Dear friends,
This is a much-delayed but promised reply regarding responses I received to
a query about rates of return in forestry.
On 15 February 1996, I sent a note to the list commenting that a rate of
return of here in New Zealand, companies use discount rates ranging between
7% and 9% to value their forestry investments. I asked for respective
rates of return in other countries. As promised, here is a summary of the
comments I received.
Geoff Fisher (fischerg@fec.waiariki.ac.nz) (New Zealand) wrote:
>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.
Ryde James (from Australia) wrote:
>From " Competitiveness of selected Australian Plantation Forests" 1993,
>Stephens, Hansard and Dean. Australian Bureau of Agricultural and Resource
>Econimics, Research report 93.10.
>Calculated Internal rates of return for forest plantations located near
>Bathurst ranged from 11.1% for domestic pulpwood to 2.9% for export
>pulpwood. Seven scenarios were considered; rates were 11.1, 10.3, 9.0, 8.3,
>7.1, 5.8, 2.9%.
>For scenarios based on plantations in Tasmania, best was IRR of 10.6% for
>domestic pulp and worst was 7.3% for export paper. Rates were 10.6, 9.5,
>8.6, & 7.3%.
>Your thesis that rates of 2-4% are low for plantations in the Antipodes
>would be confirmed by these figures.
Sjur Baardsen reported on rates of return in Norway.
>In Norway, any public investment should - according to the guidelines from
>Ministry of Finance - use a 7% social rate of discount. However, in nordic
>forestry there are only some few marginal investments which will yield such
>high returns. The forest owners seem to treat their forests according to a
>3-4% real rate of discount after tax. Be aware that the Norwegian taxation
>system makes the real rate of return equal before and after tax.
Sam Radcliffe reported on timberland funds in the United States.
>The institutional (pension fund) timberland investors in the US
>report the following rates of return (nominal, pre tax):
>Wachovia (southern pine) 1981-94: 11.22
> " " " 1994: 5.13
>NCREIF Timberland Index (mostly reflects the returns of John
>Hancock):
> South 1987-95: 14.58
> Pacific NW " 38.10
> South 1995: 21.52
> Pacific NW " 9.89
>These indexes include both income and capital appreciation
>(often based on appraised values).
He also noted that the US Forest Service argument for a 4% discount rate
can be found in Row, Kaiser, and Sessions Journal of Forestry article in
June 1981.
Mark Rasmussen said that he looked at some Region 8 FORPLAN models half a
year ago. The PNV was still calculated using the 4% rate. There is
ususally a sensitivity analysis at 7.5%.
Thank you to all who responded.
Sincerely,
Ted
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| Ted Bilek, Forestry Economics |
| University of Canterbury, School of Forestry |
| Private Bag 4800, Christchurch, NEW ZEALAND |
| |
| e-mail: t.bilek@fore.canterbury.ac.nz |
| phone: 64-3-364-2121 fax: 64-3-364-2124 |
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