How Do Exchange Rates Affect US Forest Products and Timberland Investments?

20 10 2011

When studying exchange rates and currency markets, I sometimes think of the old joke “the quickest way to double your money is to fold it in half and stick it back in your pocket.”   Currency markets shake more than jello and swing more than Tila Tequila.  Short-term events and market sentiment can drive capital flows into and out of currencies, swamping fundamentals and expected relationships for years.  As such, exchange rates affect forest products trade flows and investments in timberland assets.

It’s funny to think that money “has a price” beyond our labor, but it does.  An exchange rate – which is the price of money in terms of another – and interest rates – which reflect the price of borrowing or loaning money – produce thundering reverberations in the heads of investors and currency traders, far beyond the crack and snap of a tree hitting the ground.  However, exchanges rates affect forest businesses and timberland investors in at least three ways:

  • Exchange rates affect prices.  When the US dollar gets stronger (when we can buy more Canadian dollars or Japanese yen per US$), US exports become relatively more expensive and imports become cheaper.
  • Exchange rates affect investment returns.  If, for example, forest products are imported or exported, or if they compete with forest product imports or exports from other countries, their prices will be affected by exchange rate changes.
  • Exchange rates affect investment activities. When, for example, the US dollar weakens, US timberlands appear relatively cheaper assets to foreign investors.

Previous research into the affects of exchange rates on the US forest products industry indicate that while (1) exchange rate volatility negatively impacts some US exports in the long-term (Sun and Zhang 2003) and some forest products in the short-term (Zhang and Buongiorno 2010), (2) exchange rate levels are more important than exchange rate volatility.  For products such as logs, lumber, pulp and paperboard, a 1% increase in exchange rate variability leads to a 0.3%-0.4% decrease in volume exported in the short-term and a 0.1% export price decrease in short-term.

How do exchange rates affect timberland investment activities?  First, foreign investors continue to increase holdings of US timberlands (Mendell 2009), and investors from Canada and Europe dominate this activity.  While US interest in forest timberlands is minimally affected by exchange rates (Mendell et al; in press with the International Forestry Review), foreign investors cite exchange rates as a critical attraction to investing in the United States.

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