HancockTimberland Investor F i r s t Q u a r t e r 2 0 0 6

Hancock Timber Resource Group 99 High Street, Boston, MA 02110-2320 617-747-1600

Over the past three years, prices for pine timber in Brazil, in inflation-adjusted dollars,

have increased almost 150 percent. Price increases were driven by surging export-

oriented domestic production as a result of a weak domestic currency. Continued

strong demand, combined with a strengthening currency since 2004 have brought

Brazilian softwood prices to international levels.

The Timber ResourceThe pine resources of Brazil areconcentrated in two contiguousregions of the country. Approximately30 percent of the 1.9 million hectaresof pine plantations are comprised of“tropical” pine species, located in thenortheastern and central regions ofthe country. Due to relatively slowgrowth, and poor form, this resourceis generally used for fiber and localmarket requirements.The muchlarger and faster-growing pine plantations of the southern region of Brazil are comprised primarily ofsouthern pine timber, of the samespecies found in the U.S. South. It isthese areas that have supported thefastest growth in demand in the lastdecade, and a commensurate rise instumpage prices.

Demand for timber by domestic manufacturers in Brazil rose signifi-cantly early in this decade, triggeredby a substantial fall in the value of the Brazilian Real.A weaker Realcombined with healthy off shoredemand for southern pine products,caused sawnwood, panel andsecondary manufacturing capacity to rise, as production was pushed

toward the export market. Anincreasing volume of sawnwood prod-ucts are now exported in the form of furniture components, molding and millwork, and rough lumber forfencing. As much as 20 percent ofpine sawnwood is currently exported

from Brazil to markets in Europe andthe U.S. Brazil, along with Chile andNew Zealand, has also emerged as oneof the largest suppliers of molding tothe U.S. market. Similarly, the panelindustry of Brazil in the last decadehas experienced tremendous growth,with Brazil today being the largestsupplier of pine plywood to the U.S. market.

Exchange Rates MatterIn the early 1990’s, Brazil sufferedthrough a difficult period of highinflation, and rapidly changingcurrencies. In 1994, the Real wasintroduced and initially pegged tothe US$ at a rate of 1:1. At the time,Brazilian timber was very competi-tively priced on a global basis with small sawlog stumpage pricedbetween US$ 11-12 per cubic meter,and large sawlog stumpage pricedbetween US$ 20-22 per cubic meter. (See Chart 1 on page 2.) Thedomestic log market of Brazil duringthis time, however, was dominatedby small private mills, generallycutting rough and green productsfor the domestic market. Logs weretypically sold on a roadside, or logyard basis as few buyers could affordstumpage sales, or efficiently handlemultiple product sales.

Prices remained fairly stable untilthe Russian default in 1998 trig-gered a currency crisis in Brazildropping the value of the Realagainst the US$ from 1.2 $R/US$ in December 1998 to 2.1 $R/US$ by February 1999. Pine stumpage

Softwood Sawlog Prices in Brazil—The Move to Equilibrium

An MFC Global InvestmentManagement Company

“Demand for timber by

domestic manufacturers

in Brazil rose significantly

early in this decade,

triggered by a substantial

fall in the value of the

Brazilian Real.”

continued on page 2

prices remained low in US$ terms until early 2003 when a very weak Real (hitting a daily lowof 3.8 $R/US$ in late 2002) greatlyincreased demand for sawnwoodand plywood for the export market,and began to push log prices towardinternational levels. Between the 1stquarter of 2003, and the 1st quarterof 2006, inflation-adjusted US$stumpage values for small and largepine sawlogs in Brazil increased by 143 percent and 149 percent,respectively. In absolute terms,inflation-adjusted small sawlogprices increased from approximatelyUS$ 10 per cubic meter, to US$ 24per cubic meter, and real prices forlarge sawlogs increased from US$ 21per cubic meter, to US$ 51 percubic meter.

In mid-2004, the Brazilian Realbegan to strengthen against the US$as a result of extremely high realinterest rates in the country, and a surge in US$ inflows based onrising agricultural and mineralcommodity exports and prices.From a mid-2003 level of 3.1$R/US$, the currency has strength-ened to a level of approximately 2.2 $R/US$ in the 1st quarter of2006. Such a move in a generallyUS$ denominated log market wouldtypically have resulted in a fall inlocal price levels in order to main-tain parity in US$ values.Althoughmost price tracking services havedocumented only that prices haveleveled off since mid-2005, there istransactional evidence to suggestthat discounts as high as 20 percentare being taken in the large sawlogand veneer log markets today toachieve the same result.

Observation of pine sawlog stumpagevalues in Brazil and the U.S. South

show prices have tended to track oneanother historically.The correlationbetween the annual change in infla-tion-adjusted US$ denominatedstumpage prices over the past decadeis 33 percent. Excluding the years

following the run-up in Brazilianstumpage prices, the correlationbetween the two regions strengthensto just under 50 percent.

This recent movement in Brazilianprices toward stumpage values in the

Hancock Timberland Investor First Quarter 20062

Softwood Sawlog Prices in Brazil—The Move to Equilibrium continued

continued on page 6

Sources: Timber Mart-South, STCP Engenharia, HTRG Research

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Chart 2: Brazilian and US South Pine Sawlog Stumpage Prices

Sources: STCP Engenharia, Ibbotson Associates

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Chart 1: Pine Sawlog Stumpage Prices in Parana Brazil

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U.S. Pacific Northwest Export

U.S. SouthU.S. Pacific Northwest Domestic

U.S. Northeast

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Quarterly Average Regional Composite Prices for

Softwood Sawtimber Stumpage (US$ per MBF)

Figure 1. Softwood Sawtimber Stumpage Prices

Regional softwood stumpage prices were mixed firstquarter. U.S. Southern Pine stumpages prices were up 3 percent over last quarter, or $8 per MBF, to average $260 per MBF for the quarter. Softwood sawtimber pricesin the U.S. Pacific Northwest remained unchanged fromlast quarter, yet up over $10 per MBF from year-ago levels. Radiata pine export prices in New Zealand fell first quarter, losing all of last quarters gain as vessel shortages had freight rates climbing during the quarter.

Figure 2. Lumber and Sawlog Prices in the U.S. South

U.S. Southern Pine lumber prices retreated slightly firstquarter, yet remain high as compared to historic levels.Both delivered Southern Pine sawtimber and chip-n-sawaverage log prices were unchanged from last quarterlevels, despite regional drought conditions and high logproduction across the South.

Figure 3. Lumber and Sawlog Prices in the U.S.

Pacific Northwest

Lumber prices in the U.S. Pacific Northwest were mixedfirst quarter, with coastal Hem-Fir prices gaining $43 perMBF over last quarter, to average $352 per MBF. Lumberproduction in the region has fallen, with prices for somegrades of lumber being off 10 to 20 percent this year as compared to the same period last year. Prices for thetwo indicator grades we track here, Douglas Fir Green 2x4 Random and Hem-Fir Dried 2x4 Std&Btr, both held up despite lower production numbers so far this year.

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Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber

Quarterly Average Prices for U.S. South Lumber

and Sawlogs ($ per MBF - lumber scale)

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Whitewood SawlogDouglas-fir Sawlog

Hem-fir (Coast), Kiln Dried, 2x4 LumberDouglas-fir, Green, 2x4 Lumber

Quarterly Average Prices for U.S. Pacific Northwest

Lumber and Sawlogs ($ per MBF - lumber scale)

Sources: Random Lengths and Log Lines

Sources: Random Lengths and Timber Mart-South

Hancock Timberland Investor First Quarter 2006 3

Sources: Log Lines, Timber Mart-South,New Zealand Ministry of Forestry andHTRG analysis

Figure 4. Softwood Pulpwood Stumpage Prices

In the U.S. Pacific Northwest, a combination of wetweather impeding logging and less residual chip outputfrom a slowdown in lumber production pushed softwoodpulpwood stumpage prices up first quarter. Softwoodpulpwood prices in the Pacific Northwest finally averagedabove break-even levels at $3.00 per ton.

Figure 5. Market Pulp and U.S. Pulp Log Prices

Delivered softwood pulplog prices were mixed firstquarter. In the U.S. South, prices fell just over $0.50 to$24.41 per ton from last quarter and down $1 per tonfrom year ago levels. Delivered softwood pulplog pricesin the U.S. Pacific Northwest strengthered again firstquarter, rising $5 per ton over year ago levels.

Figure 6. U.S. Timberland Values in Private

Property Markets

Timberland values in the U.S. Pacific Northwest were up $45 per acre first quarter to $2,321 per acre. In theU.S. South, values fell $11 per acre over last quarter to$1,162 per acre. It is worth noting, first quarter timber-land values as reported by NCREIF are of limited use asonly a small sample of properties in the database areappraised first quarter.

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Southern Pine Pulp Logs

Douglas-fir Pulp Logs

NBSK Market Price

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($ per metric ton) and U.S. Pulp Logs ($ per 10 tons)

Sources: FOEX Industries Ltd, Log Lines and Timber Mart-South

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Source: NCREIF

Sources: Log Lines, Timber Mart-South and HTRG analysis

Hancock Timberland Investor First Quarter 2006

Figure 7. U.S. Timberland Valuation Multiples in Private

Property Markets

Trailing multiples to operating EBITDDA were mixedfirst quarter. In the U.S. Pacific Northwest, marketvalues rose enough to offset the fall in trailing fourquarter income per acre— resulting is a rise in themultiple.The opposite occurred in the U.S. South.Thefall in timberland market values offset the increase inthe trailing four quarter income per acre, dampeningthe multiple.

Figure 8. Hancock Securitized Timberland Index

Share prices for the individual timber-intensive compa-nies we track for our Securitized Timber Index weremixed first quarter. Share prices for Rayonier rosesteadily throughout the quarter where as Plum Creek’sshare price remained relatively unchanged from lastquarter. Overall, our Index ended the quarter slightlyhigher than last quarter.

Figure 9. U.S. South Timberland Values in Public Equity

and Private Property Markets

Timberland values in the U.S. South moved in oppositedirections first quarter. Private timberland valuesdropped one percent from last quarter levels and public timberland values rose three percent.

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Timberland (trailing 4-quarter EBITDDA)

Sources: NCREIF and HTRG analysis

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The Timber Company

TimberWest

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Index

Monthly Securitized Timberland Share Value

(Indexed to 100 at start date)

Source: HTRG analysis

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Sources: NCREIF and HTRG analysis

Hancock Timberland Investor First Quarter 2006

6

Research Team

Courtland L. Washburn, Ph.D.Managing Director and

Chief Investment Officer

cwashburn@hnrg.com

Robert W. HaglerDirector of International Investment

Strategies & Economic Research

bhagler@hnrg.com

Mary Ellen AronowSenior Forest Economist

maronow@hnrg.com

Hancock Timber Resource Group is a divisionof Hancock Natural Resource Group, Inc., aregistered investment adviser and whollyowned subsidiary of Manulife FinancialCorporation.

References to expected investment performance in this newsletter are based on historical information and are based on management'sprojections. Potential for profit as well as for loss exists.

Hancock Timber Resource Group 99 High Street, Boston, MA 02110-2320 617-747-1600

Softwood Sawlog Prices in Brazil—The Move to Equilibrium continued

© 2006 Hancock Natural Resource Group, Inc.

Figure 1. The composite price for southern sawtimber is based onquarterly average Timber Mart-South published prices for pine sawtimber and chip-n-saw stumpage. Pacific Northwest prices are derived from quarterly average Log Lines published prices forwhitewoods and Douglas-fir with internal analysis of logging costsfor stumpage calculations. New Zealand export prices are based on New Zealand Ministry of Forestry quarterly average publishedprices for Radiata unpruned A, J and K sort export logs with internalanalysis of logging costs for stumpage calculations. Northeastsawtimber prices are calculated from internal analysis.

Figure 2. Quarterly southern pine (westside), kiln dried, 2x4 #2 lumberprice published by Random Lengths. Timber Mart-South publishedsouthern pine sawlog and chip-n-saw log prices converted tolumber scale using RISI historical lumber recovery rates aspublished in North American Lumber Forecast.

Figure 3. Quarterly Douglas-fir, green 2x4 lumber (Portland rate) andHem-Fir (coast), kiln dried, 2x4 lumber prices published by RandomLengths. Douglas-fir and whitewood sawlog prices derived from LogLines published prices for #2 and #3 sawlogs in various regions inthe Pacific Northwest converted to lumber scale using RISI histor-ical lumber recovery rates as published in North American LumberForecast.

Figure 4. Pulpwood composite prices are derived from quarterlyaverage Timber Mart-South published prices for southern pine pulp wood stumpage, Log Lines published whitewood and Douglas-fir pulp logs with internal analysis of logging costs for thePacific Northwest, and HTRG analysis of Spruce/Fir pulpwood in the Northeast.

Figure 5. Quarterly NBSK pulp prices derived from daily list pricesreported by FOEX Industries Ltd. Southern pine pulp log prices

published by Timber Mart-South. Pacific Northwest Douglas-fir pulplog prices published by Log Lines. Pulp log prices expressed inmultiples of 10 to accommodate market pulp pricing scale.

Figure 6. Regional NCREIF timberland market value per acre is derived by dividing the total regional market value at quarter end by the number of acres reported in that region. Market values forNortheast timberland were re-estimated for the period 1998Q4through 1999Q3 to adjust for what we believe to be an anomalousproperty included in the NCREIF database during those quarters.

Figure 7. EBITDDA multiples are calculated using NCREIF timberlandvalue per acre at quarter end divided by a trailing four-quarteraverage NCREIF net income per acre.

Figure 8. The Hancock Securitized Timberland Index (HSTI) uses a base-weighted aggregate methodology (similar to that used toconstruct the S&P 500) to calculate a market capitalization-weightedvalue for seven publicly traded timber-intensive forest productscompanies. Base weights were readjusted for the emergence ofnew companies or at the beginning of each year. Dividends are not reinvested. The companies included in the HSTI have noinvestment relationship with the Hancock Timber Resource Group.

Figure 9. Public equity derived from our Timberland Enterprise Value perSouthern Equivalent Acre (TEV/SEA) for five timber-intensive publiclytraded companies compared to southern timberland values per acrecalculated from the NCREIF database. TEV is a quarterly estimatebased on total enterprise value (total market equity + book value debt)less estimated value of processing facilities, other non-timber assetsand non-enterprise working capital. SEA uses regional NCREIF $/acrevalues to translate a company’s timberland holdings in various regionsto the area of southern timberland that would have an equivalentmarket value.

NOTES:

U.S. South can also be observed on a freight equalized basis. In fact, anestimate of current pine sawnwoodproduction costs in Brazil puts totalproduction costs (less residualrevenue) at just over US$ 120 percubic meter of lumber. When thecost of ocean freight to the U.S.is considered, it is apparent thatBrazilian producers no longer have a delivered price advantage overproducers in the U.S. South.

Should the Brazilian Real remain at current levels of $R 2.2/US$,downward pressure on log pricescan be expected to continue. On theother hand, should the Real weakento levels of $R 2.5/US$ as projectedby many financial institutions,current price levels would seem to be sustainable in the short tomedium term.

The movement of log prices in Brazilover the past decade reflects both

the increasing integration of theworld’s forest product industry, andthe impact currency movements canhave on production economics andmarket orientation. The export-

oriented pine industry of southernBrazil must now compete globallywith raw material costs that havemoved to international levels.

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Chart 3: Pine Lumber Production Costs — 2006 estimate

Source: International Wood Markets, HTRG Research