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Carol Franklin: Talking Teak

The Chairwoman of the Board of Forests for Friends and of the Tree Partner Company speaks about investments in teak, ecological concerns and the country of Panama.

Trees are a fixture of the physical landscape, inspiring the human imagination, and their products are a ubiquitous component of everyday life. Small wonder that they also constitute a vehicle for investment. Teak is particularly prized for its beauty, spiritual associations, durability and ease of workmanship. A teak tree matures in about 20 years and is fairly easy to grow, though the locations where it thrives pose their own challenges. Nonetheless, in the right hands, teak offers an interesting proposition for the patient investor.

Giselle Weiss: You describe "falling into" the business of growing trees but finding it interesting. Why ?

Carol Franklin: Investing in trees means you give your money away for 20 years. The concept is difficult to sell in the sense that if you go about it properly, it really is illiquid. Most of our competitors say that you will get a first payout after three to five years, and that they will reimburse your investment if necessary, which is absolute rubbish. They also tell you that returns are between 9 percent and 15 percent a year, which is also rubbish. We compare our return to what you used to get on a savings account – so something like 6 percent to 7 percent per annum, 85 percent of which comes in after 20 years when the trees are harvested.

How does it work?

The basic concept is that the investor pays all the money up front, on a shareholding basis. In other words, we have enough money for the 20 years it takes for the trees to grow. We buy the land, plant the trees, and maintain them very carefully. If all goes well, we have the first non-commercial thinning after four to five years. Then after eight, 14, and the final harvest after 20 years.

Let's backtrack just a bit. Why trees, as opposed to vineyards or fancy cars or Picassos or a nice little chemical start-up?

I personally have always been interested in ecology. And trees are vital for our survival. They help slow down climate change by capturing CO2. They are something that you can see and touch, as opposed to, say, derivatives.

Why teak?

After 20 years you can sell the wood. There are a lot of beautiful and interesting trees, but they have no international market, whereas there is a functioning international teak market. At the moment, we are selling all our wood to India, which could buy the entire worldwide harvest. Recently, the markets of Vietnam and China have been growing, and some of the wood is going to these countries to make very nice garden furniture, doors, cabinets, whatever. It would be nice if the US and European markets became stronger again in the near future.

Just to be clear, we're talking about tree plantations, not tropical forests, right?

Yes. We plant the trees on former cattle land. Plantations are not ecological, although ours are all certified by FSC (Forest Stewardship Council). What plantations do is to take the pressure off the primary forests, as people no longer have to go and cut trees in the jungle.

And the reason for doing it in Panama?

Teak only grows in tropical regions, but you probably wouldn't want to invest your money in many of the countries along the equator. Panama has a relatively reliable legal system and, due to its narrow shape between two oceans, there is always a port nearby. If you plant in Brazil, for example, and people do, the nearest port can be 3,000 kilometers away. Getting the timber there costs a fortune. Unlike overland transport, sea transport is not very expensive. Panama also has tax incentives for reforestation.

Who should invest in a teak plantation?

It's not about quick money. So patient money, possibly. People who have an affinity for trees. People who are ecologically minded and who want to do something to save the world. Pension funds would be ideal because it's a long-term asset and pension funds have calculable long-term liabilities. It's well suited to family offices: traditional families used to have their own woods, and some still do. We have many grandparents! They think long-term, and teak is a shorter return than German forests, for example. A German oak takes 100 years to mature.

And who should not invest?

Someone who might need the money in the next 20 years. I'd also never invest more than 10 percent of my available money in something like this. We're not listed, which means the investment is even more illiquid. But this also means we are decoupled from the financial markets. So if everything goes down, which it will again of course, at least your trees will continue to grow. And if the wood price happens to be unattractive at any given moment, we can just let the trees stand and wait. It's not rice or oranges or vineyards.

Could you describe the planting cycle?

You buy the land. You prepare the land. You plant the trees. You have to get the right soil and the right seedlings. Over the past ten years, seed- lings have improved dramatically. Because our plantations are ecologically certified, you can't use certain pesticides and herbicides, so you have to keep the grass and shrubs down with the machete. As the trees grow, you cut the branches to avoid knots in the wood. You usually plant between 800 and 1,100 trees per hectare, with the trees spaced about 3 meters apart. After four years, you thin the trees to give them enough room and light to grow and become tall, strong and straight trees.

And you continue to thin as the trees grow?

Yes. The next thinning is usually after eight years. This is the first commercial thinning and the wood is used for doorframes, tongue-and-groove walls, indoor floorboards or furniture. As we now get more money than we pay for the thinning, we can use the proceeds for the maintenance. So in the cash plan this is income, but we do not distribute it to the shareholders – unlike some companies who use this money to keep their shareholders happy and have to look for additional income for maintenance. There's another thinning at 14 years, and the final harvest at 20, but it could be 18 or 22, depending on the growth of the trees and the state of the market.

Aren't the trees vulnerable to weather or natural enemies?

For the first four or five years, you have to be careful about fire. So we have fire breaks, usually roads. And we have people living in the plantation to watch. Panama has no hurricanes. We do have local windhoses, and sometimes a bunch of young trees will fall over. But you can put them back up and they continue to grow. There's also a type of fungus, but it's fairly limited, and we are on the lookout for it.

What should investors know or consider before they make such an investment?

The main thing is that they should realize that the money is out of their portfolio for 20 to 24 years. And they should check us out because you invest in people and not in things. It's like re-insurance. It seems very technical, but in the end, you under write the under writer.

Do you worry about climate change?

Well, there are general concerns about the unpredictability of the rains. And, naturally, if the tropics were to become colder, that would be an issue. But on a day-to-day basis, I think political risks tend to be higher than natural risks. Panama is probably more stable than some of the other countries in the tropics.

Do people come to see the trees?

We organize investors' trips including visits around Panama – to the canal, an indigenous village, the old fortress near Colón and our sheep and goat farm. We have quite a few people who just want to have a look and not invest, or who want to get a feel for who we are before they invest. We're happy with that.

If you were starting over, would you do this again?

My first experience with this type of investment was actually sitting on the board of a company that failed. It's a long story. My husband and I made it our business to rescue it – now called Forests for Friends – which was a huge gamble and the odds were against us. But if we hadn't accepted the challenge, two-and-a-half thousand people would have lost their money. We succeeded, and that effort, as well as starting The Tree Partner Company, has changed my life.