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Comparative Timber Investment Returns for Selected Plantations and Native Forests in South America and the Southern Un

Comparative Timber Investment Returns for Selected Plantations and Native Forests in South America and the Southern United States. Fred Cubbage, Rafael Rubilar, Jacek Siry - USA Patricio Mac Donagh, Mirta Noemi B á ez - Argentina

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Comparative Timber Investment Returns for Selected Plantations and Native Forests in South America and the Southern Un

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  1. Comparative Timber Investment Returns for Selected Plantations and Native Forests in South America and the Southern United States Fred Cubbage, Rafael Rubilar, Jacek Siry - USA Patricio Mac Donagh, Mirta Noemi Báez - Argentina José Sawinski Júnior, Arnaldo Ferreira, Vitor Hoeflich - Brazil Virginia Morales, Gustavo Balmelli, Gustavo Ferriera - Uruguay Jose Alvarez, Pablo Donoso - Chile Speech Presented at the Southern Forest Resource Assessment Consortium (SOFAC) Meeting May 30-June 1, 2005, Research Triangle Park, North Carolina, USA

  2. Authors and Affiliations

  3. Outline • Forests and plantations • Rotations, growth rates, harvest ages, and volumes • Factor costs and stumpage prices • Capital budgeting analyses • Sensitivity analyses • Conclusions

  4. Area of Natural and Planted Forests for Selected Countries, 2001 Natural Planted FAO 2003;natural 97%

  5. Wood Production for Selected Countries, 2000 Industrial Roundwood Wood Fuel FAO 2003; 54% wood fuel in the world

  6. Forest Plantations and Sustainable Forest Management • Important industrial round wood source • Represent ~ ¼ of industrial round wood supply • Allows us to produce more wood on less area • High rates of growth • Opportunity to conserve the natural forests • Helps soil recovery • Issues • Requires knowledge and large investment $600-$1000/ha • Environmental conversion of natural forests, less benefits • Local communities • Opposition to GMOs

  7. Forest Plantations Selected Literature • Plantations decrease pressure on natural forests • Binkley 1997 • Sedjo and Bodkin 1997, Sedjo 1991 • Store carbon, reduce global warming • DiNicolla et al. 1997 • Inadequate for supplanting natural harvests • Tomberlin and Buongiorno 2001 • Cossalter and Pye-Smith 2003 • Negative impacts on local people, employment • Cossalter and Pye-Smith 2003 • World Rainfroest Movement 2005

  8. Area of Fast Growth Industrial Plantations Fast > 5 m3 / ha / yr FAO 2003, Siry and Cubage 2005

  9. Area of Fast Growth Industrial Plantations FAO 2003, Siry and Cubbage 2005 Fast > 5 m3 / ha / yr

  10. Plantation Species and Representative Growth • Tropical and subtropical plantations • Pine: 20-45 m3/ ha/yr • Hardwood / eucalypts 30-60 m3/ha/yr • Temperate and boreal plantations • Picea, fir, pine: 10-20 m3/ha/yr • Hardwood: 10-20 m/3ha/yr • 70% softwood / 30% hardwood • Native forests: 1-4 m3/ha/yr • 1 m3~ 1 – 1.2 tons green weight; 0.4-0.6 dry tons

  11. Average Plantation IRRs - Sedjo 2001

  12. Methods • Select countries • Southern Cone, USA • Argentina, Brazil, Uruguay, Chile, US South • Select principal commercial timber species or prospects – exotics and natives • Authors’ estimates of: • Growth rates, typical current practices, genetics • Factor costs and output prices • Develop cash flow analyses / spreadsheets • Capital budgeting analyses • Iterative review by authors and foresters in each country • Sensitivity analyses – reserves, land costs, subsidies

  13. Rotations, Harvest Ages, and Harvest Volumes

  14. Input Costs, Prices, and Returns

  15. Productivity of Plantations Pine Authors’ Estimates

  16. Productivity of Plantations Eucalyptus Authors’ Estimates

  17. Productivity of Native Plantations Authors’ Estimates

  18. Productivity of Native Forests Authors’ Estimates

  19. Returns of Plantations, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; no land cost

  20. Returns of Plantations, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; no land cost

  21. Returns of Native Species / Plantations, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; no land cost

  22. Returns of Native Forests, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; no land cost

  23. Sensitivity Analyses Assumptions

  24. Sensitivity Analysis of Separate Scenarios, Pinus Taeda in Southern Brazil, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; $2500/ha land cost

  25. Sensitivity Analysis of Separate Scenarios, Pinus Taeda in Southern USA, 2005 Land Expectation Value Internal Rate of Return 8% discount rate; $1400/ha land cost

  26. Sensitivity Analyses – Summary Results, IRR

  27. Biological, Political, and Financial Risk • Biological • To date, exotic plantations bear less risk than natives • Fewer native predators and pathogens • Introduced biological and chemical controls • Ants huge problem, other disasters possible, but rare • Political – US > Chile > Uruguay > Brazil > Argentina • Environmental regulations • Government stability • Favorable investment climate • Subsidies • Country risk (Economist Intelligence Unit 2005) • Ranking of 100 countries in developing world • Chile 4th, Brazil 51st, Uruguay 65th, Argentina 97th

  28. Conclusions

  29. ConclusionsExotic Plantations Returns • 10% to 24% base IRRs w/o land costs • Results similar to Sedjo, 2001 • Add new information on reserves, land, & subsidies • Land in reserves decrease IRRs < 1% • Subsidies increase IRRs about 2% • Land purchase costs and sale without inflation at end of rotation decreases IRRs ~4-11% • Good land costs higher in Brazil, Chile • But possible land appreciation costs • Possibility for much greater returns in S America • Early investors with cheap land costs have profited most; more difficult now

  30. Conclusions Native Species Plantations • Best 5 had 4% to 10% IRRs – Aracauria, Nothofagus, P taeda • Prosopis had returns <1% • Less than exotics; better than natural stands • Growth of ~4-5 m3/ha/yr seems to be key • Assumes similar stumpage prices to exotics • Grow in area that exotics will not • More certain growth rates • Better for small farms and agroforestry • Erva mate good returns, but limited market

  31. Conclusions Natural Stands • 97% of Americas • Little information on inputs, prices, management • USA best, at 4% to 8% IRR for natural stands • Tropical and subtropical natural stands • Few commercial timber species: 0-20% of stand • Estimated returns very speculative • Unmanaged tropical stands likely a financial loss • Selective management - returns of ~2% IRR • Perhaps perfect management can yield 4% IRR • Less survival risk, more commercial species risk • Low IRRs, but not very negative LEVs, even at 8%, since there are few inputs • Preliminary, tentative conclusions

  32. Conclusions Forestry Sector Prospects • Economic development opportunity – Forest sector GDP • 3-4% Brazil, Chile • 2% USA • 1% Argentina, Uruguay • 2 new pulp mills each in Chile and in Uruguay • Many sawmills and panel mills • Modest expansion everywhere • Most need and greatest prices – Chile & Brazil • Large supply, low prices – Argentina • New supply, unknown markets – Uruguay • Stasis or slight declines – U.S. South • Least risk in most developed markets/countries

  33. Conclusions • Data poor, especially for South America • Exotics in S America have higher returns than native species and USA species • Plantations require large amounts of capital • Native plantations have lower returns, but some IRRs approach stock market and other assets • Degraded subtropical stands have low to negative returns • Better management key to make natural species profitable at all

  34. The Bottom Line • Plantations profitable but costly to establish • Forest reserves decrease returns modestly • Land costs decrease returns greatly • Current Southern Cone forest owners achieve high profits, but with land opportunity costs • Management beats neglect in natural forests • Nonmarket and social values important for broader analysis • Regulation, incentives, certification, payments for environmental services may be key to subtropical forest retention • Need much more research!

  35. Comparative Timber Investment Returns for Selected Plantations and Native Forests in South America and the Southern United States Fred Cubbage, Rafael Rubilar, Jacek Siry - USA Patricio Mac Donagh, Mirta Noemi Báez - Argentina José Sawinski Júnior, Arnaldo Ferreira, Vitor Hoeflich - Brazil Virginia Morales, Gustavo Balmelli, Gustavo Ferriera - Uruguay Jose Alvarez, Pablo Donoso - Chile Speech Presented at the Southern Forest Resource Assessment Consortium (SOFAC) Meeting May 31-June 1, 2005, Research Triangle Park, North Carolina, USA SOFAC_PLANTATIONS_30MAY2005

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