Other silvicultural costs include a range of non-labour costs associated with planting, tending, pruning and thinning forest plantations. In general, these costs are relatively modest compared with land, labour and harvesting costs.
The cost of planting stock will generally depend on the species and the extent to which the planting stock has been improved in some way. For example, the cost of nursery-grown forest planting stock for small-scale planting in the United States of America tends to range from around US$50 per 1000 seedlings for Pinus taeda to US$225 per 1000 seedlings for Quercus (oak) species. The cost of planting stock for large-scale planting will generally be lower, because buyers can negotiate better prices with suppliers or, in the case of many government agencies and some of the larger private companies, they may have their own forest nurseries and plant production or improvement facilities.
The cost of fertiliser, herbicide and pesticide applications will depend on the nutrient levels at each planting site and whether there is a need to spray to suppress weeds or control pests and diseases. For example, typical fertiliser costs in New Zealand forest plantations of Pinus radiata are estimated to range from zero to US $350 per hectare (New Zealand Ministry of Forestry, 1997). Weed and pest control in these plantations is estimated to cost up to $20 per hectare per annum.
In developing countries, other silvicultural costs are generally much lower, but a number of different costs may be incurred. For example, in 1991, the total cost of planting and managing a forest plantation on an 8-year rotation in Sudan was estimated to be US$ 500 per hectare (Sudan Ministry of Agriculture, Natural and Animal Resources, 1991). Water management and irrigation costs accounted for around 47 percent of this total and forest protections (i.e. guarding the forest plantation from fire and theft) accounted for a further 6 percent of costs.
Generally speaking, the most expensive operation in a forest plantation is harvesting the final crop and delivering the roundwood to the forest processing plant. Harvesting and transportation costs can vary markedly and will depend upon geographical factors such as location, topography and the length and quality of roads that will be required for the harvesting operation.
For example, Figure 20 presents the results of a study in British Columbia, Canada (British Columbia Ministry of Forests, 1997) that showed that roading, logging and transportation costs comprised 52 percent of the estimated total delivered roundwood production cost in 1996. Although these figures are for harvesting in the natural forest rather than in a forest plantation (where harvesting and transportation costs may be lower), they serve to demonstrate another point about forest plantation costs. This is that the net benefit of having low forest regeneration and management costs in the natural forest (compared to forest plantations) may be reduced if harvesting and transportation costs are high due to the remoteness of the natural forest area being harvested or difficult working conditions at the site. Indeed, one of the main advantages of establishing forest plantations is that the forest plantation can be located and management can be planned so that harvesting and transportation costs can be minimised when the final crop is harvested.
Source: British Columbia Ministry of Forests (1997).
Naturally enough, appraisals of forest plantation investments are guided not only by costs, but also by expectations of future revenues. A considerable body of literature and analysis has been devoted to predictions of future price levels for forest products and, in general, two main schools of thought have arisen from all of this work. On the one side, some analysts see ever increasing demand for forest products and increasing levels of restrictions being placed on forest harvesting (particularly in the natural forest) and expect that these will eventually lead to sustained increases in forest product prices in the future. Opposing this, other analysts point to the fact that the scope for increases in forest product prices is limited by competition from non-wood products and that the forestry sector is constantly developing new technologies and management techniques to increase forest productivity and to improve production techniques. Viewed from this perspective, forest product prices are unlikely to increase in the future in general, although prices in some areas and for some types of product may increase if supply can not keep up with demand.
The first view presented above developed throughout the 1980's and early 1990's, when a considerable amount of concern focussed on the likelihood of a forthcoming wood crisis. During this period, wood and fibre supplies from several traditional sources were reduced by harvesting and export restrictions, leading to expectations that this scarcity would continue into the foreseeable future and, consequently, lead to significant and sustainable increases in roundwood prices. For example, in 1992-93, a short-term log price "boom" was fuelled by a coincidence of new harvesting restrictions in the United States of America and Malaysia.26 At the time, a number of commentators suggested that this price increase represented a structural realignment in timber markets that would be sustained in the future. Largely because of the "windfall" gains made by forest plantation owners selling their roundwood at this time, forest plantation establishment accelerated rapidly in several countries. For example, new planting in New Zealand quadrupled between 1991 and 1994.
More recently, the second school of thought referred to above has gradually gained wider acceptance. This is, in part, because the price increases associated with the 1992-93 log boom have not been sustained. Indeed, the view that forest product supplies will generally increase to meet future demands without significant price increases in the foreseeable future has been reinforced by the results of several recent global supply and demand analyses.
Similarly, analysis of many long-run series of forest product prices would also suggest that, if historical trends are a good indicator of future trends, then the real price of most forest products is unlikely to rise in the foreseeable future.27
Figure 21, for instance, shows that the real (i.e. inflation adjusted) stumpage price of sugi (Cryptomeria japonica) has declined over the last 30 years in Japan. 28 The figure also shows that forest planting costs and harvesting wages in Japan have increased markedly, in real terms, over the same period. This has probably reduced the profitability of forestry activities in Japan and, it is believed, has discouraged forest plantation owners from undertaking a range of forestry operations (such as thinning) in recent years (Forestry Agency, Japan, 1995).
The long-run historical stumpage and log price series for other species (including: Douglas fir in the United States of America; Radiata pine in New Zealand; and hardwoods grown in the natural forests of Brazil) display trends that are similar to those shown above.
To summarise, a large amount of historical evidence would tend to support the view that significant shortages may induce price increases in the short-run or, maybe, in the long-run in specific niche markets. However, for the majority of roundwood production from forest plantations, which is aimed at mainstream bulk commodity markets, assumptions of significant long-run real price increases are likely to be optimistic.
Source: Forestry Agency, Japan (1995).
In most countries, the taxation of forest plantation investments is quite a complicated subject. Tax regimes differ widely between countries and are often also very different for different types of investor (e.g. pension funds, corporations and individuals). It would be an enormous task to attempt to categorise the vast variety of alternative taxation regimes and rates of taxation applicable to forest plantation investments in every country in the World. Not only would this be far beyond the scope of this paper, but also it would probably go out of date very quickly. Consequently, this section presents a very general discussion of the different taxation mechanisms affecting forest plantation investments around the World and how, in principle, these affect forest plantation establishment, management and harvesting.
A very simple way of comparing tax regimes in different countries is to compare the basic income tax rate applied to companies and individuals. Such a comparison is not, however, sufficiently accurate to assess the total level of taxation in different countries. For example, investors in forest plantations may also have to pay a range of other taxes including: additional direct taxation surcharges; indirect forms of taxation (such as sales and excise taxes); land taxes; capital gains taxes; and capital transfer taxes. The ability to offset taxation against other business losses is also likely to differ between countries, as will various other taxation-based incentive structures or concessions that might be available. In terms of the calculation of tax, regulations regarding depreciation or whether taxation is based on cash profits or earnings-accrued can also vary. Finally, the degree of sophistication of tax legislation and the level of monitoring by authorities is also likely to vary between countries. Any or all of these factors can substantially affect the total level of taxation that the forest plantation investor will have to pay.
Table 13 presents indicative basic rates of corporate taxation for a range of countries. As the table shows, there are substantial differences between taxation rates in different countries at even this most basic level. For example, taxation rates in the small selection of countries listed here vary from 10 percent to 45 percent. Ignoring the effects of subsidies and incentives, the total amount of tax paid in different countries is likely to range from 0 percent (in "tax-shelters") to around 70 percent29.
Table 13 Indicative basic rates of corporate taxation around the World30
Basic rate of corporate tax (%)
Basic rate of corporate tax (%)
Primary source: Danziger Foreign Direct Investment (1999).
The first (and probably most important) point to note about taxation of forest plantation investments, is that taxation is likely to significantly affect the financial return to any forest plantation investment. Although this may seem rather obvious, it is very important to bear this in mind, because the results of most comparative analyses of forest plantation investments are presented without taking into account the effects of taxation. This is particularly the case in comparisons across countries, where it would be complicated to try to introduce the effects of different tax regimes.
This common practice (of presenting only pre-tax performance figures) can be highly misleading, both when attempting to compare forest plantation investment opportunities across countries and, in particular, when comparing forest plantation investment opportunities with other investment opportunities within a country. The most important rule to remember when comparing any financial analyses of investment opportunities is that it is post-tax returns that are relevant.
The second point to note is that, on the whole, the tax treatment of investment in forest plantations is generally favourable. For example, one of the major tax advantages that forest plantation investment has over other investments is that taxes are not generally levied each year on the annual growth in the value of standing roundwood. Instead, taxes are generally only paid when the roundwood is harvested and results in revenue for the investor or owner.
An example of the magnitude of this benefit is given in Perley (1992). Perley demonstrates that, for investment in a forest plantation for 30 years in New Zealand, the effect of taxation is only to reduce the real rate of return on the investment from 8.5 percent (pre-tax) to 7.89 percent (post-tax, calculated using a 33 percent tax rate). In contrast, the effect of tax on an annual fixed-interest investment (over the same period) earning a real rate of return of 7.32 percent (pre-tax), is to reduce that rate to 4.1 percent (post-tax). The relative difference between the pre- and post-tax returns on the two investments results from the annual tax charge that has to be paid each year on the fixed-interest investment. Taxes on income from the forest plantation investment only have to be paid when roundwood is harvested.
In some countries, investment in forest plantations receives even more favourable tax treatment, when establishment costs can be deducted from other pre-tax income or offset against losses in other parts of the investor's portfolio. Such "tax breaks" have been popular at different times in various countries, although they often lead to unintended consequences (see Box 6 for an example). In developing countries they are also generally less effective than direct cash grants or subsidies, because many small landowners pay little or no tax anyway.
Throughout much of the 1970's and 1980's, high rates of forest plantation establishment were achieved in the United Kingdom. This success was largely driven by favourable tax treatment of the forest plantation investment, but it led to unintended consequences.
How was it done?
In very simple terms, tax avoidance on forest plantation investment involved three stages:
1. When an investor acquired a forest plantation or land for planting, they would elect to have it taxed essentially as a business (i.e. on the basis of profits and losses each year). In the early years of establishment, high losses would be generated from incurring planting and management costs with no revenues from the sale of roundwood. These losses would be offset against the investor's other income.
2. Once the forest plantation reached first-thinning stage, the investor would then transfer ownership to someone else (e.g. a family member). This transfer would not result in a tax liability.
3. The new owner would then elect to have the forest plantation taxed essentially as a land asset. Tax in this case would be charged on the expected rental value of the land in its unimproved state. In most cases this was so low, that the tax authorities would not bother collecting it.
This worked because an owner could elect which schedule they wished to be taxed under and because the growth in the value of trees was specifically excluded from Capital Gains Tax and did not, therefore, result in a charge when ownership was transferred.
What were the consequences?
This arrangement was very successful in promoting afforestation but had two unintended consequences. Firstly, the scheme presented a very tax-efficient method for people with high incomes to create a tax-free asset. This proved unpopular with the general public (and the tax authorities). Secondly, it encouraged afforestation on the cheapest land possible (the cost of buying the land was not tax deductible under 1. above and the poorest land attracted the lowest charge under 2. above). This land tended to be land with the lowest forest productivity, but often also a relatively high conservation value (in its original state).
The tax benefits of investing in forest plantations in the United Kingdom have been reduced, but forestry activities are still largely exempt from most taxes.
Source: A Whiteman (pers comm).
Risk can be defined as the probability or likelihood of sustaining loss although, more accurately, it is a measure of volatility around an expected value.31Because of the long time period generally involved in investment in forest plantation projects, risk may be of relatively more concern to the investor than would be the case for an alternative investment with a shorter life-span. For example, with a long-run investment in a forest plantation, the effect on profitability of a sustained adverse change in costs or prices will be compounded throughout the rotation. Furthermore, there may be little that the investor can do, in terms of changing management techniques or marketing strategy, to reduce the impact of such an adverse event.
On the other hand, forest plantations do offer some benefits from the perspective of risk. For example, favourable changes in costs and prices may also be captured and compounded throughout the rotation, resulting in higher levels of profitability. A few studies have suggested that roundwood prices are essentially countercyclical, offering opportunities to reduce risk within an overall investment portfolio. Forest plantations also have the benefit that, when comparing them to other manufacturing operations, production can be altered relatively easily to take account of current market conditions (i.e. if prices are low, the trees can be left in the ground and will continue to increase in volume).
The anticipated profitability of projects over a long time horizon depends crucially on the cost of capital or discount rate and the twin components of risk and return. In forest plantation projects lasting, for example, 30-80 years, a seemingly small change in the assessment of annual risk would, through cumulative or compounding effects, result in significant differences in the expected rate of return on the project. Thus, even at the planning stage, it is extremely important to identify and try to correctly assess the risk associated with any forest plantation project.
Another point worth noting is that cost of capital is not constant across investment projects and different countries or through time, but should change according to the degree of risk encountered. For example, the risk of investing in (i.e. purchasing) a relatively mature forest plantation is likely to be much lower than the risk associated with establishing new forest plantations. Different financial arrangements to support investment in the forest plantation project (e.g. debt or equity financing) also have different levels of risk associated with them. Consequently, any attempt to produce a robust assessment of the comparative profitability of forest plantation projects across countries (i.e. by considering risk) is fraught with difficulty.
Even just identifying the risk variables that should be taken into account is not an easy task. Furthermore, given the quality of much of the existing data and information about forest plantations, it is almost impossible to assigning meaningful and reliable quantitative values to many of the uncertainties associated with a forest plantation project.
In reality, most international comparisons of the financial returns from investment in forest plantations ignore the element of risk or rely on very simple indices or "professional judgement" to differentiate between different countries. Certainly, in comparison with the methodologies developed for assessing risk in financial markets, the techniques used to assess forest plantations are relatively rudimentary. To a large extent, this is because there is insufficient data in the public domain to carry-out a meaningful statistical analysis of many of the risks associated with forest plantation projects. However, the risks associated with forest plantation projects can be explained and described in qualitative terms. Mostly, they fall into four (related and overlapping) categories and these are discussed in more detail below.
26 The development of the "Option 9" timber supply plan, which placed new limits on harvesting in National Forests in the United States of America and temporary log export bans imposed in Sabah and Sarawak.
27 A historical analysis of past trends is, however, somewhat difficult to interpret, because the quality of forest products may have changed markedly in the past within each broad forest product category.
28 Sugi is one of the main species grown in forest plantations in Japan.
29 According to the Investor's Business Daily (Sweden Goes South, May 27, 1997) Sweden has the highest taxes of any industrial country:
"Although its basic corporate tax rate is 28 percent, each company must also pay a tax equal to about 40 percent of its workers' wages... Some 59 percent of total Gross Domestic Product goes to taxes".
Sweden's Value Added Tax (sales tax) rate is also 25 percent.
30 The rates shown here have been extracted from a variety of recent sources. Some countries' taxation rates may, however, have changed between writing this and going to press.
31 In statistical terms, risk is measured generically as the standard deviation of annual returns arising from a specified class of investment. More sophisticated statistical tools measuring, for example, skewness and kurtosis in the distribution of returns, are also utilised in risk analysis.