5 Economic aspects

5.1 Financing schemes for reforestation

5.1.1 International investment

Several foreign companies, dedicated to plant, manage and sale teak, began to invest in Costa Rica, either establishing operations by themselves or subscribing contracts with local forest companies, that provide forestry services. They are not interested in State incentives, but do inscribe their farms in the Forest Regime^[4] so as to have land taxes exemption, and income tax exemption from sales of plantation products.

Their funds come from selling the forest stands in parcels (and its maintenance) to the general public in Europe and North America through two main modes:

• Sale of project’s shares. Its value is equivalent to a determined area, or to a fraction of the value of the project.
• Sale of planted areas that vary in size from ¼ ha to one or more hectares. Some sell not only the stand and its maintenance, but also the land, while others only sell the stand, and include the leasing of the land.

In the last years some foreign companies have purchased already established plantations from local growers who had used the incentives granted by the Costa Rican government. In these cases, the purchasing company assumes the liabilities contracted by the seller with the State.

5.1.2 State incentives

The vast majority of the plantations established in Costa Rica have been totally, or partially, financed by State incentives. The first one was to allow landowners to deduct unlimited plantation expenses/ha from income tax (theirs or from other taxpayers). Later, to prevent over-expending, it was established a fixed amount/ha, adjusted yearly. Then followed a forest bonus (CAF), still in use, to pay Government taxes, credits etc. (can be sold in the stock exchange at 99.9% of its face value). These two models did not require reimbursement on the part of the beneficiaries.

Presently FONAFIFO finances the planters with credits. Loans are guaranteed with mortgage, collateral or fiduciary warranties (according to the conditions of the trust that funds it). Interests are cumulative, and payments are determined according to each project’s cash flow which depends on the expected production program. Credits for the management of existing plantations have similar conditions. In general, credits for timber production projects area granted at the basic passive rate (rate paid by the bank to private investors) minus 6 points (around 12 - 18%). The credit cannot exceed US$600/ha.

The same amount is also the maximum granted by the Payment for Environment Services (PES) incentive model. PES was created for the recovery and maintenance of forests, and includes all activities (protection, conservation and forest management) in natural forest and/or established forest plantations. In the later case, the US$600/ha is disbursed in the first five years, in tracks of 50, 20, 15, 10 and 5%. Since funds depends on the resources assigned by the government, and those raised by FONAFIFO by selling environmental services abroad, payments can be made with credit instruments or cash.

5.2 Establishment and maintenance costs

Plantation costs vary widely due to factors such as prior use of the soil, size, slope, location, access, soil and climatic conditions, existing infrastructure and the modality of financing. Planting can be done by the farmer or by a contracted company, who will be responsible for planting and the management of the farm as a whole. In the second case, costs related to farm maintenance (infrastructure and administration), and those, are charged to the plantation.

5.2.1 Plantations done by the landowner

Case 1

Cost studies of Costa Rica (GFA et al. 1998) (Table 11) plantations of 30 ha or more, 1,111 trees/ha, have reached US$863/ha for the first five years, and US$1,034/ha for a 20 years rotation, under the following conditions:

• An average of 100 meters of fences and 50 meters of roads per ha
• Soil is prepared with agriculture tractor
• Nursery stock produced in boxes
• A 22% of social charges paid on salaries
• Except fertilizer, no other chemical product is used;
• Technical supervision done by professionals, who visit it 3 visits during establishment (first year), 2 in the second year and 3 times for pruning and thinning. Each visit costs an average of US$117.40, including transportation and travel expenses.

The above data refers to plantations established in parts of farms where the following cost are beared by other farm activities or, in the feasibility analysis are assumed to be negligible:

• Foreman living permanently in the farm
• Services, such as drinking water and electricity
• Accounting
• Administrative subdivision of the plantation
• Basic equipment not provided by workers, such as hand pruning saws, shovels, etc.
• Construction and/or improvement of infrastructure, such as houses, stockrooms, culverts, bridges
• Maintenance of infrastructure (fences and roads) after year 1
• Transportation of personnel and inputs
• Unforeseen expenses, such as materials and labour for fastening bowed trees and pests and diseases control.

Case 2

Alfaro and Villamizar (1998) estimated a cost of US$1,054/ha for the first five years (US$1,707 for a 20 years rotation). It was a plantation of 1,111 trees/ha with genetic improved material (2% higher cost over not improved material). When plantations were established, as the landowners could not afford infrastructure investments, these items were excluded from the study, together with pre-investment costs (reforestation plan). Administration and technical assistance costs added US$20/ha/year, and the daily wage was estimated at US$6.8, including social charges (Table 11).

5.2.2 Plantations done by contractors

Case 3

In these plantations, in addition to planting and managing the stand, the companies have duties and activities (below detailed) that give this system especial characteristics:

• As the main objective is to produce first quality material for international market, the management system is not limited by funds, as it happens with plantations established with local support.
• The contractor built and/or improves the necessary infrastructure and maintains it. Does the paper work for the Environmental and Energy Ministry to include the farm in the Forest Regime. As a rule, the contractor pays taxes and have the employer civil and environmental responsibilities.
• A third company, or independent professional, is subcontracted as a verifier (regency) and, sometimes, as a certifier. This company prepares the reforestation plan, visit the project bimonthly during the first year, and at least twice during other years. The verifier has to report to the contracting party if management has been done properly.
• Third company visit (RNT 1988) costs US$240, including transport and travel expenses.
• Subdivision of the planted area suitable for selling in parcels of 1 to 20 ha, done by surveyors.
• Pre-investment costs include selection of the farm, verification of its area (surveying) and legal status, and soil analysis.
• Soil preparation and fertilization according to site conditions. Where it is not possible to prepare the site with agricultural tractors, a more expensive method is used. Holes of 35 cm. depth by 30 cm diameter are dug (manually or with motor-drills). Usually a soil specialist determinates the fertilization system. Fertilizer is applied every year, except when in thinning years. After year 4 (first thinning) 500 grams are applied to each tree.
• The farm area acquired for teak planting. Farm improvements and maintenance costs are charged to the plantation. Normally, two to three permanent workers live in the farm.
• North Region of Costa Rica projects general norms are:
  • 1,300 - 1,600 trees per ha
  • 60 ha average area suitable for planting (average farm area 81 ha)
  • Average distance to paved roads; 5 km
  • 20% slope or less in 90% of the area. As they are small terraces, that rarely allow mechanization, holes are open with motor drills, and diameters are enlarged with a shovel
  • Mean annual temperature of 26 ºC and mean annual rainfall of 2,700 mm
  • A dry period of three months
  • Deep, clayey soils of average fertility, no risk of floods
  • Usually the farms have poor or non-existent infrastructure
  • Between 10% and 25% of the area is covered by bushes, or abandoned orange plantations. There are isolated -trees.

After four years of working under these conditions, a company has been able to reduce establishment and maintenance costs by 20%, and further reductions are expected (GFA et al. 1998). Major factors responsible for the cost reductions are: increase of the planted area reduced fixed and administrative costs; and assuming previously subcontracted activities (marking and drilling of holes). Nowadays, under the conditions described above, cost/ha amounts to US$2,194 for the first 5 years and to US$2,250 per/ha for the following 15 years (with a 500 grams fertilization applied to each remaining tree after year 5). For a 20 years rotation period, total cost is estimated at US$4,444 (Table 11) without contractor’s profits.

Table 11. Comparative reforestation cost estimates under different conditions (US$/ha)

Sources: GFA-RNT 1998, Alfaro and Villamizar 1998, Sage (Consultora S.A.) 1998

Dollar exchange rates: Case 1 = 255.5, Case 2 and 3 = 250.

5.3 Markets and prices

Currently in Central America, the only country that is developing an important international and local market for teak is Costa Rica but, as local information is kept confidential, their is no reliable information on domestic prices. The majority of the plantations are just producing the first commercial thinning. There is not reliable data on prices of old plantation, since these were areas planted by foreign companies in Parrita decades ago, and teak was not managed technically.

5.3.1 Plantations

Data of young plantation prices some landowners are asking is presented (Table 12). Though it is what they ask to foreign investors, they provide a first approximation of the wood value during the first stages of development.

Table 12. Prices of the forest projection requested by local farmers to foreign investors

Source: Hernán Delgado (Parrita), Armando Campos (Guanacaste) and Mohamed Sandí (San Carlos).

* In 1998 the price increased to US$6,500/ha.

5.3.2 Standing timber for local consumption

The most reliable information source on local market standing timber teak prices is the information bulletin of the Costa Rican Forestry Chamber (CCF). It registers mostly transaction prices of the South Pacific zone, where there are the oldest plantations. Bulletin number 20 present information on local market with a price average of US$117/m³ at December, 1996. By January - February 1998 the average price decreased to US$91 and by March - April 1998 the price was US$110/ m³.

5.3.3 Timber (logs)

In 1998 CCF published data on sawmill yard transactions at US$260/m³ for diameters between 15 and 24 cm, sold to European buyers. No other specification for that diameter was supplied. This price is similar to plantation logs in the international market, since their average price for the March - June 1995 period was US$240/m³.

Sri Lanka’s plantation logs reached US$243/m³ by the end of 1996, and Costa de Marfil’s FOB price for plantation was US$286/m³by the middle of 1997. In both cases were logs of 15 and 20 cm diameters. As a rule, the international market buys logs free of defects, such as twistings, knots, and rot. In 1996, this market quoted Sri Lanka plantation logs, diameters between 21 and 50 cm, at US$304 and 426/m³; while timber from Central and South America, with diameters of 31 to 50 cm, reached FOB prices between US$190 and 200/m³. This information is summarized in Table 13.

Table 13. Teak (Tectona grandis) log prices by diametric class, from Sri Lanka, Central and South America

Source: ITTO Market report, 1995; FAO and Phillips (1997)

Na = not available

5.3.4 Sawnwood

CCF (1998b) reports a single local market transaction of rough boards for export (2"x2"x120", 50% sapwood, 50% heartwood and free of pitch) at US$500 per m³ FOB.

The international grading includes a category "special quality scantlings", whose lengths range from 2.5 feet (short) to six feet (long), several widths and thickness. In 1995, natural forest lumber prices varied US$855 to US$1,950/m³ for shorts, and US$1,985 to US$3,095 for long. "Special and better" category, widths of 8" and lengths between 3-4 feet and varied thickness, reached prices between US$2,580 and US$4,055/m³. “Planks-special and better 3.5 thick" varied between US$2,460 and US$3,395/m³ and "decks-special and better" with lengths between 11 and 15 feet, several widths and thickness ranged from US$4,785 and US$5,235/m³ (G. Gresham, Churchill M. Group 1996). However, depending on the dimensions, plantation lumber reached prices of US$1,200 to US$1,300/m³ in 1995 the international market (ITTO 1995).

Lumber from plantation was sold at prices of US$800 and US$1,200/m³ FOB in Lagos in 1996, and FOB Papua New Guinea in 1995, respectively. In 1997, a mixture of several lumber categories from plantations of Trinidad, Costa Rica and Panama was sold in US$600/m³ CIF Miami. Currently in the United Kingdom, lumber from Central America and Trinidad plantations is quoted from US$800 to US$1,200/m³, of 1"x2.5"x2.5' and 1"x2.5"x6' (Gareth Phillips, consulting, Oxford, England).

5.4 Income expectations

In cases 1 and 2 (Table 11), to calculate the internal return of the projects, local teak timber prices have been used. If a part of the total volume is selling to the international market, Internal Rate of Return (IRR) and Net Present Value (NPV) will be bigger.

Case 1 assumes income in years 8, 14 and 20, from the sales of 20, 40 and 180 m³/ha, respectively. Standing timber prices are US$65, US$78 and US$91/m³. The IRR is 23% and the NPV) (3%) is US$11,196 (GFA et al. 1998).

Case 2 assumes income in years 10, 15 and 20 from the sales of 25, 45 and 180 m3/ha, respectively. Standing timber prices are US$65, US$78 and US$91/m³. The real internal rate of return is 22.7% and the NPV (3%) is US$11,882 (Alfaro and Villamizar 1998).

Case 3 corresponds to plantations done by contractors. Therefore higher yields in volume and quality are expected, and most of the products will be sold in the international market. Also, as the contracting companies are supposed to engage in subsequent stages of the industrialization and commercialization process, other prices must be used to estimate profitability.

A commercial accumulated volume of 327 m³/ha is used, and is the simple average of the high class sites reported by Camacho (1998) for Flora y Fauna S. A. and Picado (1997) (section Physiological and Technical base). Logging loses are estimated at 15%, so 85% will be actually sold.

Two commercial thinnings are programmed:

• The first in year 8 produces 26 m³/ha total volume and 22.2 m³/ha of commercial volume will be sold at US$67/ m³, generating a total income of US$1,467/ha. This income would make the plantation self-sustainable, as it will provide US$244.50/ha/year until the next commercial thinning.
• The second (year 15) produces 49 m³/ha total volume and a total income of US$6,601/ha. Logs with diameters between 15 and 20 cm (50% of total commercial volume = 20.85 m³) were priced at US$240/ m³, minus logging costs of US$20/m3, will produce an income of US$4,587/ha. The rest of the commercial volume will be sold locally, as standing timber, at a price of US$96.60/ m³. These prices are the lowest local price reported for standing teak trees (CCF 1998a); and will produce an income of US$2,014/ha.

The final harvest (year 20) will produce a total volume of 252 m³/ha. All timber will be converted into rough lumber at a 55% recovery factor (117.7 m³). Only 50% (58.85 m³) will be sold at US$800/m³ (66% of price in the international market); minus logging, milling, drying and hauling costs (US$178/m³), FOB port. Net income generated is US$36,605/ha. Another 30% of the lumber can be sold at US$600/ m³ (50% of price in the international market), FOB port, generating a net income of US$14,900/ha, after deducting logging, milling, drying and hauling costs. The remaining 20% can be sold at a price of US$400 (33% of the international market price) and generates a net income of US$5,226/ha. The final harvest income is US$56,731/ha. Logging, milling and transport costs includes the normal profits of these operations.

The expected total income of US$64,800/ha from plantations with first quality management, whose final product is rough sawn lumber (against standing timber of cases 1 and 2). The income comes from three different harvests, done in years 8 (US$1,467/ha), 15 (US$6,601/ha) and 20 (US$56,731/ha).

Plantations established by foreign companies are sold to the general public of their home countries. Information about other components of the total cost (i.e. marketing costs) were not available to the consultants. The present study is limited to calculate the Net Present Value of the income generated by the different harvests at different discount rates (Table 14).

Table 14. Present value of income at different discount rates (US$ 1998)

Source: The authors

No real price increase is assumed.

Summarizing, the major limitation of the present study are:

• Local data on teak prices comes from a small market in the South Region of Costa Rica, where most of the timber comes form plantations that were not properly managed,
• Data of plantation yields is based on projections of the growth of stands that are just undergoing their first commercial thinning.

Furthermore, in spite the availability of teak prices from other countries, there is not enough information on quality of local teak products to allow an objective price-product comparison.

To increase net income/ha, local producers and foreign investors should consider more elaborated products. Some of these foreign firms are already producing furniture and parquet flooring. Investments, costs and returns are not available.

Another particularly important factor is the future of the teak market. At a first glance, diminishing inventories of teak natural forests and restrictive policies enforced of these countries, will force future prices upwards but, given the uncertainty of prediction models, this factor is difficult to assess.