INFLATIONANDTIMBERLANDRETURNS.pdfVIP

INFLATION AND TIMBERLAND RETURNS Jack Lutz Forest Research Group Alton, ME 04468 jlutz@ Abstract Timberland is often described as an inflation hedge and the correlation between the two is usually cited as proof. (In fact, the literature indicates that timberland is a hedge against unexpected levels of inflation.) The correlation coefficient for inflation and timberland returns is generally positive, and fairly strongly so. Analysis shows that U.S. timberland returns, as measured by the NCREIF Timberland Index, appear to lead the U.S. Consumer Price Index by a year and those returns are highly positively correlated with inflation. However, timber prices, which are a major driver of timberland returns, are not always highly correlated with inflation. It appears that a geographically diversified timberland portfolio is required if investors want timberland returns to be positively correlated with inflation over the long term. We also look to see if U..S timberland returns provide an inflation hedge for investors based outside the U.S. Keywords: Timberland, investment, inflation Introduction Timberland is often described as an inflation hedge and the correlation between the two is usually cited as proof. (In fact, the literature indicates that timberland is a hedge against unexpected levels of inflation.) The correlation coefficient for inflation and timberland returns is generally positive, and fairly strongly so. Inflation and Timberland Returns Figure 1 shows a typical correlation analysis comparing timberland returns with other asset classes and inflation. The correlation coefficient for timberland and inflation is 0.4493. Figure 2 compares time series of timberland returns and inflatio