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Saturday, 02/12/2011 9:35:32 PM

Saturday, February 12, 2011 9:35:32 PM

Post# of 207
From an article:
Timber is one of the safest and steadiest growth investments available, protecting an investor in times of inflation and providing returns that have beaten almost every other investment sector over the past 40 years. Teak is one of the best values with the highest yields in the timber sector. It is a small niche segment of the timber industry and is managed by smaller, privately owned companies rather than by big institutional operators.

There are a number of ways to invest in teak with small very reputable timber companies. How you invest and with which company can have a significant effect on your returns. The key question you must ask is: "What assets am I buying with the funds that I invest?"

As you research the returns and opportunities in teak investments, you will find that companies use many different ways to calculate return on investment. As you compare investments and predicted returns, be sure that you apply the same standards to each investment opportunity. There are different ideas concerning what teak will be worth in 25 years, as well as many different predictions of how much teak will be available and what condition it will be in over time. Therefore, the most useful investment comparisons consider what assets you´re getting for your investment dollar rather than what your dollar will be worth at some point in the future. To put it another way, determine how much of your investment is actually going into the company´s products and assets.

(When evaluating a return on a timber investment, it is important to understand what data the company is using and how it is using the data. Such data may include price per unit and growth rate.

Teak is a commercial wood, which means the price per unit is pretty well fixed at different sizes and ages of the stand and at different points of being processed, i.e. price of trees on the stump, price of logs FOB (freight on board), and price of cants, (square sawed logs) or the price of rough cut lumber. The average sale price of mature teak in 2009 is about $500 US dollars per cubic meter for raw logs; rough cut lumber will wholesale at around $1,200 to $1,800 per cubic meter. As the timber is further processed by a company, the fewer middle men are involved and the greater the overall return on investment will be.

Most well managed and well located teak plantations have comparable growth rates. Teak has been cultivated in plantations for over 1,000 years; therefore, proper management techniques and typical growth rates are well documented. Companies that claim to be able to grow trees faster than anyone has ever grown a teak tree over the past 1,000 years are likely to disappoint investors over time. Minimum rotation for teak is 20 to 25 years. Growth rates on average over a plantation run from 10 cubic meters to 20 cubic meters per year with an overall average of 12 to 14 cubic meters per year. After thinning, yields after 25 years of growth in a properly managed plantation will be about 200 to 220 cubic meters per hectare (one hectare is approximately two and one-half acres).

With prices and growth rates roughly comparable for well managed and well located plantations, return on investment (ROI) is based largely on the cost of purchasing and managing the teak plantation. Cost for land, planting, and management for a full 25 year rotation in Panama, for example, runs about $8,000 per hectare ($3,300 per acre). The land costs about $3,000 per hectare, while the cost of planting and management runs about $5,000 to $6,000 per hectare, as teak is very management intensive, especially to produce the highest quality wood. In Ecuador, costs run about $6,000 per hectare because of lower land prices. Coast Rica’s costs are about the same as or a little higher than Panama’s. If the investment costs more than $8,000 to $10,000 per hectare for newly planted trees, the amount over this base cost may be going in other directions and the return on investment will be proportionally less for the investor.

How much does an investment in teak cost? This may sound simple, but there are a number of different ways to invest in teak and a number of different ways to present the numbers.

There are opportunities that allow investors to buy managed parcels of teak by the hectare within a larger plantation. It is then relatively easy to determine how much the investment costs per hectare. These investment opportunities typically sell from $20,000 to $50,000 per hectare, which means the “promoter” is charging $12,000 to $38,000 per hectare over and above the realistic cost of the teak. This is a hefty premium to pay for getting into an investment and will significantly reduce the investors ROI. At $20,000 per hectare, the investor has to wait for an increase in value of more than 100% to be at the breakeven point; at $40,000 per hectare a 400% increase in value is required to break even. On top of this, some companies add management fees after 5 to 10 years, further reducing any potential return on one’s investment. Another disadvantage of investing in small parcels of teak relates to the economies of scale. Selling a few hundred cubic meters of wood individually will net far less than if a company can provide a continuous supply of teak to buyers. In addition, overhead and management costs can erode returns and the investors will never gain the returns possible from setting up a mill and processing the wood; therefore, this method of investment is not ideal.

Some investment proposals will add significant appreciation and inflation factors into their ROI calculations. When comparing investment opportunities, start the comparison without these factors included in the calculations. Base the calculations on todays prices. Appreciation and inflation can then be added back in. If the calculated ROI (without appreciation and inflation) is 12% and if it is projected that teak prices increase at 7% per year over the next 25 years on average, then the inflation adjusted return will be 19%. (Over the last five years, teak prices have been increasing at about 7% per year.) Use $500 per cubic meter for the price of mature raw teak logs today. If you get more than that it's great, and you will get a nice upward surprise.

But this is the reality of teak raw log prices today. Processing the logs into lumber will significantly increase the return.

In summary, timber is one of the safest and highest yield long-term investment classes available, and teak is one of the best timber investments available. An investor’s ROI is greatly affected by the initial cost of the investment and by the investment structure. Evaluating each timber investment opportunity with the same projections will give you a true indication of which is the best investment for you. Extensive research has indicated that using a growth rate of 10 to 12 cubic meters per year is a safe, conservative projection. A Final harvest yield of 200 to 220 cubic meters per hectare after 25 years on average is a good conservative estimate. The price of mature raw logs today is about $500 per cubic meter.

Look for a company with a full disclosure policy, so that you can determine where your funds are going. Make sure your investment is going into timber and not simply investment promotion activities. If more than 10% of the investor's funds are going into marketing, you may want to move on. Ask for the bylaws of the company and become educated about what is actually being offered. If the company cannot provide the information and data you need to evaluate the investment, keep looking. Find a company that is truly committed to providing an investment opportunity structured to provide the most for you, the investor.

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