Forestry Stocks and ETFs: The Back Door to Cellulosic Biofuels Investing
|ETF||% Producers||Expense Ratio||Daily volume||Close 9/17/09|
Even given my cursory analysis of each fund's holdings, WOOD stands out as clearly superior to CUT for investors interested in a Forestry ETF as an investment in Biomass, because of the significantly higher exposure to producers than consumers. CUT does have better liquidity, but that hardly makes up for the lower expense ratio of WOOD, and high exposure to wood consumers.
Even the 60% exposure of WOOD to biomass producers is not enough so that I think these funds are a good way to invest in the sector. It would be theoretically possible to get exposure just to producers by going long WOOD and shorting CUT, but such theories tend to work a lot better in theory than in practice.
Hence, I feel the best approach to get exposure to wood producers is with individual stocks. Most of the holdings of these two funds are international, but there are still a few US-listed ones. With the caveat that I have not researched any of these companies, here are the US-traded holdings of the two funds that seem to be mostly wood and pulp producers, as opposed to biomass consumers:
|Company/Ticker||% of WOOD||% of CUT||Notes|
|Aracruz Celulose S.A.(ARA)||4.73%||4.97%||Brazilian wood pulp producer|
|Plum Creek Timber Co. Inc. (PCL)||5.55%||2.24%||US Timber REIT; in DJ Sustainability index|
|Potlatch Corp (PCH)||6.5%||1.35%||US Timber REIT; Forests are FSC certified|
While a portfolio of only three stocks is not very diversified, few investors are likely to commit more than 10% of their portfolio to forestry, and devoting 3% or less of your portfolio to a single company should bring adequate diversification. The loss of global exposure (the ETFs contain several Japanese and European companies as well as US and Brazilian ones), but this loss seems worth avoiding significant exposure to an industry (paper and packaging) with a significant input (pulp) that we expect to become more expensive due to competing uses.
Just as farmers are now benefiting from higher corn and soy prices because of the production of ethanol and biodiesel, it seems fairly certain that timber companies will benefit from higher prices for both lumber and previously unused slash. Nevertheless, there remains a question of when. Cellulosic ethanol plants are still in the pilot stage, with not nearly enough being produced to make a difference to the forestry industry's revenue. In contrast, cofiring wood and using it for heat are both established industries. At the moment, however, these uses for wood tend to be driven by the prices of alternative fuels (coal and heating oil), and not by reduced carbon emissions.
Although forest waste and sawdust can be practically free at the source, the cost of gathering and transport often means that they are nearly as expensive as the alternatives at the point of use. In order for the industry to overcome the logistical barriers, a price on carbon emissions is probably necessary. For US investors considering Plum Creek or Potlatch, it probably makes sense to wait until we see action from the US on climate change before investing.
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