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Saturday 10 December 2016

Making most of the timber boom

Opt for an existing plantation to accelorate your returns

Published 12/10/2010 | 05:00

Prospective forestry owners are looking at the possibility of buying an established plantation of 10 years or more, allowing them to get a faster return on their money
Prospective forestry owners are looking at the possibility of buying an established plantation of 10 years or more, allowing them to get a faster return on their money

Is the smart money going into forestry at the moment? Industry insiders seem to think so. International timber prices have risen by 40pc in the past two years. However, forestry experts are confident that this is not just an isolated peak in the market.

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"We've been tracking prices since 1976," said John Phelan of Woodland Forestry Services in Galway. "We'd see this price rise as simply a correction back to historical norms for timber."

What is giving Mr Phelan added confidence is the performance of the sector at a time when the construction sector is practically extinct.

"Timber prices are high at the moment because of the increasing environmental constraints on clear-felling beginning to kick in around the world," he said. "More controlled felling is underpinning demand and all the indications are the international markets will continue to remain strong into the future."

Looking at the domestic market, the evolving biomass sector has provided a new outlet for many forestry by-products, especially thinnings. It's one of the few sectors in the economy where exports are growing. "So if it's good now, that bodes well for a time when the construction sector finally gets going again," added Mr Phelan.

He has dealt with more serious enquiries in the past few weeks than he has witnessed for years. "Investors are re-awakening to the appeal of non-volatile, steady-as-she-goes investments like forestry," he added.

The icing on every forestry cake is the fact that forestry income is deemed tax exempt -- although this is subject to a high-earner income relief restriction. For most farmers, this will be worth an extra 20-40pc. Any tax-free income is also likely to be worth quite a bit more by the time this Government has implemented enough taxation measures to cover its tracks.

So it's not surprising that farmers are also queuing up to jump on the forestry bandwagon.

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Forestry consultant Dermot Houlihan said that he had seen a doubling in the number of enquiries from farmers about growing trees on their land.

"Continuing poor returns on beef farms and the dismantling of REP Schemes have provided further reasons for farmers to enter the fray," said Mr Houlihan.

But is there an even quicker way of getting money from trees? Traditionally, when farmers thought about forestry, they looked at the 35-40-year option of planting bare land on the back of a planting grant. For the next 20 years, they are reliant on the forest premia and, subsequently, thinnings sales before waiting for the big pay-day 15-20 years later when the plantation is clear-felled.

But there is another way. Many are now looking at the option of buying established plantations of 10 years or older.

You will have lost out on at least 10 years of premia but there is a significant upside: getting the crop established is the hard part.

Established

By buying an established plantation, you have the advantage of knowing exactly what you are going to get. If you buy plantations at 20 years of age, you are also significantly shortening the return on investment. It's possible that you could be clear-felling the plantation 10 years later and, at current market rates, you could almost double your money (see table, image 2).

However, there is a downside. The uncertainty in the Government's finances at the moment has led to a lot of speculation regarding possible restrictions on the size of the forestry budget. Already budget estimates slashed the provisions for planting and maintenance grants for next year by more than 75pc. We'll wait to see what the actual provision will be in the December budget.

But there are also worries surrounding the annual premia. They have already been cut by 8pc in last December's budget.

Who's to say that they won't be cut again this year as the Government scrambles to save money wherever it can?

The current freeze on further planting grant approvals has heightened the sense of foreboding in the sector.

Irish Independent