5. The Economic Viability of Sustainable Management of Private Indigenous Forests
There are many factors that influence the viability of an individual forest management proposal. Most important are:
- costs and returns associated with SFM Plans versus Permits (allowable harvest rates and costs of compliance);
- size of forest and forest resource (ability to achieve economies of scale);
- species under management (growth rates and value);
- location and physical factors (cost of production).
5.1 Sustainable Forest Management Permits
SFM Permits currently require negligible expenditure on the part of the forest owner to make application and register an approved permit. It is estimated that the cost of establishing a SFM Permit is commonly less than $1000 and may be as low as $250; the principal cost being the registration of the permit against title to the land.
On occasion forest owners employ forestry consultants to prepare SFM Permit applications and while this action may incur additional cost, it is at the discretion of the owner. No formal inventory is required, and details requested as part of a permit application are minimal compared with a SFM Plan. Further, some conditions applicable to SFM Plans (e.g. forest protection) are not presently applicable to permits. SFM Permits are potentially very profitable. For example, a forest owner undertaking an aerial harvest of rimu under a SFM Permit may realise a stumpage revenue of about $58 750 (250 m3 x $235/m3) with negligible cost.
While the provisions for SFM Permits were inserted into Part IIIA of the Forests Act to enable a cost effective harvest to be undertaken from small forest areas/resources, it is noteworthy that 135 of the 320 SFM Permits issued to 30 June 2001 cover forest areas exceeding 100 ha and 16 of these cover forest areas exceeding 350 ha. Some landowners have indicated that they will progress to SFM Plans, indicating that costs of compliance with Part IIIA of the Forests Act may have influenced their initial decisions.
5.2 SFM Plans
The drafting of a SFM Plan is reasonably complex, requires specialist knowledge and incurs a significant cost, both in undertaking the forest inventory required and drafting the plan. The impact of this cost on the profitability of forest management is directly influenced by both the size of the forest resource and the species present.
The preparation of a draft SFM Plan, even for a small forest area (e.g. 50-100 ha) is unlikely to cost less than about $10 000, costs being split between forest inventory and collection of information, data analysis and drafting of the plan. For a forest of 100 ha this amounts to a cost of $100 per ha. With increasing size the unit cost declines, a plan for a 500 ha forest costing about $40 per ha. Where the forest carries a moderate resource of timber the cost of establishing the plan will normally be offset by revenue in the first few years of operation.
The following is an example of a registered SFM Plan in operation in podocarp-hardwood forest:
Forest Area: 220 ha
Podocarp resource: 23 980 m3 (109 m3/ha)
Cost of SFM Plan; $15 0001
Annual harvest: 100 m3/annum (sawlogs)
Stumpage value $23 500/annum (based on aerial harvesting)
Ongoing forest management $2 200/annum ($10/ha)
1 Includes Resource Management Act 1991 compliance.
A beech forest of equivalent area would have similar planning and management costs and with a sustainable rate of harvest (sawlogs) of 528 cubic metres per annum (say 4m3/ha/ann x 60 percent conversion to sawlogs) would return an annual stumpage value of about $31 680 (assuming a stumpage based on aerial harvesting of $60/m3)
Note: The Forests Act provides for a periodic harvest to be undertaken. This has benefits for the owner and the forest; it can reduce unit operating costs and reduces the frequency of harvesting operations (providing longer periods of forest stability without interference). The period is usually limited to a maximum of 10 years for podocarps and 5 years for beech, to ensure that forest structure and natural values are maintained.
There are additional compliance costs applicable to SFM Plans. These may include periodic monitoring of the forest, costs associated with restocking harvest gaps and pest control. Compliance costs (included as ‘ongoing forest management’ in the analysis above) will vary between forests but are unlikely to be less than about $10 per ha per annum. This translates to $22.00 and $4.20 per cubic metre (sawlog equivalent) respectively, in the podocarp and beech examples above. Where rules in district or regional plans (Resource Management Act 1991) require a resource consent to undertake indigenous forest management, this may incur significant additional costs, from $500 for a non-notified consent to $10 000 in the case of publicly notified consent applications resulting in public hearings.
5.3 Valuation of Forests under Sustainable Management
Historically, indigenous timber resources were valued in terms of their liquidation value at a point in time or over a specified liquidation period. Now that clear felling of indigenous forests is not an option it is appropriate to value them on the basis of the stream of revenues and costs under sustainable management, discounted to their present day value. Present Values are tabulated below for the two examples in 5.2:
Table 2 Present Value of Podocarp Forest under Sustainable Management
| Year | ||
|---|---|---|
| Cost of Management Plan (includes RMA consent application) | 0 | 15 000 |
| Harvest (m3 sawlogs) | annual | 100 |
| Management Cost ($/m3 - sawlog) | annual | 22 |
| Stumpage Value ($/m3 – sawlog; aerial harvesting) | 235 | |
| Discount Rate ( percent, lowest Treasury rate) | 7 | |
| Term of Plan (years - set at minimum allowable under Forests Act) | 50 | |
| Discounted Present Value ($) | 278,960 |
The Present Value is substantially less than the liquidation value of the standing timber ($5.64 million). A substantial proportion of the difference ($5.36 million) could be regarded as a default value for the non-market benefits accruing to the forest, or more specifically the "public good" value attributed to the forest under sustainable management.
Table 3 Present Value of Beech Forest under Sustainable Management
| Year | ||
|---|---|---|
| Cost of Management Plan (includes RMA consent application) | 0 | 15 000 |
| Harvest (m3 sawlogs) | annual | 528 |
| Management Cost ($/m3 – sawlog) | annual | 4.20 |
| Stumpage Value ($/m3 – sawlog; aerial harvesting) | 60 | |
| Discount Rate ( percent, lowest Treasury rate) | 7 | |
| Term of Plan (years – set at minimum allowable under Forests Act) | 50 | |
| Discounted Present Value ($) | 391,600 |
This compares with a liquidation value of about $2.77 million (assuming a stand volume of 350 m3/ha and sawlog conversion of 60 percent). The smaller gap between Present Value and Liquidation Value reflects the faster growth rate of beech forest and the higher annual harvest possible compared with podocarp forest, albeit at lower stumpage values.
Note: Where managed as an adjunct to a farming operation, business risk may be perceived in quite a different light. Indigenous forest owners in these circumstances would often ascribe substantially higher values to the future income from the forest than the discounted present values indicated above, primarily because of the relatively small capital investment required and the often limited potential of the land for alternative uses. In such circumstances business decisions will not necessarily be made on the basis of cashflow analysis at commercial discount rates.
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