Why tropical Trees are Low Risk but High Return

The Economist magazine has stated that the average annual returns on timber, meaning managed preserves that are eventually harvested, have outstripped those from leading global stock indices, property, oil and gold for the past decade. Worldwide, timber has attracted more than $20 billion of investment from institutional investors.Supporters of this trend say that managed timber reserves are good for the environment, preserving biodiversity on lands that might otherwise be logged recklessly. Plantation owners agree with the Economist. There are more and more people on our planet wanting wood products for housing, furniture, paper and more, while there are less and less forests and woodlots available. The result is a simple economic fact: Demand will continue to exceed supply, causing high prices and therefore high returns for tropical tree investors.

Many people think that tropical trees are slow to grow. The first thing you need to do is get away from that kind of short term thinking, as it causes so much trouble for investors. For example, many people enter the stock market thinking that short term is one week and long term is two weeks. If you stop and think about it, what they are really doing is throwing the dice in hopes of a magical quick return on investment. As any business owner will tell you, it takes years of careful management and strategy to build a profitable business with consistent returns. Guess what, many tropical trees grow, mature and can be harvested in just 10 years time! Unfortunately, way too many public companies and mutual funds try to short term please investors, leading to poor performance in IRA's, RRSP's and pensions, and yes, even to scams and scandals.

Once you accept that it is going to take 10 years to see a decent return, the next question is how big a return? Bank savings pay from .75% to 2% a year. Savings bonds, CD's, GIC's and Treasury Bills pay between 2.5% to 5% a year. People with stock portfolios are ecstatic if they can average a 10% a year return, rarely consistent and always risky. Contrast that with people who invest in low risk tropical trees and hardwoods. It is not unusual to have annual growth of from 30% to 40% non-compounded. Take plantation groups like Amazonia Reforestation, for instance. They pay their investors a return of about 33% per year non-compounded. An investment of $4,000 USD with them will produce a return on investment of $17,000 USD in 10 years time. In contrast the same $4,000 USD making 10% compound interest over 10 years produces only slightly over $10,000 USD, assuming no recessions, stock market scams or other risks.

So what are the risk factors? The obvious risks are drought, fire, flood, disease and pests. All of these risk factors are greatly reduced using modern forestry practices. Acceptable losses due to risks are usually calculated and deducted by timber companies before the stated returns are offered to investors, which is a nice change. Tropical trees are planted in places where there are consistent and predictable weather patterns, making drought and flood problems minimal. Fire breaks and controlled burns of surrounding areas, together with strict underbrush controls make fire risk negligible. In fact, some species of tropical trees, like Acacia mangium, Caraipa llanorum or Acosmium nitens are actually natural fire barriers. Disease and pests are limited by multi-species cultivation, meaning a good tree plantation does not have all of its eggs in one basket. This greatly reduces the incidence of pests and diseases, which may be further controlled with spraying and frequent harvests in 10 to 12 year cycles.

Best of all, the investor does not need to buy stock or shares in the forestry company. Rather, the investor has the option of buying the tropical trees directly. For example, Amazonia Reforestation issues Tree Ownership Certificates to its investors for the exact number of trees they own in the plantation. This joint venture approach has the added due diligence benefit of allowing the investor to come and see, touch and hug their trees any time they want. The plantation or forestry company provides the land, the tree nurseries, the planting, the know-how, the management, the harvesting and the ultimate sale of the timber, and shares those proceeds with the investor on a low risk, high return basis.

Having a green investment in tropical trees is a low risk but high return strategy that everyone should do. Tropical trees are a good passive green investment and a great way to protect the health of our planet. They are also instrumental in sequestering carbon from our atmosphere in the fight against climate change, with groups like CO2 Tropical Trees leading the charge. If you can make money and help the planet, it is definitely the best of both worlds!

Dexter Dombro is a former lawyer who does afforestation and reforestation projects in Latin America. He resides in San Jose, Costa Rica, and has an office in Medellin, Colombia. His web site is http://www.myreforestation.com and his blog is at http://www.co2tropicaltrees.blogspot.com.