and quantity.
With the increasing focus on ESG and climate change, timberland and farmland with sustainable practices are becoming more attractive to 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)
And there you have it – a quick introduction to timberland and farmland as alternative investments. Next up, we’ll move on to real estate investments. See you soon!
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