Here’s Tanner Callais from The Street Authority who recommends “Two Timber Stocks For Your Watchlist.”

Wealth From Wood

Stocks… bonds… annuities… real estate… the investment tools that can fund a comfortable retirement are endless.

But there’s one very profitable asset class that is worth its weight in… wood.

In fact, it’s outperformed many other investments and markets for several years now – and a recent downturn gives savvy investors an enticing entry point. So if you want to unlock timber’s profit potential that timber holds, the time to invest is now – and we’ve uncovered one place where prime timberland is selling for less than $30 an acre.

Not Just For Rugby And Kiwis

It didn’t seem to matter where I went during my stay in New Zealand… all I saw was entire hillsides covered from top to bottom, as enterprising farmers had planted trees anywhere they could.

And with good reason. “It’s their 401(k),” said my brother, who’d lived in New Zealand for nearly a year. “They plant trees, let them grow, then cut them down when they want to retire.”

When I think back to seeing the rows and rows of these farms, the investment potential of timber didn’t immediately occur to me. But these farmers have really got things figured out.

After all, they don’t worry about how the inflation rate is going to affect their holdings. They aren’t worried about what the Fed is doing to bail out struggling companies. They simply plant trees, let them grow, and know that the money they’ll make from selling the timber will take care of their retirement.

And based on the historical performance of timber, it will be a comfortable retirement, too…

A Strong Track Record Of Impressive Returns… During Both Bear Markets And Inflation

From 1972 to the present day, investing in lumber has produced annual returns of 11%. That means a $100,000 investment in lumber in 1972 would be worth about $4.3 million today.

In the U.S., you can often pick up land for under $1,000 an acre if the trees on it are still small. Within 10 to 15 years, you can thin out your tract and get paid about $500 an acre for the pulp. And after 25-30 years, when the trees are mature, you should pocket $4,000 to $5,000 an acre for them at current prices.

What’s more… lumber is also a fantastic way to diversify your portfolio. Like gold, timber tends to do better during periods when stocks and bonds go down. In fact, during three of the four largest bear markets of the 20^th century, the value of timber actually rose.

And during the highest inflationary cycle in modern U.S. history – between 1973 and 1981 – timber returned an impressive 22% per year.

Two Timber Stocks For Your Watchlist

If you’re looking for the biggest and “best of breed” timber stocks, take a look at Plum Creek Timber (NYSE: PCL) or Rayonier (NYSE: RYN). Both companies own massive tracts of timber in the United States and offer solid yields of 5.6% and 7.1% respectively.

But if you’re looking for an even more lucrative play, buying actual timberland is as attractive right now as we’ve ever seen. That’s why institutional investors like Harvard Management Company, which manages the university’s endowment, bid on timberland in May 2008.

But why? Despite all the factors that suggest lumber prices should be high – the industry’s long-term performance… the imminent infrastructure boom… and the fact that timberland is a limited resource – prices are still down.

But what Harvard arguably sees here is an excellent chance to invest at more favorable prices. And there are deals to be found… if you know where to look.

In fact, as I was conducting my research for The Street Authority Market Advisor, I uncovered some unbelievable prices for timberland.

For example, small tracts of 200-acre land are going for only $45,000 ($225 per acre). Some plots are as low as $165 per acre. The absolute best we found was priced at only $29 per acre of timberland – less than the cost of dinner for two.

Granted, buying timberland takes a little more time and investment than simply buying a few shares on the NYSE. But with this low cost per acre and the historic performance of this most basic material, we see right now as the opportunity of a decade.

Source: For $29 A Pop, You Can Put Your Retirement On Autopilot

As you might expect, the U.S housing slump is reducing demand for finished lumber. Meanwhile, timber, pulpwood, and paper prices are rising worldwide – but curiously, profit margins are eroding.

What’s up with that?

The global commodity boom has created a supply/demand price imbalance between the four distinct industry sectors that rely on timber as a raw material. In fact, that imbalance is a huge mismatch. And savvy investors may be able to wring substantial returns from the winner.

You see, timber companies have shrewdly maintained monopoly-like control of raw materials to hold the line on prices, despite the economic downturn. They are doling out enough – and only enough – supply to maintain sufficient revenue streams to pay the bills. Meanwhile, their downstream relatives are suffering.

In a sense, timber owners are weathering the storm. And when the storm is over, their profits should explode.

It’s a complicated scenario being driven by a number of economic factors including the declining U.S. dollar, classic market demand/supply ratios, emerging markets growth, and even export quotas and tariffs.

Investors who tune in may catch lightning in a bottle. The end game could send timber company profits – and your portfolio – soaring in the next 12 months to two years.

Let’s take a look.

Housing Slump Wreaks Havoc on Lumber Mills

As lumber prices have swooned to a five-year low, wood has been piling up at lumber mills. Sawmills throughout the United States and Canada have been reeling since the second quarter of 2007, when lumber prices collapsed to below the cost of production.

Here’s what’s happening now:

* In the United States, single-family-housing starts dropped 1.7% in April to a seasonally adjusted annual rate of 692,000 units, the lowest monthly production rate since January 1991, and a jaw-dropping 42% below 2007.
* U.S lumber consumption is expected to drop, from 64 billion board feet to 43 billion board feet from 2006 to 2008. A drop of 21 billion board feet in the span of three years is simply staggering, equal to the total production of the Top 20 softwood lumber producers in the U.S. market for all of 2007.
* North American lumber at the Chicago Mercantile Exchange has fallen as low as $209 per thousand board feet, down a whopping 56% from its peak of $473 in 2004 – at the apex of the housing boom.
* Lumber companies in the Billion Board Foot Club, a measurement of the largest lumber companies in the world, was reduced from 22 to 15 in 2007. Six of the victims to be cut were in North America.

Particularly hard-hit are the big lumber mills in Canada, which ship much of their production to the United States. The key factor was the unprecedented run-up in the Canadian dollar. With sales denominated in U.S. dollars and costs accrued in Canadian dollars, a wide range of Canadian producers were running in the red and simply ran out of money.

In addition, Canada mills must pay a 15% duty to ship lumber into the United States. That puts the price at those mills at about $175 per thousand board feet, said Gerry Van Leeuwen, vice president at International Wood Markets Group, a Vancouver-based lumber consulting firm. “There is just no way anyone is making any money,” he added.

In the past, sawmills only needed to wait for interest rates to decline before ramping up production. Now, however, they will have to wait until the housing glut is over before lumber demand gets back to normal.

And that’s not likely until mid-2009 at the earliest. Our advice is not to bet the farm on lumber companies right now.
Global Growth Buoys Pulpwood and Paper Mills

Meanwhile, pulpwood and paper has been in a strong bull market for almost two years. Demand for paper and pulp remains strong – from overseas markets, in particular. And that demand doesn’t appear likely to ebb anytime, soon.’

Overall, world paper demand is moving ahead, buoyed by accelerating growth in Asia. The surge in paper demand in Asia is driving a huge appetite for both virgin pulp and recycled fiber. In 2006, alone, China’s imports of wood pulp jumped 150% to 7.5 million tons.

Increased exports have also helped pulpwood prices. The weak U.S. dollar makes it cheap enough for pulp and paper companies to purchase products in the United States and ship them overseas.

On top of that, demand from European utility companies for wood pellets should keep pulpwood prices elevated. Believe it or not, European utilities have turned to wood chips to produce power in order to lower their greenhouse gas emissions in accordance with the Kyoto protocol.

So you would think paper and pulpwood mills would be humming along, bringing in record profits.

Don’t make that bet.

The Big Squeeze

There is a huge fly in the ointment for pulpwood-and-paper mills.

Paper mills, of course, rely on pulpwood as raw material. Pulp mills, in turn, operate on small logs and wood chips – a byproduct of lumber production. And, as you might expect, the weak market has lumber mills cutting back on production. This is forcing pulpwood mills to rely on buying more logs or raw timber, says Daniel Stuber, of Forest2Market.com,. The lack of available chips has produced a big demand for small, lower quality logs.

The fact is, pulp mills are using twice as many logs as they normally would to satisfy production levels. And they’re getting hit right in the wallet.

“One of the bright spots for timberland owners is the demand from the pulp-and-paper industry,” Stuber said. “Land owners have been withholding stands with larger trees until saw-timber prices rebound, but they have been able to generate revenue through thinning practices and harvesting younger stands.”