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The ultimate question about commercial forestry is “what is it worth?” At the end of the day the real or true value of a forestry investment is a combination of what price the purchaser is willing to pay and at what price the investor is willing to sell the asset.
Markets For Timber
Ireland is very dependent upon the UK market. Most analysts are of the opinion that competition will increase over time with additional supplies coming on stream from non-traditional sources. The UK and European market for certified timber products – timber from forests managed according to the principles of sustainable forest management (SFM) – is increasing.
Currently most forest valuations and analyses assume that the market (domestic and export) will be able to absorb or consume all of the timber produced. This is very much dependent upon the development, growth and competitiveness of the domestic sawmilling and small roundwood processing sector. Little consideration has been given to what will happen when private plantations established over the past twenty years reach thinning stage. By 2010 some 18,500 ha will be due for first thinning (Figure 1), assuming an average yield class of 18 and first thinning age of 20 and excluding those plantations deemed unsuitable for thinning due to a variety of reasons including access and stability.
It is estimated that between now and 2015, private plantations will be capable of producing a total of 4.12 million m3 in thinnings, provided that they are thinned on time and that markets are available (8).
Timber Price
Timber price has a major impact on any investment valuation. Over the years, timber prices world-wide, have kept pace with inflation and most analysts agree that this scenario is likely to continue into the future. Timber prices are subject to cyclical variations related to the general world economy and growth / development of industrial capacity.
In terms of private investment in forestry, there are a number of factors that will influence price at the local level. These include
(a) tree size;
(b) road access (county and internal);
(c) harvesting costs (ground conditions, haul distance etc.);
(d) stem and wood quality;
(e) lot size (area and timber volume);
(f) supply and demand situation.
The most prudent approach in terms of valuation for a specific investment is to adjust general prices in relation to the distinguishing features of the timber coming from the investment.
For valuation purposes, the use of current timber prices is inappropriate and can give rise to misleading results due to the cyclical nature of timber prices. Use of a long term price series is more appropriate.
For hardwoods in Ireland there is little or no reliable information on average prices. Thus, for valuation purposes, we are faced with a dilemma as to what are realistic prices. There is no simple solution and any assumption must be treated with extreme caution.
Tree Growth - Site Productivity
Timber growth rates in Ireland are higher than in other European countries due to the mild climate and relatively long growing season. Growth rates can be predicted with a high degree of accuracy and are usually expressed in terms of yield class e.g. YC 20, a site that can on average produce 20 cubic metres of timber per hectare per year.
Risks
There is no such thing as a completely risk free investment. Governments have been known to fall, stock markets to crash, freak weather to devastate vast areas, banks to go bankrupt etc. The same applies to forestry. There are risks and it is important to state them clearly and where possible to account for them in any valuation undertaken.
The major potential risks associated with forestry in Ireland today are wind, fire, frost, disease, markets and prices. There are other considerations, for example, taxation on investments, regulatory restrictions, timber technology, timber substitution and grant aid, where changes could affect returns.
Financial Maturity
There is a right and a wrong time to fell any timber crop. The right time is when it is financially mature (Figure 3).
Returns
Returns are expressed as real rates of return over and above the rate of inflation. There is a lack of published information on returns from investment in forestry in Ireland. Growing for the Future - A Strategic Plan for the Forestry Sector in Ireland (5) estimated the real rate of return from forestry (Sitka spruce) as 5% including land cost and exclusive of grants and subsidies. Irish Forestry Unit Trust (IFUT) estimates the return from forestry as being within the range of 5% to 7% (4). At a conference on forestry investment organised by the Irish Forestry Industry Chain (IFIC), most speakers indicated returns in the region of 5 to 7% with the proviso that these could be higher if there was no land cost associated with the investment. Thus farmers planting their own land could expect significantly higher returns.
In Britain on better quality land, with zero opportunity cost attributed, rates of return of 7% (1) and 6.5% (2) have been demonstrated. The World Production Outlook in Britain (3) concluded that rates of return were low and estimated an expected mean of 2.3% for the period 1977 - 81. Very favourable assumptions about land, labour and timber prices raised this to about 6%. Other analysts indicate returns from commercial conifer forestry in the UK are in the region of 4%-6% (7).
In summary returns are very much dependent on a combination of factors but most analysts indicate rates of return in the region of 5% to 7%. Returns are significantly higher where the investment does not require the purchase of land.
References
(1) PIEDA 1986 Forestry in Great Britain. National Audit Office, London.
(2) CEED 1986 Forestry: Britain’s Growing Resources. UK Centre for Economic and Environmental Development, London.
(3) Forestry Commission 1977. The Wood Production Outlook in Britain. HMSO Edinburgh.
(4) Personal Communication 1998 Brendan Lacey, Chief Executive IFUT.
(5) Growing for the Future. A Strategic Plan for the Development of the Forestry Sector in Ireland. 1996 Department of Agriculture, Food and Forestry. Stationery Office, Dublin.
(6) Phillips, H. (1998) Resource Management: Modelling Management Interventions- Report on Rotation Length, Thinning Intensity and Felling Decisions for Blue Areas. Coillte (Unpublished)
(7) Anon (1999) Forestry Investment Fundamental. Tilhill Economic Forestry, http://www.tilhill.co.uk/investment.htm
(8) Gallagher, G. and O’Carroll, J. 2001. Forecast of Roundwood Production from the Forests of Ireland 2001-2015. COFORD, Dublin.
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