Friday 22 March 2019

Rising demand for timber makes forestry a gold-plated investment

"I'm building up a business now and I cannot get over how successful it is."

Rare words to hear in today's economy, and even rarer to hear them from a farmer.

But John Jackson has always ploughed his own furrow, so to speak.

Seventeen years ago he did the unthinkable in farming circles when he sold his tillage farm in Donegal to invest the money in forestry.

However, this was no flight of fancy driven by a love of trees. Mr Jackson was able to buy five times the amount of land that he originally had by targeting more marginal land at a fraction of the price.

He was also aware of a fact that has inexplicably by-passed the vast majority of Irish investors. Trees grow faster here than almost anywhere else in the northern hemisphere.

Our growth rates, referred to as 'yield class' in the business, are often three times faster than other countries that have bigger forestry industries, such as Austria, Germany, Finland and Sweden.

"We've only got 11pc of our land area in forestry," says Paul Brosnan, director of the Dublin-based International Forestry Fund. "This is miniscule compared to the likes of Finland where two thirds of the country is forested. However, with our tremendous growth rates, a 10pc increase in our planted area would bring our annual output to the same levels."

In addition, we have some of the highest prices for timber here in the whole of Europe. "We have a fantastic sawmill sector here that has developed huge export markets," states William Merrivale, a Cork-based forestry consultant.

"However, they are struggling for adequate supplies. 10pc of our annual requirement is currently imported from Scotland, and our mills could easily process double what they are handling at the moment," he adds.

In addition to the demand for mature logs, private foresters such as John Jackson up in Donegal are also witnessing a huge growth in demand for the previously unsaleable 'thinnings' that are harvested off a plantation every five years after the first 15 years of growth.

The demand is being driven by rising oil prices, as people look for lower cost alternatives to heat everything from homes to hotels.

This by-product adds another €80/ha per year and provides a valuable cash-flow to this long term investment. The overall rate of return over the life of a 35-40 year plantation is somewhere between 4-7pc. In addition, the first €80,000 of annual income is tax free.

So why isn't the country being blanketed in trees?

Well, the first thing is that many rural communities don't want their parish subsumed in forest. "It becomes a darker, quieter place," one local told me on a recent visit to Donegal.

Subsidies

The second reason is that farming, while not offering stellar incomes, has provided just enough to stop farmers from considering the alternatives. A raft of EU subsidies have kept an artificial floor under farm returns on our more marginal land.

But there are signs that this may be about to change. The most recent figures on planting applications reveal a 25pc increase.

"Farm payments have gradually eroded over the last decade. In contrast, forestry payments have remained relatively solid," remarks William Merrivale.

This, coupled with the increasing realisation that farming on marginal land in wet years like 2012 hasn't a hope of getting a viable return from globalised food commodity markets, is making more farmers consider the unthinkable.

There are also plenty of enticing incentives to encourage more into the sector. The first is a planting grant that covers the cost of planting and maintenance for the first four years.

Then there's the annual government-funded subsidy of approximately €450/ha (for diverse coniferous plantations) for the first 20 years after planting. Again, it's all tax-free.

The income from thinnings effectively takes over where the subsidy payment leaves off. Yes, there is a maintenance and insurance cost, but this shouldn't be more than €25/ha per year, and is often a lot less.

The problem for the average punter is that these incentives are largely available to farmers only. As a result, buying 'bare' land for €5,000-10,000/ha to plant tends to be the preserve of farmers and large forestry companies.

However, forestry investment funds such as those being operated by Mr Brosnan open up the possibility for investors to get a slice of the action.

"The average investor in our 18,500ha of trees has just €4,000 tied up. We usually launch at least one new portfolio every year that will typically last for 12 years. The most recent one returned about 4pc per annum, with the previous two schemes that ended in 2011 returning over 6pc each," he claims.

The big picture looks good too. As with any commodity, global demand is rising and predicted to continue in the same vein for the foreseeable future.

For a low risk, sustainable investment, that doesn't involve a brick or ounce of mortar, it's one worth considering.

Indo Business

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