Combining financial returns with social and environmental impact We invest in sustainable forest plantations in South America, building an attractive timber portfolio combining income yield and capital appreciation. The right tree in the right region, for the right customer We explore the market environment looking for financial returns and high impact investments. The Forest Company — who we are The Forest Company combines socially and environmentally responsible forestry investment with unique potential for stable and attractive returns.
Our operations We have an area of 24, hectares planted with eucalyptus and 8, hectares with pine. Latest News May 7, Social and environmental activities Impact Report. Population: million CO2 Emissions per capita: 2. Source: World Bank. Brazil - FIP Programming. Bolivia In Bolivia, droughts and floods jeopardize the fight against poverty. Knowledge Center. All Resources. Development of systems to prevent forest fires and monitor vegetation cover in the Brazilian Cerrado.
Integrated Landscape Management in the Cerrado Biome.
So use of annual returns and IRR are widely accepted even in theory for finance applications. Internal rate of return also remains in wide use in the forest products industry. We did it this way because the exact discount rate for more than a dozen countries over a decade is not possible to determine.
This fixed discount rate allowed all investments to be compared on the same basis, without the cost of land, for the entire period. This discount rate and annual timber investment cash flows were then used to estimate the net present value for one forest rotation, the land expectation value or what one could pay for land based on an infinite number of exactly identical forest rotations, costs, and prices and the internal rate of return.
However, this approach standardises timber investment comparisons across countries and for a decade of analyses. We also collected data on forest land prices for most countries in These data allowed us to compare estimated land prices with the calculated LEVs, which in theory should provide a measure of land price.
However, land prices often exceed the estimated present value of their discounted returns, because the anticipated increase in land rent is greater than the calculated rents. This approach also allowed us to compare the theory of LEV land price calculations with the actual market prices in countries where data was available. Financial, political, social, export, and environmental risks also affect these investments, which we analysed as well.
The spreadsheet was a template with cells for species, country, management costs, timber productivity, and timber returns, which were then used to calculate various capital budgeting metrics. The template is available as supplementary information see Additional File 1. The approach in the template and its capital budgeting formulas are described in detail in Spanish and English by Cubbage et al.
Several researchers have adapted the template to work best in their situation, such as: modifying timber prices from a stumpage basis to a mill basis; adding more product classes; or adding more analyses of land or other factors. In a few cases, several researchers worked in the same country, although not always with the same species. Where more than one individual was familiar with a species, a synthesis of data and inputs was used and reviewed by the relevant researchers for that country.
In addition, all the spreadsheets and calculations were reviewed by the lead author and any anomalies were noted and verified or rectified through an iterative process with lead researchers in each country. Subsequent analyses of the effects of land, regulations, and productivity on the various metrics studied were performed after the base results were established for each country. Data for these additional analyses were obtained from just a few key countries in the Americas to date. These analyses were performed by just calculating the changes in NPV for one rotation, since including land prices and other factors for perpetuity would be too complicated, and unnecessary for just estimating the incremental effects of the sensitivity assumptions on returns.
However, we calculated the NPV of four Eucalyptus spp. Summaries of comparative macroeconomic, country risks, and ease of doing business were made for a broader set of countries since the data were readily available from agencies such as the Belgium Export Credit Agency ONDD , the Organisation for Economic Cooperation and Development OECD and Standard and Poor's Then the final tables of inputs, costs, yields, and investment returns were assembled and analysed to examine trends for each year that this benchmarking exercise was performed, , and The results include an overview of the economic factors in each country and the timber investment returns.
The benchmarking data are still too different among years and countries for sound statistical analysis, and there are missing countries and species in each year. In addition to the timber investment returns, it is useful to have some benchmarks for other asset classes. Finding global benchmarks is difficult, but a useful reference by Damodaran summarises annual returns on USA stocks, short-term Treasury T bills, and long-term Treasury bonds.
An Inflation Calculator provided a means to calculate real returns similar to those we calculated for timber investments. We estimated periodic returns for stock and bond returns for the same initial years as the timber investments to ; to ; and for to This is important, because a percentage investment loss has a greater effect than a percentage investment gain--the loss reduces the base, and thus any gain is calculated on that smaller base.
Many investors also seek dividends or annual payouts from their portfolio in addition to capital appreciation. This is a minimum hurdle rate often sought by investors, and achieved approximately by the better timberland investments. The key inputs and outcomes for the analysis of the 40 timber investment management regimes and capital budgeting returns in are summarised in Additional File 2.
The sensitivity analysis of these returns for the effects of land prices, productivity rates, and environmental regulations for the key countries in the Southern Cone of South America and for the United States are summarised in Additional File 4. Some selected risk estimates as of for the countries analysed are summarised in Additional File 5. In total, these provide a wealth of information about comparative timber investment returns over the seven year period.
The analyses of US stock and bond returns since are summarised in Additional Files 6 and 7 respectively. The results indicate that excluding land costs, returns for exotic plantations in almost all of South America--Brazil, Argentina, Uruguay, Chile, Colombia, Venezuela, and Paraguay--were substantial, and in China as well. The greatest amount of information for the countries in this study was available for the year , as the set of co-authors expanded over time.
These base investment returns in , excluding land costs, favour afforestation in South American countries, which have fast growth rates and reasonable timber prices. Other developing countries and the Asia-Pacific region had lower rates of return, with perhaps the exception of China, but still were attractive, based on the still prospering regional economy in Asia.
North America, especially the US South, had the lowest calculated rates of return due to modest growth rates and low timber prices. In practice, LEVs do not specifically estimate the value of the land; they just indicate the potential returns assuming perfect knowledge and perfect capital markets existed, the discount rate was correct in all locations at all times, and all the costs and prices were estimated exactly.
Investors of course would like to find regions that have large LEVs, but cheap land, to maximise their profits. However, land prices probably have increased since then due to competing uses for increasingly valuable crops of soybeans, sugar cane, or corn. Argentina and probably Paraguay had LEVs somewhat greater than the price of land.
Land expectation values in temperate forests, however, were generally close to zero or even negative. The US South had one of the lower returns, but New Zealand and Australia also had low rates of return, especially for new investors who would need to buy land. There are many factors that determine the actual land price everywhere, including expected annual or future returns, land price appreciation, scarcity and competition with other land uses, the discount rate, and demand.
An LEV only captures a static set of input costs and output prices at a given discount rate, and is not dynamic enough to capture all market information and future expectations. Instead, it provides a good criterion for comparing different management regimes on a given tract of land, or comparative potential returns among species and countries with current forest plantation management, productivities, costs, and returns.
The trends in investment returns during the period from to were compared with the findings from Cubbage et al. These trends varied unpredictably by country Table 2. The LEVs and IRRs in Brazil increased consistently throughout the period, which seems to mirror the large domestic and export demands, and the rapidly expanding Brazilian forest products sector. Argentina returns increased from , and peaked in Internal rates of return in Chile decreased slightly during the period, probably reflecting the depressed world economy where they export most of their product.
This also was true in Colombia, although for less apparent reasons. Investment returns in Venezuela seemed to be lower in than in , but the estimates were difficult to make due to high inflation and large fluctuations in exchange rate, so not much can be concluded from the three-year trends provided here. The Uruguayan market is almost entirely dependent on exports, which probably caused the decreased returns from to The US South fared the worst with timber investment returns based on current costs and stumpage prices decreasing significantly from to This situation obviously reflects the poor sales and prices of timber during the USA economic recession and enduring housing slump.
The US Pacific Northwest actually had stable investment returns, probably due to better saw-timber prices and exports to China in Note that the timber investment returns were relatively comparable to those cited by Sedjo for the countries in South America based on prices.
This does confirm common feelings that timber investment returns in the developed countries studied have been worse in the s than in the s. The results of the analyses of the effects of land prices, environmental protection, and higher productivity and timber prices are summarised in Additional file 4. Each of these variables were analysed at the typical land purchase price and environmental reserve requirements, or likely increases in timber growth rates.
The directional effects of these factors are obvious. Buying land for environmental protection requirements reduces investment returns; better timber productivity and prices increase returns. The magnitude of these effects differs by country and by each factor, however, which is the key to net returns. The addition of land costs dropped the U.
S Pacific Northwest returns to 5. It is interesting to note that an independent timber-land investment analysis by a US forest consultant Thomas produced a value of 2. Leal reported estimated annual investment rates of return for Brazil in including land, which were greater than those found in our research.
However, these greater potential returns would carry more risk. The countries in our analysis have varying legal requirements on forest land use, ranging from requirements for legal reserves in Brazil through use of buffers around streams in most countries to use of best management practices in the US South. We assumed that a share of all land purchased would be inoperable due to terrain and environmental restrictions, and that one would have to pay the same full price for that land as for productive land.
There would be no timber production at all on the areas affected by environmental regulations, resulting in a complete loss of income from the affected areas. This would then reduce the net returns for the entire property in proportion to the area lost. One would still have to buy the land in order to establish the plantation, but have no benefit from doing so from the affected hectares, although there were no added management costs others than taxes, of course.
This loss of useless hectares in a purchased property would decrease net returns substantially. Our estimates of land costs for areas that have complete environmental restrictions are imprecise. In Brazil and Argentina, one probably can pay less for land that has absolute prohibition of forestry activities, but this amount is not clear.
This fact would tend to make net rates of return with land costs in Brazil and Argentina somewhat higher than we calculated, but so indeterminate that our assumption of one base forest land price in each country was best. The costs of reserving a share of the land base for environmental protection alone on already owned lands did not decrease investment rates of return as much as the purchase of the land did at prevailing rates in each country, generally only decreasing the IRRs by one or two percentage points.
This is based on the assumption that you already own your land, and you do not need to pay to prepare the site nor to plant, and manage a stand, so the loss of a share of that land is not a large opportunity cost compared with buying new land. However, coupling environmental protection requirements in each country with land purchase costs dropped all the IRRs to 5.
In some of these countries, returns decreased even further due to the additional amount of land that would need to be withdrawn from production due to environmental constraints. Higher yields and prices had the opposite effect to the above, and improved the returns in the Southern Cone countries the most. Including all the factors of land costs, environmental protection requirements, and potential productivity increases, the IRRs were not that different among the Southern Cone countries 5.
Key macroeconomic or political factors that affect country investments are summarised in Additional File 5. These data are readily accessible, unlike our timber investment returns estimates, so other key forestry countries are also listed for reference. These data confirm the impressions that one might have about relative country-level risk, but make the gradations more clear.
Colombia, Indonesia, and Uruguay fell in the next tier, with a common rating of about 4. Paraguay was in the next group, largely alone with political and export risks of a 5, but less expropriation risk, perhaps based on its long history of private ownership. Argentina, Ecuador, and Venezuela ranked last, with a value of 7 for most risk ratings.
Each of these countries has nationalised some private industry, including the nationalisation of some forest land in Venezuela. Brazil, Colombia and Peru were all just upgraded to this level in and Out of countries, Venezuela is almost the worst in the world. Indonesia, Ecuador, Brazil, Costa Rica, Uruguay, and Argentina all are in the lower third of the countries in the world for Ease Doing Business, saved only by the even worse record of most African countries. Similarly, they all take many Days to Start a Business, and conversations with forestry colleagues suggest that these are optimistic estimates for land investments.
Several countries in Latin America are also becoming more inimical to foreigners buying land. Due to limited available land and loss of local owners e. In Brazil in , the Attorney General volunteered a new opinion that the Constitution effectively restricts direct future foreign ownership of agricultural and forest land. Various vehicles have been proposed or used to bypass this ruling, and indeed many believe that it is an incorrect interpretation of the Brazilian Constitution.
However, the ruling was explicitly restated in , casting doubt on rural-land investments occurring without having a majority Brazilian investor. This situation is causing severe problems and deterring investments. In December , Argentina passed a "Ley de Tierras" Land Law , which prohibited direct foreign ownership of land of more than hectares. Uruguay has not prohibited foreign ownership, but its president has opined against building any more large pulp mills in the country. However, the country still granted tax exemptions for a second new pulp mill in Chile is not restrictive per se, but has little available land for forest plantation investments, and the two major forest products firms do not want to lose their core land base to new investors.
In addition, the recent increases in agricultural commodity prices have caused large pressures for many good forest sites to be converted to crops throughout the world. Despite concerns in other countries, Colombia on the other hand is encouraging foreign direct investment, and Ecuador is actively seeking to make major new forest plantation investments. Statistics for comparative USA equity and debt investments for 12 recent years that terminate in our last timber investment calculations are summarised in Additional File 6.
The annual returns for stocks for that period are also graphed in Figure 1. They indicate that U. S equity and debt returns since have varied considerably, and differ depending whether one is calculating equity stock or debt T-bills and T-bonds and using nominal with or real without inflation. We calculated annual US stock returns for three different time spans ; ; and , since results may vary by the starting and ending dates. Annual nominal with inflation and real excluding inflation returns for US stock investments, Based on these three periods, the highest average annual stock returns were 4.
The best T-bill returns were worse, at 2. The best T-bond returns were better at 8. However, the worst periodic real returns were negative for stocks for two of the three periods and for bonds for all three of periods selected since In addition, the variability in stock returns was far worse than other assets in the s, including timber-land returns as calculated here.
The calculations of indexed net returns on average USA equity investments since indicate that they have performed poorly Additional File 7. So in real terms, not one of the equity investments would even provide any capital appreciation during that period. Annual NCREIF timber returns were excellent from to Cascio and Clutter , but also dropped substantially after the global recession in They may have increased in the few years since the recession, but more slowly than stock market returns.
Again, our results indicate that timber-land returns, with about 2. In fact, land prices also have been stable or increasing in most countries, which would further increase total timberland investment returns for current investors. This research summarises global investment returns for key forest plantation countries in the world based on data from to The data focus on returns to investments assuming that one owns land already, which would be typical for existing investors.
It also adds a component to estimate returns with land costs for the key Southern Cone and USA regions and species. Each metric has merits for different applications. Net present value is a common and well understood discounted cash flow measure for project decisions, and is useful for short term investments of a similar scale and duration. Land expectation value extends NPV in perpetuity, and is useful for comparing timber investments of different lengths on the same area and infinite duration.
Land expectation value also can be used to estimate the theoretical land value based on static management regimes, costs, and prices. It also is the most common metric used in the forest investment discussions, conferences, and comparisons with other assets. We have used IRR most frequently in the analyses conducted here because of its ease of understanding in comparisons. Our results indicate that the fast growth rates and higher reported timber prices drive the best timber investment returns because management costs were not much different among the different parts of the world.
South America in general had the highest returns for existing investors, without the cost of land, and Brazil in particular was consistently the best country and improved during the period from to Opportunities for high rates of return i. China also had a high IRR for Eucalyptus species, but this may be possible only in limited regions that have high timber prices. Also, finding available land for new investments is challenging. Furthermore, that land will have to be leased or rented either from the government or communities, which requires a large transaction cost and social-capital building.
However, most of these investments could be similar to or better than the existing returns for other asset classes since The returns we estimated here appear relatively conservative when compared with earlier research findings when both timber and stock markets were better, such as found by Leal or Cascio and Clutter , which seems reasonable. Environmental protection costs alone did not decrease returns much for present owners where land was a sunk cost.
They mostly removed the land from production, but did not add more management costs. Land costs are of course a key to determining net returns for new investors. We collected data on land costs at their typical sale price per hectare as of However, these are in considerable flux, based on some depression in timberland markets currently, and the reverse for agricultural land markets.
In theory, the LEV data should provide a measure of land prices that is close to the estimated land prices, if the inputs and discount rate were correct. However, the LEV was only close to the estimated local land prices in about half the cases, indicating that more than discounted timber returns are contributing to forest land prices. This would suggest that LEV is more useful in analysing alternative timber growing returns and management regimes than for estimating the total value of land, which has many components other than timber growing potential alone.
In practice, land prices in the last decade increased rapidly in most of the countries examined, albeit for different reasons. The USA had increased timber-land prices with more demand, high rates or development for urban uses, and good timber prices up until the recession of Many of those factors were similar in South America and Asia, and land prices there have been further fuelled by rapid increases in prices for agricultural land, especially for soybeans, which can use converted forest land in some cases.
In addition, given the Southern Cone financial crises in and , investments in land were perceived as more secure than other investments. This would suggest that the returns estimated would be most accurate for better developed regions, species and markets, which already largely have established roads, nurseries, land tenure policies, and markets.
We invest in sustainable forest plantations in South America, building an attractive timber portfolio combining income yield and capital appreciation. More media. The Forest Company combines socially and environmentally responsible forestry investment with unique potential for stable and attractive returns.
We have an area of 24, hectares planted with eucalyptus and 8, hectares with pine. Our eucalyptus forests mature by the age of 6 years and pine by Main navigation.
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