TIR Research Library

Chung-Hong Fu: Managing Director Economic Research and Analysis

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In mid-2022, monetary and market signals show increasing headwinds facing the United States economy and inflation has now reached a 40-year high.  In response, the U.S. Federal Reserve is aggressively raising interest rates and is reversing the easy monetary policy that has been in place since the Global Financial Crisis.  As a result, home mortgage rates have reached their highest level in 13 years.  Combined with the global fallout from the Russia-Ukraine war and persistent supply-chain disruptions, many economists are projecting a downturn or even an outright recession for the U.S. before the end of 2023.

Any slowdown or recession will obviously hurt the U.S. housing market.  The health of the housing market bears watching because home construction is the leading consumer of wood products such as lumber, plywood, and oriented strandboard.  For example, three-quarters of the 53 billion board feet of softwood lumber consumed last year in the United States went into building new homes or repairing and remodeling existing homes. 

In “Will Economic Headwinds Threaten US Timberland Returns,” our Economist, Chung-Hong Fu, discusses these opposing forces and provides insight and perspective into how they could impact the performance of the asset class going forward.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Over the course of 2021, the investment community saw one major announcement after another of institutional investment funds or organizations committing funds to the natural capital features of timberland assets.  In many cases, these investments were made in the carbon sequestration potential of forests and their capacity to help the world address the challenge of global climate change.  However, increasing amounts of this capital also was invested in some of the other environmental and social attributes of working forests – specifically their capacity to enhance biodiversity, protect watersheds, provide clean air, and stimulate rural economic development and job creation.

Regardless of how one defines natural capital, the underlying premise is an acknowledgement that investors have a role to play in making the world a better place for future generations.  In this paper, we will show how the new wave of capital targeting nature-based solutions is reshaping the timberland asset space – causing its underlying value proposition to evolve and expand.  The goal of the paper is to help investors better understand how these values can help advance their financial and non-financial (i.e., ESG) objectives.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Global climate change has reached the forefront of the public’s consciousness in recent years and investors that hold natural assets, like timberland, in their portfolios are particularly interested in understanding the challenges and opportunities it may pose for them in an investment context. Forests, like any ecosystem, are vulnerable to climate changes and specifically the impacts they have on temperatures, rates of rainfall and wind conditions. Yet, forests also can be a part of the solution for addressing and mitigating climate change. Trees cover 31 percent of the world’s land mass – providing clean air and water and capturing from the atmosphere carbon dioxide – the leading cause of climate change.

In “Hedging Against Climate Change in Timberland Investing” TIR’s Forest Economist, Chung-Hong Fu addresses two issues. First, it provides a concise overview of how climate change could affect the world’s investable forests. Second, it outlines suggested strategies for buttressing, and perhaps even enhancing the performance, of a timberland portfolio in the face of the uncertainties that are arising as a result of climate change.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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In September of 2020, TIR announced the creation of Mission Forest Products and its new “greenfield” sawmill project at Corinth, Mississippi. Prior to the pandemic, lumber prices stood at around $ 400/mbf.  Since that announcement was made, lumber prices skyrocketed to more than $1,500/mbf.  We would like to say we were prescient, but that was not the case.  As always, we were focused on fundamentals and both market and asset-level inefficiencies.  That strategy, which also guides our core approach to investing in timberland, is what initially drove us to pursue the mill construction opportunity.  In addition, while we forecasted that lumber supply deficits would occur in future years, our investment thesis was based primarily on the notion that we could establish and exploit a position in the Upper South as a low-cost lumber producer. A potentially overlooked dimension of the story was the role of private equity in the sector.   The North American sawmilling industry has long been dominated by family ownership and publicly traded entities — structures that are accompanied by agency costs and challenging constraints.  In his latest white paper, “A Step Beyond Timber: Considering Private Equity Investments in Wood Products Manufacturing in the U.S.,” TIR’s Economist, Chung-Hong Fu discusses the role of private equity in the sawmilling sector.  In it, he outlines some of the advantages of using private equity capital to build and operate sawmills, explains why private equity activity in this sector has been limited, and describes why TIR’s breakthrough approach of employing private equity to capitalize a “greenfield” project may pave the way for more such activity in the future.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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As interest in Environmental, Social and Governance (ESG) issues increases, investors and investment managers are working to define and refine what ESG means and what ESG engagement looks like in the context of their portfolios and the asset classes in which they are active. In the private equity timberland investment sector, the concept of managing ESG‐related issues is not new. However, when assessing the ESG credentials of timberland investment management organizations (TIMOs), and the strategies they utilize to manage one’s portfolio, there are certain attributes to which investors may wish to pay particular attention. In “ESG and Its Growing Influence in the Timberland Investment Sector,” TIR’s Economist, Chung-Hong Fu, examines ESG in the context of timberland investments and the fiduciaries that manage their forest assets.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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In “Coronavirus-Led Migration Away from Urban Cores: Is it a Trend a Timberland Investor Can Rely On?,” our Economist, Chung-Hong Fu, discusses the migration from urban centers to the suburbs and more rural areas, which has been catalyzed by the pandemic. The pandemic coincides with a largely unrecognized transition that was already occurring as Millennials are entering the prime age for family formation and transition to single- family home ownership. This transition has implications beyond the timberland asset class, but considering that single-family homes consume three times as much wood as multi-family units, and the fact that the migration can have a ripple impact on demand in rural real estate markets, the trend is of particular interest to timberland investors.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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When the COVID-19 pandemic began in the United States in the spring of 2020, like most business sectors, the forest products industry experienced a lull in activity. However, lumber prices in the South rebounded quickly and dramatically and are now at all-time highs. This was due not only to an increase in housing starts, but also to increased activity in the home repair and remodeling sector as Americans turned their attention to home improvement projects while they were forced to work and shelter in place. The accelerating demand for building products caught many lumber producers by surprise — forcing them to ramp up production and increase prices. In his latest research white paper, “Exploring the Link Between Lumber Prices and Timber Markets,” TIRs Forest Economist, Chung-Hong Fu, examines the association between lumber prices and timber market performance by breaking down how lumber markets in the U.S. Southeast and U.S. Pacific Northwest differ and how the timing and impact of market changes affect them. The paper also provides insight on what timberland investors can expect from the economic recovery that is now underway.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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As we are in the midst of the fallout of the COVID-19 pandemic, China is a focus for a number of reasons. The pandemic will undoubtedly cause companies and countries to reexamine their supply chains and the risks associated with having too much exposure to China’s economy. Over the past 10 years, China has had a voracious appetite for logs and pulp. This has created opportunity in some global timberland markets and has buoyed returns where China has added to the marginal demand for logs and fiber. However, as a consequence of following the precepts of Modern Portfolio Theory, some investors may have unknowingly over-weighted their timberland allocations in these investment regions. In Chung-Hong Fu’s latest paper, “Do you know how much exposure you have to China?”, he provides much needed insight into which timberland investment markets have been most dependent on China and to what degree.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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When investors and their consultants examine the timberland asset class and try to understand its inherent risk factors, and specifically those created by a particular management style or strategy, they often look for a framework to assist in the evaluation process. In “Timberland Investments: A Strategy and Style Framework with Associated Timberland Risk Factors” our Forest Economist, Chung-Hong-Fu offers an alternative. In this paper, Fu discusses the conceptual relationship between risk and return and associated style and strategy. He also adds a comparison by region and then brings the management and style together with the regions profiled to further illustrate how the selection of management style and strategy and one’s targeted investment region(s) can influence and drive risk and return.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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One of the common questions posed by investors is whether or not the recovery has been fully “baked into” the current underwriting of timberland acquisitions. Typically, the answers we provide are based on our direct participation in the markets. However, in “FOMO: Have you missed the opportunity?” Chung-Hong Fu, Manager of Economic Research and Analysis, takes an objective, data-driven and analytical approach to answer the question. In addition to addressing that basic issue, Hong’s analysis also teases out sharp contrasts in the two largest global investment regions, the US South and the US Pacific Northwest.