Re: Rate of return in forestry

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• Subject: Re: Rate of return in forestry
• From: Geoff Fischer <FISCHERG@FEC.WAIARIKI.AC.NZ>
• Date: Fri, 16 Feb 1996 09:56:55 +0000
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• Organization: Waiariki Polytechnic, Rotorua, NZ.
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Ted Bilek wrote on 15 February:

> According to a report by Le Vif/L'Express (January 5, 1996), a leading
> Francophone information weekly, which was recently posted to the list by
> Nelson Wong,
>
> >even the best forests in the world only provide a 2-4%
> >annual return on investment,
>
> Here in New Zealand for radiata pine plantations, we expect to get at least
> 7% real pre-tax rate of return on plantation forest (usually radiata pine)
> investments.  Carter Holt Harvey, the leading industrial forest land owner
> uses 8% discount rate to value its forests (CHH Annual Report.  1995).  I'm
> told that one of our other leading forestry companies uses 9% while still
> another uses 7%.
>

There is of course a difference between the internal rate of return
and the discount rate used to value the asset.   Never-the-less it is
reasonable to state that radiata pine plantations in New Zealand
yield a return to capital of this order.
However the real rate of return on capital on radiata pine
plantations in excess of 28 years old and most Douglas fir
plantations in New Zealand is closer to 4%.    The markets for long
rotation radiata pine and for Douglas fir are probably more assured
than those for short rotation radiata pine.    Therefore, while we
can be very confident about 4% rates of return, and reasonably
confident about 7%, we should beware of becoming excessively
optimistic in relation to projected returns of, say, 11%.

Furthermore the current high rates of return for forestry in New
Zealand have raised the price of forestry land (doubling over the
past three years) which naturally tends to depress the rate of return.

I have conducted a study of discount rates used in New Zealand
forestry from a rather broad perspective.   It is much too long to
post to the list, but I would be happy to send a copy to any
interested parties.

 **********************************************************************

Geoff Fischer           Phone 64 7 346 8975
Forest Hand 2           Fax   64 7 348 9133
                        Email fischerg@fec.waiariki.ac.nz
                        Post  Forest Education Centre
                              Private Bag RO3028
                              Rotorua
                              NEW ZEALAND

This message does not necessarily represent the views of
Waiariki Polytechnic Forest Education Centre.

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