Saturday, September 17, 2011
Issues and Alternatives for Teak Investors
Teak is the common name for the tropical tree and wood of Tectona grandis. This popular investment tree is native to south and southeast Asia, but is also planted as an introduced species in Africa, Central and South America. Teak is grown in plantation settings, because its fine wood has a large market and demand. The teak tree can be a very good investment, with high returns, but it may take as much as 30 years for plantation teak trees to be big enough to sell. The yellowish brown wood is used for fine furniture, outdoor furniture, boat decks and other articles, where weather endurance is required. The wood is mostly termite and insect resistant. Other popular uses include wooden bowls, cutting boards, arts and crafts, indoor flooring, veneers and finishing wood. There is an environmental concern, because of past reckless logging of old growth teak, though the majority of teak wood now comes from plantations.
The market for teak wood is always good, provided one is selling mature lumber from larger trees (25 to 30 years). The market for lumber from small teak trees is very limited (12 to 20 years) and does not fetch anywhere near the prices paid for large, mature logs and sawn lumber. Many firms offer investments in teak plantations, and some of them are reliable business partners. However, while teak is a high return commodity, it is not a quick return investment. This article will briefly address some of the issues that teak investors should consider, and contrast those considerations with other possibilities.
Teak trees need relatively good soil in which to grow. They do not do well in poor or infertile soils. If a planter can match the soil and rain conditions found in Burma (Myanmar), they will have excellent results. Similar conditions are known to exist in Costa Rica, Panama and parts of Colombia. The downside of this fact is that other, faster growing trees or crops can be grown in places set aside for teak trees, which sometimes puts pressure on teak plantations that require many years to produce mature trees. It is not uncommon for teak plantation owners to cut down their immature teak trees to make way for other agricultural or housing projects that offer a quicker cash flow solution to the land owner.
Tectona grandis does not provide any other cash flow while it is growing. There is a limited use of the leaves in south India and Indonesia as a wrap for steamed preparations, but that is of no commercial value. Many other species of tropical trees have fruits, nuts, honey or resins that can be sold while the trees are growing. Experience in Central America has shown that teak is not that environmentally friendly in regions where it is an introduced species. A common observation by visitors to teak plantations in the Americas is that they are devoid of bird, animal or insect life. Additional issues are the fact that teak trees need good soils that could be used for food production, and the fact that teak is generally planted in monocultures due to the high cost of good land.
From an investment perspective the long time to maturity required by teak trees needs to be considered when investing in their cultivation. Best intentions do not resolve practical problems. For example, will the planter with whom one invested still be alive in 25 to 30 years? Does the company operating the plantation have a continuity plan which the investor can trust? What happens to the trees in the event of a bankruptcy or other form of liquidation? What happens if land prices increase exponentially mid-way through the growth cycle, putting pressure on the land owner? Even if the trees are somehow protected, who will see to future fertilizations, pruning, culling, fire breaks and other maintenance if the original company or plantation owner is no longer active?
It is also worth thinking in terms of insurance. The longer the growth period for a tree, the more exposure one has to potential natural disasters like fire, pests, floods, droughts or diseases. This risk factor is obviously much smaller with fast-growing tree species that mature in 10 years versus 30 years. As a teak investor one should definitely inquire as to a company’s or plantation owner’s Plan B or insurance. For example, Amazonia Reforestation in Colombia, which does not cultivate teak, has a self-insurance plan that involves planting twice the number of tropical trees for which it has financial obligations, as well as planting a variety of species to reduce risks.
This does not mean one should not invest in teak, but rather that it is important to do so with open eyes and a full understanding of the long time commitment required by successful teak plantations. Diversifying so that one has holdings in other, faster growing tropical tree species, as well as teak, makes a lot of sense. Teak is not the only game in town, so having a tropical tree investment strategy that includes other species is a good thing. Teak investments are usually more costly than other tree species, because of the long maintenance period involved, but the payoff is not something one will regret. As with other tropical tree species, it is correct to say that teak trees can be low to medium risk but high return.