First published: April 2006
Author: Dr. Ronnie de Camino, forestry expert.
PanAmerican Woods Plantations (PAWP) is a Costa Rican reforestation company that was established in the late ´80. The objective was to reforest the countries land that was being deforested at a catastrophic rate in that period - Costa Rica was in the top ten of countries with the highest deforestation rate (percentage wise) for two decades. The Costa Rican government realized this and came with an incentive program to stimulate reforestation, forest management and forest conservation. One of the benefits was that reforestation companies were exempt from (corporate) taxes. PAWP has established some 3.000 ha´s of teak in the late ´80´s and early ´90´s. The company went through a turbulent period from ´94 to ´99, when it became apparent that the high expectations in price and yield that were raised by the initiators were unrealistic; that the investment price was much too high and consequently lawsuits were filed by investors as well as the US based SEC. That period was closed when the Dutch investment management company NIBO bought a controlling interest in the company, restructured it completely, changed the management, changed the concept and repositioned the business with realistic expectations of yield and price and after some 5 years of hard work put the company in an excellent position. Currently, PAWP is producing some 30.000 m3 (some 1.000 containers) of precious teakwood, which is being exported to several Asian countries. The plantations are FSC certified, which means that the management of the plantations is done in a sustainable way in both ecological, economic and social terms. A substantial part of the wood is being processed in a modern, adjoining factory into pre finished flooring. About one container of flooring is currently exported per day, to many prestigious clients, while the company is expanding its production capacity rapidly. Since 2003, PAWP is paying dividends to its shareholders.
When the company was still in somewhat difficult circumstances, Mr. Ronnie de Camino was asked to join the Board. Although the history of the company was turbulent (and not always in a positive way), Mr. De Camino decided to accept the position in order to be able to contribute to the salvation of this company and turn it into a positive example for reforestation. He also joined because he knew that he was surrounded by a Board, a CEO and foresters that have earned their credibility in managing plantations in a sustainable way - putting in a lot of work to achieve a long term, good result. They also shared the same realistic view on the cost and income of a hectare of teak, and had expressed their concern about the high investment prices and unrealistic returns on previous occasions. Now the management of the company is according to the highest standards, and the company is full circle (doing the final harvest, and replanting) it is time to share the experiences with other interested parties. Especially because there are many misunderstandings in the teak reforestation sector that have already caused large problems for the sector. From an investor's standpoint, the most important issues with regards to the management of teak plantations are highlighted below.
Lessons learned:
1) growth rates of teak. Under excellent circumstances - good soils, genetics, management and climatic conditions - the growth rate for a twenty year cycle can be maximum 15 m3 (MAI - Mean Annual Increment) of usable wood. It has been established that the current growth rate is about twice as large in the first part of the cycle compared to the second part when the growth rate is decreasing a lot. This amounts to a maximum wood production of 300 m3 in a twenty year cycle, and more than half of it being the final harvest logs. The other half is distributed between non-commercial and commercial thinings, with lower prices in the market. I like to emphasize that this amount can in reality only rarely be found on a parcel of teak, and it should be noted that it is highly unlikely that this will be the average production for an entire plantation. This is the maximum, like an Olympic record on the 100 meters. Very few teak stands of older age have been found with this stocking.
2) teak prices. Teak is an excellent species with a good reputation in especially Asia. Due to its characteristics (durability, good machining, good look, stability) it has gained this reputation and consequent relatively high price level. Although the physical properties of old grown teak (e.g. Burmese teakwood of 100 years old) are found to be very similar to the specifications of fast grown, young teakwood (same density, same durability etc), the appearance will be different due to the wider growth rings and sometimes the wood color. Mainly for that reason, as well as the fact that young, fast grown teakwood has yet to gain a reputation, the market prices are lower than for the same diameter and form old grown teakwood. Teak prices can be easily established as it is a widely traded wood, but for newcomers in this market there are several aspects to be taken into account:
a) teak prices are typically in Hoppus tons (need to be divided by 1.8 to get m3). In addition, usually traders apply penalties in girth and length. A penalty of 5 cm in girth for a tree with a girth of 60 cm may seem small at first sight, but becomes large when the correct calculations are made.
b) teak prices are usually quoted as CIF prices (per Hoppus ton) - delivered at the customers port. Most of the plantation teakwood is sold into Asia. To get the net price in the sellers logyard/plantation, the freight to e.g. India has to be deducted.
c) the diameter is the another important factor that determines the price. The larger the diameter, the higher the price. This price curve slows down after around 40 cm of diameter, with the slope following the sawmill yield that can be obtained by efficient processing of the logs.
d) it also helps to get a good price if one can sell to the final customer, without middlemen in between, and if one produces a reliable, steady stream of good quality logs or well processed (rough) squares. Also, segmentation of the logs can be meaningful, hence optimizing the value per tree (instead of selling the entire tree). Also, the FSC label contributes with a small premium for larger diameter logs.
3) management of the plantations. One sees that many teak plantations are established in Latin America by people that have no previous experience in teak reforestation or no experience in the forestry sector at all! This is partly because many people start a plantation in order to benefit from the incentives that are paid, and also because there are many groups that are selling hectares of teak to investors in Europe or the US. Many plantations are planted in areas that are not adequate for teak (like in NE Costa Rica where the teak syndrome causes plantations to die at age 10-12), in areas with wind causing large damage, using bad genetics and poor management (esp. inadequate thinning)
4) fair market value. It is argued by promoters of the current initiatives selling teak plantations that they charge what they charge, because that is the market price, as many offers on the internet show. But the current prices are not market prices because the buyers do not have not enough information to discriminate if the prices that are asked are reasonable or not. Buyers feel attracted by the exaggerated offers of big profits that are not for real. Actually, consciously misinforming investors about the returns could easily be considered "defrauding investors" which in many countries is a serious crime.
5) cost price of a hectare of teak. When one knows the income from a hectare of teak, one can calculate how much one can spend on it, for it to be a healthy investment. Let´s assume that one can produce a (quite high) average 150 m3 per hectare of exportable logs at the final harvest, with a diameter at breast height of 38 cm (and consequently a mid diameter of the 12 meter log of 24 cm) and an average net average price at logyard of $ 220 per m3, the result will be $ 33.000 per hectare (without counting inflation or price increases). That will bring an excellent return on investment, if the company that buys the land, plants and maintains the trees, works efficient and is capable. In the tropics, it is possible to purchase good quality land at good locations at prices of $ 1.000 to $ 4.000 per hectare. Planting will cost $ 1.000 for the first year, while maintenance costs $ 500 to 700 in the second year, decreasing to some $ 250 at year 7 and further away. A hectare of good quality teak can be established for $ 4.000 to $ 6.000, all included, until the company receives a positive cash flow from the sale of the thinnings.
Conclusions.
Teak is an excellent plantation species combining good growth rates with a high price of the timber and few diseases. Teak plantations have a good future when established by knowledgeable people, on the right soils, genetics, climate, management, structure, tax situation and location. If all is right, the returns from the investment can be attractive when the investors pay the right price for the planted hectare of teak. Teak plantations have important social and ecological benefits when established under the FSC criteria. The returns will always be long term, and teak plantations are not a liquid investment. A special warning! Special care has to be taken with individuals or corporations that sell individual hectares or even individual trees (as plantation forestry should be a collective investment for risk sharing and efficiency purposes), without due control from the authorities, at outrageously high prices and with unrealistic return projections. There have been in numerous reports on fraud - with some companies explicitly mentioned, from India to Europe (among them Holland, Sweden, Switzerland), a lot of money from investors has already disappeared, with several promoters of teak plantations in jail. Investors, but also forest engineers and other advisors should realize with whom they are dealing before engaging in such schemes. By giving or selling their credibility to certain scheme's they are helping to defraud investors and also contribute to the bad image of the sector.
About Dr. Ronnie de Camino. Mr. Ronnie de Camino was born in 1942 in Santiago, Chile. He graduated at the Chilean University as Forest Engineer, wrote his thesis at the Albert Ludwig University in Freiburg Germany, and had his post doctoral residence at the University of Gottingen, Germany. During his professional carrier he was teaching at various Universities, reseach, worked for several large public and private reforestation companies (like CORA in Chile and CONARE, FORESTOR in Venezuela). He became President and principal partner in RNT, a consultancy group based in Costa Rica and operating all over Latin America. He served on the Board of several (re)forestation companies (Forestal Guayamure, Precious Woods, PanAmerican Woods), International institutions and initiatives like Tropenbos, CIFOR, TFAP, worked as consultant for the FAO, World Bank, UNDP, CATIE, GTZ, FSC and has more than hundred publications in his name. E-mail: rcamino@upeace.org