We encourage investors to understand how we calculate our investment returns.
There are three main variables we consider when modeling investment returns:
- Commercial yield
- Market prices
- Price inflation
Commercial yield is measured in meters cubed per hectare (m3/ha) of commercially viable timber. Planting Empowerment uses an academic study, Growth and Yield Models for Teak Plantations in Costa Rica (Bermejo, I., Isabel Cañellas, and Alfonso San Miguel, 2004, published in Forest Ecology and Management 189 (2004) 97–110). We found this study after reading a research paper by Zanin, Feasibility of Teak Production for Smallholders in Eastern Panama, where the author compares Teak production results in rural Panama. The three different studies she used with commercial Teak production on a 25-year cycle are: 144.6 m3/ha (Alfaro, 1990), 217.2 m3/ha (Bermejo et al, 2004), and 257.3 m3/ha (de Camino et al, 2002).
Planting Empowerment uses the middle case (217.2 m3/ha) to predict the commercial yields from our plantations. This study gives production of 17 m3/ha at year eight, 24 m3/ha at year 12, 33 m3/ha at year 20, and 136 m3/ha at year 25.
Because of the paucity of information on native species growth polyculture plantings, we use the Bermejo yield numbers and harvest years, but discount the timber production at a .75x to account for the average slower growth by the native species. Even though some species are expected to grows quicker and produce more commercially viable timber, on average they are expected to grow slower and produce less timber.
We plant 30% non-native Teak and 70% native species including Mahogany, Rosewood and Spanish Cedar. We plant Teak because of its established commercial yields and ongoing market demand. The yield and pricing for the native species are more difficult to predict due to the lack of historical market information. These species don’t have a history of being used in commercial plantings, much less mixed plantings. While some pricing information is available, it is still difficult to predict accurate commercial yield and prices.
There are a few factors that determine timber pricing:
Degree of processing
Sawn boards bring higher prices than unprocessed logs.
Whether the wood is sold in log or sawnwood form, the larger the girth (or wider the board width), the higher the price. This is because larger, older trees contain a higher proportion of the more desired and valuable heartwood. Smaller, younger trees are mostly sapwood, which isn’t worth as much. Early production from plantations yields smaller girths and therefore lower pricing.
Source of the tree
Timber sawn from old growth trees tends to be more valuable than plantation timber due to its rarity, wider widths and higher proportion of heartwood. For example, Mahogany and Cedars out of Peru and Bolivia sell for over $600/m3. However, we conservatively assume $300/m3 for Mahogany and Cedar from our plantations. Given the lack of pricing history on plantation grown native species, we do use prices for old growth timber as a baseline, but are careful to be conservative in our assumptions.
Teak prices from various countries are reported regularly in the Interational Tropical Timber Organization's biweekly industry update. It includes a report on plantation Teak from Panama, where the average price has hovered around $400/m3 (July 2011) in log form. Planting Empowerment uses $465/m3 for sawnwood prices as a starting point for our Adelante plantation which was planted three years ago. This projection is in line with current prices considering the girths that we expect to produce and premium paid for sawn timber.
We use 3% price inflation for our base case, or mostly likely to occur scenario. Global inflation normally fluctuates around that rate. After studying Teak and Mahogany prices from 1995-2005 and 1996-2006 respectively, (available ITTO data) we found a 3.97% price increase for Teak and 9.7% for Mahogany. For our worst case scenario, we use a 1% annual rate and for the best case, a 5% annual rate.