Product diversification in South Africa’s commercial timber plantations: a way to mitigate investment risk

Abstract

We used the portfolio method to examine how a forest company can lower investment risk by producing a mix of timber products. We derived optimum combinations of pine (Pinus patula) saw timber production and eucalypt (Eucalyptus grandis) pulpwood production at landscape level. Our results indicate that producing a product mix rather than a single product improves aggregated financial returns and lowers investment risk over multiple rotation periods. The optimum mixture depended on past timber price correlations for pulpwood and sawn timber in South Africa between 1980 and 2011. This ideal mixture is comprised of areal ratios of about 45% saw timber and 55% pulpwood. Our example shows how economic risk of a forest investment can be reduced by creating a portfolio of a number of products. The risk that an investor has to accept for each monetary unit that is expected in return can be reduced by over 40% when comparing the risk–return combinations of a pure pine saw-timber stand with that of a portfolio of forest products. The risk associated with the production can be reduced by 20% when growing a portfolio of products rather than eucalypt pulpwood only.

Keywords: diversification, economic resilience, Eucalyptus grandis, financial theory, mixed species, Pinus patula, portfolio analysis, risk