Financial Times
Markets News / Commodities
September 1, 1999

TIMBER: Tropical production takes root
James Wilson

Teak plantations in Panama are attracting investment as hardwood forests become more profitable, writes James Wilson

Even the Pan-American highway, an otherwise unbroken trail from Alaska to Chile, has so far failed to conquer Panama's remote Darien region. First the tarmac, then the road itself, quickly peters out heading east into the Darien, one of the Americas' last wild frontiers.
However, the past two decades have seen ever greater encroachment from land-hungry farmers and peasants. Swathes of land have been cleared for cattle rearing and rice farming, while valuable tropical hardwood trees have been dragged from the jungle.
New forests are being planted, but not like those that once covered the Darien. Instead, plantations of teak - a non-native species - are becoming a regular sight as investors take a long-term gamble on big returns from tropical hardwoods.

With environmental concerns bringing tighter restrictions on exports and consumption of wood from tropical primary forest, the production of tropical timber in plantations is growing. Teak is a producers' favourite because it grows quickly, is resistant, and is seen as having strong demand.
In Panama production has grown steadily since a 1992 incentive law giving tax exemptions to forestry schemes. Many investors were tempted into the business and there are now more than 30,000ha of reforestation in the country, nearly half of it in teak.
Tax breaks aside, the economics of the business mean producers need patience and a steady cash flow. Teak trees are first cut commercially at about seven years old, and the vast bulk of profits only come from the relatively few trees left to reach maturity over a 20 or 25-year span.
"One of the reasons long-term plantations had problems establishing themselves in Latin America is because of the financing," says Julio Cesar Centeno, a Venezuelan forestry expert who took part in negotiating the International Tropical Timber Agreement. "In this part of the world, people have wanted to invest today and get a return tomorrow."
As a result many plantation owners have opted for selling some hectares to private investors. Typically an investor buys the future income stream from a specified plot in return for a payment and annual management fee, which brings in cash flow.

Many producers emphasise "green" credentials, suggesting that by supporting tropical hardwood farms, investors are preventing more timber being taken from primary forests.
One Panamanian company, Jones Forest and Development, this year issued $1.8m of convertible "forestry bonds" giving buyers the option to convert the bond into tree ownership in the future. The company, which also produces revenue from farming cattle and sheep that graze among the trees, has 1,200 ha of teak plantations in the Darien and elsewhere in Panama.
But in some cases investors have been disillusioned - and producers given a bad name - because companies made exaggerated claims about likely wood yields and financial returns.
In one case highlighted by Mr Centeno, an insurance company sold thousands of Dutch investors stakes in a Costa Rica-based scheme. Mr Centeno estimates the actual yields investors could expect were less than 40 per cent of the claims made for the plantation.
"You have to be very careful with the figures," says Mr Centeno. "There are obviously lots of variables. If it is managed correctly, with first-class land and high-quality seeds, you could get a maximum accumulated production over 20 years of 20 cu m per ha per year.
"At the same time there are plantations that are producing 3-5 cu m per ha per year," he adds.
Alberto Mantel, Jones Forest's administrative director, believes his company's teak trees can produce about 250 cu m of wood over 20 years. High-quality teak fetches about £2,750 ($4,345) per cu m in the UK, according to the International Tropical Timber Organisation.
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