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

• Lumber prices have skyrocketed and plunged in the past 18 months due to the pandemic.
• Warren Buffett once doubled his money with a clever bet on Arcata, a timber company.
• The investor pocketed $22 million after the US government settled a dispute over a redwood forest.

The pandemic has had a dramatic impact on lumber prices, dragging futures below $300 per thousand board feet in April 2020, then lifting them as high as $1,700 this May. Warren Buffett could well be having flashbacks to the time he doubled his money on a deal involving a redwood forest.

The billionaire investor and Berkshire Hathaway CEO described his Arcata bet as one of his "more serendipitous arbitrage experiences" in his 1988 letter to Berkshire shareholders.

Arcata, a printing and forest-products company, was sparring in court with the US government over its purchase of 10,700 acres of Arcata timber in 1979 to expand Redwood National Park in California. Arcata argued the government's payment of $98 million for the trees was nowhere near enough, and took issue with the interest rate it had proposed.

Meanwhile, KKR had submitted a takeover bid of $37 per Arcata share and two-thirds of any further payments by the government, and Arcata had accepted. Buffett and his team determined that the private-equity group was likely to close the deal based on its track record, Arcata would probably find another buyer even if the deal fell through, and there was potential for a major windfall once the redwood dispute was resolved.

"Your chairman, who can't tell an elm from an oak, had no trouble with that one: He coolly evaluated the claim at somewhere between zero and a whole lot," Buffett quipped in his letter.

Berkshire promptly bought 400,000 Arcata shares, or 5% of the company, in the fall of 1981. When the deal's closing date was pushed back, but a definitive agreement was signed in early 1982, Buffett's company raised its stake to 655,000 shares, or 7%, at an average cost of $38 a share - a premium to KKR's offer.

"Our willingness to pay up - even though the closing had been postponed - reflected our leaning toward 'a whole lot' rather than 'zero' for the redwoods," Buffett wrote.

The transaction ran into further delays, and KKR ultimately trimmed its offer to $35. Arcata's bosses rejected that bid in March 1982, accepting another offer of $37.50 per share plus 50% of any redwood money instead. The group's shareholders approved the deal, and Berkshire received $24.6 million, representing a solid 15% annualized return on its $22.9 million investment.

The redwood question was finally answered after a judge directed two commissions to assess the timber's value and an appropriate interest rate, upheld their conclusions in 1987, and ruled that the government owed $600 million to Arcata. The parties settled on a $519 million payment in 1988. Berkshire received an extra $19.3 million as a result, and Buffett wrote that another $800,000 payment was slated for 1989.

Assuming the money came through, Berkshire's total payout was $45 million, netting him a $22 million profit on its investment. It may have taken the better part of a decade, but Buffett must have been pleased to see his bet pay off in the shape of a 95% return.