Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How a Canadian Pension Farmed the Most Productive Timberland
Transcript
- Lucas: Luna, quick question: when you think about a highly productive asset, what comes to mind? Luna: A semiconductor fab, maybe a logistics hub, something with lots of technology and throughput. Lucas: Right. Now imagine a forest. Trees planted decades ago, left to grow, harvested eventually. Not exactly a productivity hotbed. But the Canada Pension Plan Investment Board—CPP Investments—has turned a massive timberland portfolio into one of the most productive forestry operations in the world, and it's a case study in how patient capital can drive real output gains. Luna: I'm intrigued. How do you measure productivity in a forest? It's not like you can speed up tree growth with a software update. Lucas: You can't speed up biology, but you can optimize every other variable. CPP Investments started acquiring timberland around 2007, mainly in the US and Australia. They now manage about 6 million acres globally. And they've pushed annual growth per hectare to roughly 12 cubic meters, compared to a global average of about 4. That's a tripling of output on the same land base. Luna: Wait—12 cubic meters per hectare per year? That's almost plantation-level productivity. How do they get that from natural forests? Lucas: They don't treat it as a natural forest. They treat it as a biological asset with a rotation schedule. The key innovation is what they call 'precision silviculture'—basically, satellite-based yield monitoring, targeted thinning, and fertilization only where the data shows it will produce a return. They're not clear-cutting; they're doing selective harvests based on real-time growth models. Luna: So it's like precision agriculture, but for trees. What's the specific technology stack? Lucas: They use a combination of LIDAR from drones and satellite imagery to map every stand of trees. That data feeds into a growth simulation model that predicts optimal harvest timing for each micro-zone. Then they use gps guided harvesters that cut only the trees flagged for removal, minimizing damage to the remaining stand. The result is that the forest's overall biomass increases faster because the canopy opens up just enough for the best trees to thrive. Luna: That's fascinating. But doesn't that require a huge upfront investment in technology and data infrastructure? Most forestry companies operate on thin margins. Lucas: It does, and that's exactly why CPP Investments can do it while smaller operators can't. They have a 30-year investment horizon—they're not worried about quarterly earnings. So they can spend millions on satellite analytics and custom software knowing the payoff comes in the next rotation cycle, which for pine is 25 years, for hardwoods even longer. The productivity gain is the competitive moat. Luna: So the patient capital allows them to make these long-term bets. Are there other institutional investors doing the same? Lucas: A growing number. Pension funds from Sweden, Australia, and the US have all increased timberland allocations. The global timberland market is now about $100 billion in institutional assets. But CPP Investments is the standout because they've vertically integrated—they own the land, the data platform, and even some processing facilities. That vertical control lets them capture the productivity gains all along the chain. Luna: And those gains show up in the numbers. What's the financial return look like compared to, say, a REIT or a bond? Lucas: Over the past decade, their timberland portfolio has returned about 8 to 10 percent annually, with lower volatility than equities. That's partly because timber has a biological growth component that is uncorrelated with economic cycles—trees grow regardless of recessions. And the productivity improvements add a couple of extra points of return on top of that baseline growth. Luna: Right, because a higher yield per hectare means more volume to sell at harvest time, even if prices are flat. Lucas: Exactly. And they've also made money by converting some low-productivity land to higher-value uses—for example, selling parcels for carbon offsets or conservation easements. That's a productivity story too: getting more economic output from the same asset base by layering additional revenue streams. Luna: I want to dig into the offset piece. How does that work alongside timber production? Lucas: They enroll stands in carbon credit programs. The trees sequester carbon as they grow, and CPP Investments sells those credits on voluntary markets. But they're careful not to over-credit—they only sell credits on stands that are already planned for longer rotations anyway. It's a complement, not a substitute for timber revenue. And it adds about 1 to 2 percent to annual returns. Luna: So the productivity narrative here isn't just about wood—it's about optimizing every output from the land. Timber, carbon, maybe even recreational leases. Lucas: Exactly. And that's the broader lesson for any industry with long-lived assets: productivity isn't just about doing the same thing faster; it's about redefining what outputs you can generate from the same inputs. CPP Investments looked at a forest and saw a multi-output production system. Luna: It reminds me of the Dutch agricultural model you've covered before, where they get multiple harvests per year from the same greenhouse. Same principle, different biome. Lucas: Yes, and I think the forestry case is even more impressive because the cycle time is decades, not months. You have to have enormous conviction in your data models to make decisions today that won't pay off until your successor's successor is in charge. That institutional patience is rare. Luna: Speaking of institutional patience—this show itself is a long-term project. And the reason we can keep doing deep dives like this without ads is that a small group of listeners support us directly. Lucas: Yeah, it's a straightforward model. If you get value from walking through the economy with us, you can chip in at buy me a coffee dot com slash fexingo. That's literally what funds the research and production. Luna: And we're grateful for every contribution. It keeps us independent and focused on the stories that matter, not the ad-friendly ones. Lucas: Alright, back to the forest. One more number I want to highlight: CPP Investments' timberland has a carbon sequestration rate of about 10 tons per hectare per year. That's higher than the industry average. So productivity in forestry now has a climate dimension too. Luna: Which means investors are effectively getting paid multiple times for the same biological growth—once in timber, once in carbon credits, and potentially once in biodiversity credits as those markets develop. Lucas: Exactly. And that's the frontier. The question is whether other pension funds can replicate the model. It requires deep expertise, long time horizons, and a willingness to invest in proprietary technology. Not every fund has that culture. Luna: But for those that do, the productivity gains are real and measurable. A forest that grows 12 cubic meters per hectare instead of 4—that's not a small improvement. That's a tripling of output. Lucas: And it happened not through some breakthrough in tree genetics, but through better data, better timing, and a longer view. Which is, in a way, the most durable kind of productivity growth there is.