Lumber prices are on a roller coaster. They might remind Warren Buffett of the time he doubled his money at a lumber company

Warren Buffett.
  • Lumber prices have skyrocketed and plunged over the past 18 months due to the pandemic.
  • Warren Buffett once doubled his money with a smart bet on Arcata, a lumber company.
  • The investor pocketed $ 22 million after the U.S. government settled a dispute over a redwood forest.
  • See more stories on the Insider business page.

The pandemic has had a dramatic impact on lumber prices, dropping futures contracts below $ 300 per thousand board feet in April 2020, and then taking them to $ 1,700 in May. Warren Buffett may well have flashbacks as he doubled his money on a deal involving a redwood forest.

Billionaire investor and Berkshire CEO Hathaway described his Arcata bet as one of his “most fortuitous arbitrage experiments” in his 1988 letter to Berkshire shareholders.

Arcata, a printing and forest products company, fought in court with the US government over its purchase of 10,700 acres of Arcata lumber in 1979 to expand Redwood National Park in California. Arcata argued that the government’s payment of $ 98 million for the trees was nowhere near enough and challenged the interest rate he had proposed.

Meanwhile, KKR had submitted a takeover bid of $ 37 per Arcata share and two-thirds of any other government payments, and Arcata had agreed. Buffett and his team determined that the private equity group was likely to close the deal based on their track record, Arcata would likely find another buyer even if the deal didn’t go through, and there was potential for a major boon once the sequoia dispute is resolved. .

“Your president, who can’t tell an elm from an oak, had no problem with that one: he coldly assessed the demand between zero and a lot,” Buffett joked in his letter.

Berkshire quickly bought 400,000 Arcata shares, or 5% of the company, in the fall of 1981. When the closing date was pushed back, but a definitive agreement was signed in early 1982, the Buffett’s company increased its stake to 655,000 shares, or 7%, at an average cost of $ 38 per share – a premium to KKR’s bid.

“Our willingness to pay – even though the closure had been postponed – reflected our tendency to ‘a lot’ rather than ‘zero’ for redwoods,” Buffett wrote.

The transaction experienced further delays and KKR ultimately reduced its offer to $ 35. The bosses of Arcata rejected this offer in March 1982, accepting another offer of $ 37.50 per share plus 50% of the redwood money instead. Group shareholders approved the deal and Berkshire received $ 24.6 million, representing a strong 15% annualized return on its $ 22.9 million investment.

The redwood issue was finally answered after a judge ordered two commissions to assess the timber’s value and an appropriate interest rate, upheld their findings in 1987, and ruled the government owed $ 600 million. dollars to Arcata. The parties agreed to a payment of $ 519 million in 1988. Berkshire received an additional $ 19.3 million as a result, and Buffett wrote that another payment of $ 800,000 was scheduled for 1989.

Assuming the money poured in, Berkshire’s total payout was $ 45 million, resulting in a profit of $ 22 million on his investment. It may have taken nearly a decade, but Buffett must have been happy to see his bet pay off in the form of a 95% return.

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