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Does timberland hedge inflation when you least expect it?
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My Uncle keeps asking me what type of real estate I think he should invest in. Income producing commercial property? http://mississippi-landsource.comTimberland or production farmland? I think the answer is all of them. He questions, “What about cash if inflation hits?” and asks about hedging inflation with timberland. I had to do some serous research to learn more myself, and I want to share what I found as well as the resources I used to determine an answer to the question regarding hedging off inflation.

Inflation is at a 44 year low according to a recent headline from the Wall Street Journal. That news will make you stop and really think because one of the most common arguments for investing in timberland is its purported potential to hedge inflation; therefore, with inflation as low as it is, does that reduce the attractiveness of timberland investments?

Previous research indicates that http://alabamalandsource.comtimberland investments may hedge against unexpected inflation. The seminal academic paper in this area, “Do Forest Assets Hedge Inflation?” by Court Washburn and Clark Binkley (Forest Science, August 1993), asserted that timberland assets, especially those in the Pacific Northwest and South, hedge “higher-than-anticipated inflation.” In 2007, forest economist Jack Lutz affirmed a positive correlation between timberland returns and inflation, concluding that timberlands will “preserve capital in the face of rising consumer prices” (Forest Research Notes, 3rd Quarter 2007). Forisk revisited this issue last year with similar results for direct timberlands (first figure “NCREIF Timberlands and Inflation”), but different results for an alternative timberland investment vehicle: publicly-traded timberland-owning REITs (second figure “FTR Index and Inflation”).
Returns from direct timberland investments, as measured by the NCREIF Timberland Index, correlate positively on an annual basis with inflation; public timber REITs, as measured by the FTR (“footer”) Index, lack a similar relationship over the past ten years. The key factors being: the differences in owning hard http://louisianalandsource.comland assets versus super-liquid public equities

What does this mean with current rates of inflation? The fact that inflation rates are low today has no relevance to timberland’s potential to mitigate exposure to inflation in the future. The key game is against “unexpected” inflation, not consensus expectations.

Visit my blog to see charts and more resources on this subject.
(Warnell Forestry)
NCREIF (National Council of Real Estate Investment Fiduciaries)






References


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