Investing in Afforestation
Economic aspects of woodland creation for timber production
The decision to invest in an afforestation project with the primary aim of producing timber may involve many personal and environmental factors alongside financial considerations. Adoption of a forestry enterprise within a farming unit represents a change in land use and a long-term investment of land, labour and resources. Financial evaluation provides a structured and objective means to inform the decision and allows comparison of afforestation with other economic uses of land.
Afforestation projects can take a number of forms, from planting steep areas or wet corners of a farm to integrating timber trees with agricultural production or establishing plantation woodlands. Some afforestation projects such as commercial plantation woodlands have the potential to produce quality timber products alongside diversifying farm incomes and providing other environmental benefits such as carbon sequestration and flood risk mitigation.
This series of guidance notes provides practical information for farmers and other landowners interested in investing in forestry. It is designed to help develop a first understanding of economic evaluation of afforestation projects. The six guidance notes of the series introduce the basic steps involved in the assessment of such projects to allow some preliminary due diligence when considering an investment in forestry. This does not replace a full assessment and advice by a chartered forest manager.
1 | The basics of forestry financial evaluation
2 | Evaluating the financial costs of forestry
3 | Revenue from forestry enterprises
What is the estimated cost of professional advice at an early stage for a farmer/landowner considering putting an area of land into forestry?
You can find some relevant information in guidance note 2. We would recommend contacting a professional land agent to get a cost estimate for your specific situation.
What options exist within contracts to help with initial upfront costs of establishment (e.g., if Government grants are not available)?
To help with finance, it is possible to sell a proportion of carbon upfront through the woodland carbon code. Carbon credits and carbon payments allow to accrue income earlier. In some instances selling the carbon upfront as PIU is used to fund establishment. There is also potential to refinance land once planted as we are seeing significant changes in asset class appreciation. These options should be discussed with a professional land agent on an individual basis.
Generally there is also generous funding available under Glastir for the first 12 years in Wales to cover establishment and maintenance costs of woodland creation along with premium payments on top.
Thinning allows to derive some income from timber sales earlier, i.e. year 20 or 25 as opposed to year 40/50.
Landlease models. There is a small movement looking at contracts to allow earlier income through joint ventures. Agreements regarding upfront finance provision and management with a split of timber profits at harvesting have existed for some time (e.g. Coillte, Ireland). New land lease models are being implemented in England where landowners allow a third party to grow timber on their land and are paid a ‘rent’ but these are not yet fully established.
How is the carbon footprint value taken into account?
Is there a futures market for timber (i.e. buying timber forwards)?
This is not a standard arrangement in the UK. As such a futures market doesn’t exist. However, some modern agreements have been based loosely on this idea, where a third party finances timber production on farmland on agreement that they will split the profits from timber with the third party come harvest time (e.g. Coillte’s Farm Partnership Scheme).
Is the capital value of woodlands improving?
Land values are opportunity costs, moving from farming to forestry might affect the capital value of land. However, recent market insight suggests the capital value of woodland and agricultural land are moving closer to parity. Forestry is improving as an asset class with capital values increasing as a result. Any potential changes in capital values of land from conversion of farmland to woodland can be factored in using other economic appraisal tools such as cost-benefit analysis (see guidance note 5).
What is the average percentage of income that is made up of government grants for plantations in Wales?
While these numbers are readily available for farming enterprises – e.g. in LFA upland sheep & beef in Wales the BPS makes up around 80% of income – given the timescales involved for forestry limited comparable records are available for private woodland enterprises. Based on the example calculations in the guidance notes grants make up just under 50% of income from woodland creation at current values. Some other research indicates that woodland creation was only likely to be profitable without grant funding in the 1990s as timber prices were very high. The average support per hectare for Welsh grants is about £7,500 over the course of the rotation without the BPS basic income element. You should take into account that payment for afforestation currently includes the flat rate BPS on new established woodland in Wales.
Should we factor in the risk of reduced future public funding?
Future public funding is a major part of why woodland creation makes financial sense. Carbon payments may pick up some of the potential future slack, should public funding be reduced. This is why conducting a sensitivity analysis is important as it demonstrates the effects of grant funding, whether such funding is available or not and to what extent. The economics of tree planting for timber production strongly depend on the yield class, too. For some sites the timber value alone will make the tree planting project financially viable, for others this will not be the case.
How to include uplift in timber value over the rotation period?
The examples in guidance notes 1-3 were calculated based on prevailing timber prices at the time the examples were put together (spring 2021). These will need to be adapted to the individual parcel of land and timber prices at the time of the consideration. You can use sensitivity analysis to include any potential changes in timber values.
How are opportunity costs of land factored in?
Guidance notes 5 explains how to account for opportunity costs.
How do timber plantations get past additionality for generating carbon credits?
If you can prove that your woodland enterprise is not financially viable without carbon credits, then you meet additionality rules.
With climate change and potential forest fires, there will be a need for insurance. What are potential costs for these?
Some indicative costs for insurance can be found in guidance note 2. These costs will vary by woodland and options should be discussed with a professional broker on an individual basis.
Funded with support from the Welsh Government.