Forestry Update

Having decided that you wish to invest in forestry you may find yourself overwhelmed by the choice of companies out there specialising in that field.

Essentially there are two different ways of investing in forestry, directly or indirectly. Direct investments involve the purchase of ownership of the land and the trees grown on that land, either by an individual or a company. Indirect investment on the other hand involves buying shares in an established forestry investment company. While there are pros and cons to both investment types it is generally acknowledged that direct investments generate the higher returns.

Before of course making any decision I have included below some areas you may wish to look into before you go ahead.

Location, Location, Location

Many countries, worldwide offer various opportunities to invest in reforestation with the bulk coming from South and Central America, Australia and New Zealand. It is important to examine the financial and business infrastructure in each jurisdiction, for example: whether the area is well serviced by the infrastructure necessary for the planting, tending and harvesting of the trees. It is also worth noting that once the trees are ready for harvesting they must then be transported for them to be processed. Good transport links are very important and help reduce costs.

Experience, Experience, Experience

This really needs hardly any explanation. Forestry is a very specialised field and therefore the more experienced and expert the manager is then the better the eventual return once the trees are harvested.

Research, Research, Research

Even after making the initial investment regular and comprehensive information should be made available to keep you abreast of all new company information. I find a company newsletter to be the most effective way of establishing this in addition to the company website.

Many forestry investment schemes welcome international investment, indeed it is unusual to find one that doesn’t. In addition there are very attractive tax benefits international investors can claim against the income at harvest. So to conclude, should you be looking for a long term investment then investing in forestry might just be ideal.

The signs are growing that international efforts to shut down illegal logging and enforce timber harvesting regulations are succeeding in slowing the destruction of forests.

In particular the overhaul of logging laws and the injection of zeal into enforcement have led to a significant drop in Brazil’s illegal logging and deforestation rates as a whole.

During a recent trip into an area of once rampant deforestation, Bob Walker a expert on deforestation in the Amazon and a professor of geography at Michigan State University, witnessed the clamp down on illegal logging.

“You had tens of thousands of loggers who were out of work — people were not happy,” Mr. Walker said in an interview. “A lot of the sawmills went broke. I was amazed to see it.”

According to a new report by Chatham House, a British think tank the decline in illegal logging and deforestation rates is also being witnessed by major timber producing countries such as: Cameroon, Malaysia, Ghana and Indonesia.

Due to weak or limited regulations the term ‘illegal logging’ remains somewhat unclear in many producer countries. However progress has been made due to international pressure on countries like Cameroon. An independent regulator now oversees their timber trade, financed by a coalition of donor countries this has resulted in tighter controls over logging in general and reductions in overall deforestation.

Last month torrential rains in the northeast of Brazil lead to widespread flooding, entire towns were flattened and so far 51 people have been reported killed with a further 76 still missing. So a legislative bill to modify the Forestry Code has immediately set off alarm bells with activists everywhere. According to them the bill will only worsen the effects of extreme weather, which is increasingly frequent in the context of climate change.

As the bill made its way though Congress, 13 environmental organisations expressed their concern in an open letter to all the candidates vying for the Brazilian Presidency in the October elections. Rafael Cruz of the environmental watchdog group Greenpeace told IPS that the proposed changes were an ‘historical reversal’ of the 1965 forestry code that is currently in force.

Environmentalists find the bill particularly controversial as it proposes declaring an amnesty for illegal logging on more than 40 million hectares of savannah and forest in the Amazon region recorded since 1996. In the letter environmentalists point out that this would pardon an equivalent of 14.6 billion tonnes of carbon dioxide emitted illegally.

According to the lawyer Rebelo, reform of the Forestry Code is necessary as at present agricultural development and with it the supply of food for the Brazilians in greatest need are at risk from the existing rules.

Another controversial point in the bill is the removal of a nationwide requirement to maintain a portion of larger properties in legal reserve.

“In the Amazon forest alone, that could mean the elimination of legal reserves of up to 70 million hectares,” states the environmental groups’ letter. Assuming that half of those areas are already deforested, “even so, the legislative bill removes legal protection from at least 35 million hectares of forest,” the letter says.

In addition the bill also proposes that each Brazilian state can use its own criteria to reduce upwards of 50% from the federally defined areas of permanent preservation, which act as buffer zones along rivers and lakes in an effort to protect these water sources. This will allow the release of 12.8 billion tonnes of carbon dioxide stored in the vegetation of the Amazon. This amounts to three times Brazil’s goal for reducing emissions of greenhouse gases released through deforestation. Brazil even announced that goal during the climate conference in Copenhagen last year.

Despite this the bill was approved last Tuesday by a special committee of the Forestry Code by 13 votes in favour to five against. Now the proposal will be put for consideration in the House floor before a vote in the Senate.

Despite this victory for the agricultural sector, (members of the caucus and representatives of rural producers applauded the approval) not everyone was thrilled, in particular the representatives of family farms and small holders left disappointed.

I don’t know about you but I have found the best way to diversify my investment portfolio is to invest in forestry. In the UK forestry has had a long history as investment for high net worth individuals and more recently for the smaller investor, such as myself.

The tax breaks associated with forestry aren’t to be sneezed at either, there is no income tax or CGT payable and once forestry investments have been owned for over two years they are free of inheritance tax liability.

While yields can be somewhat volatile, due to the nature of the product the investment can be stored on the stump until the market value goes back up. This is the advantage with forestry plantations as opposed to other crops as once the trees are mature they can be left to increase in value.  In 2007 forestry saw a 31.6% total annual return, this fell in 2008 to 7% but that was still well ahead of the commercial and residential property sectors and the stock market.

However, this is a long term investment, it can take anywhere between six to ten years to harvest a plantation, during which time there’s no income. This type of investment would suit those looking to add to their pension fund or those that already have a steady stream of income coming in.

A friend asked me recently why I liked Brazil so much, well I said Brazil has a lot going for it and not just its sun kissed beaches and pina coladas.

Over the next seven years Brazil will have hosted two of the most important World events, the World Cup in 2014 and the Olympic Games in 2016. This means that in the lead up to these events Brazil will need to make large infrastructure investments to stimulate growth in the civil construction works, services, logistics and transportation sectors.

At the moment it is predicted that Brazilian company investments in the coming seven years will meet the optimistic economic outlook in Brazil. Currently foreign exchange reserves exceed US$260 billion, Brazil’s credit rating has risen to investment grade and the GDP is expected to increase to 6.5% by the end of this year.

Riding on the back of this economic wave the pulp and paper industry supplies products for all other sectors. The challenge then will be to show the international community that the Brazilian pulp and paper industry is ready to expand its operations but not at the expense of the land it occupies.

In addition according to a survey conducted by the National Agriculture Confederation (CNA), the Brazilian Association of Forest Plantation (ABRAF) and the Brazilian Sugarcane Industry Association (UNICA) Brazil has 72 million top soil hectares available for cultivation.

So the land is there then, ready to meet demand for food production, biofuels and the forest based sector. Currently Brazil has 6.3 million hectares of planted forest, which supply raw material for the wood, furniture, steel and pulp and paper industries. This is equivalent to 0.7% of the Brazilian territory.

According to the Brazilian pulp and paper sector an important part of their thesis in climate negotiations is that with the expansion of planted forest areas there will be a rapid growth of planted forests and the resulting high CO2 capture rate will directly aid the fight in global warming.

Their goal then is to validate forest carbon credits as a mechanism to offset emissions. They are so confident in the auspicious progress of these negotiations that they are submitting this proposal via the Brazilian government to the United Nations Climate Change Conference (COP16) in Mexico this November.

Halfway through 2010 and Copenhagen seems a lifetime away, while Cancun is only around the corner. Despite popular media claims Copenhagen wasn’t such a total disaster as it is now portrayed.

The credit for this must go to the BASIC bloc, Brazil, South Africa, Indonesia and China. These rapidly developing countries had already implemented plans to reduce their emissions and had them internationally monitored and verified. What I have found is often overlooked is the fact that this is the first time in the history of international cooperation on climate change that there is a voluntary partnership between North and South with backing from emission targets and intentions. In total over 100 countries associated themselves with the Copenhagen Accord, which is more than any other agreement has done since the Kyoto Protocol.

In my humble opinion the silver lining that came out of talks in Copenhagen was the REDD plus scheme, which focused on reducing the 20% of global greenhouse gas emissions that are linked to deforestation. By paying developing nations to conserve rather than chop down their forests would curb these emissions and provide important benefits to local and national economies.

For instance in the case of Indonesia, if they halved their current rate of deforestation they could potentially earn up to $1 billion per annum and that is if prices for carbon stay relatively low. More income could be generated if the efforts to curb emissions drive the price of carbon higher. In advance of an international agreement on climate change investment in renewable energies and forestry can help support the carbon markets.

Of course developing countries such as Brazil and Indonesia aren’t just driving down emissions for the environment; their motives are of a much more financial bent. The pledge of $30 billion from developed nations would be ploughed into investments on the ground.

However, the concern among many developing countries is that the industrialised nations aren’t providing new money but instead are repackaging old pledges and/or funds diverted from other existing budgets.

And some countries are not prepared to wait for a new ‘Kyoto Protocol’. Instead roughly 30 developing countries are already requesting UNEP’s help in transforming their economies and development strategies to a green economy. For many of these countries this move not only makes social and environmental sense but economic sense as well.

In China for instance over 30% of their stimulus package is being spent on high-speed rail, renewables and energy efficiency projects.

The challenge for world leaders at the climate talks in Cancun later this year is to recognise that only through a fair and equitable global agreement can climate change be addressed by all 193 countries.