Projections

Deforestation Trends

To meet the demand for tropical hardwood lumber, growing populations are under pressure to cut old growth forests for cash and to provide space for agriculture. The World Resource Institute has calculated the current rate of tropical rainforest destruction at 50 million acres a year. They also estimate that less than 700 million acresremain with growing global pressure to protect much of that resource. The confluence of these forces will create a global shortage within 14 years (as of 2009). Currently, tree farms and plantations supply only 1-2% of the tropical hardwood market. Even given the most optimistic projections, it is highly unlikely tropical hardwood farms will fill more than a few percent of the current worldwide demand.



Historical Prices

The rate of increase in tropical hardwood prices since records started being kept in 1972 has averaged 13% per year. To remain on the conservative side we have based our estimates on the more conservative value of the 6-7% annual price increase that has been documented for lumber in general by the forest industry over the last 100 years. In the case of tropical hardwoods, this is very conservative. Demand and limited supply has resulted in a price increase of almost 1000% in just the last 10 years.

Agriculture and clear cut lumber practices of the past century have eliminated over 90% of the hardwood forests. Strong preservation measures are defending the remaining native stands. This has fostered a new interest in cultivating certain hardwoods for the wood artesian market, and knowledge is growing rapidly. In developing our projections we have analyzed the performance of a diverse range of tropical hardwoods in plantation settings. Much of our data comes from the performance of Acacia mangium a very closely related tree from the same genus. The potential rewards and the satisfaction of bringing a sustainable source of these woods to market have lead to our focus on ifilele, mahogany, sandalwood, spanish cedar and teak for this years planting. In typical lumber outlets it can have a retail range from €20 to €65 a board foot. Wholesale information is difficult to come by, but conservatively it could be 50% of these numbers. Only the potential tree owner can decide which tree is right for them.

Assumptions and Projection Notes

Trees are sold in 100 tree blocks. Even though tree growth can vary between species and location, for the purpose of this analysis we will are using the growth rates typical of other plantation grown tropical hardwoods. Intensive management practices such as supplementing major and minor nutrients, selective thinning of stands as the canopy closes and protection from competitors and pests is expected to result in growth rates similar to plantation grown Acacia mangium and other tropical hardwoods. A very conservative starting price for wholesale hardwood was set at €9.00 per board foot. Trees are planted with an initial spacing of 3 meters to generate a much better early growth form. This encourages long straight trunks and actually increases the yield of quality lumber. Roughly 15% of the trees will be removed prior to achieving marketable size in order to favor the growth of the best trees and maximize the total yield of lumber. Commercial forestry refers to this process as “releasing” the remaining trees to achieve their full potential. If the trees were planted with greater initial spacing to avoid thinning, the resulting trees will tend toward a bushy growth form with little marketable lumber. If they were planted closer and no trees were removed, their growth would be stunted once the tree canopy closed. This management technique has proven to be the best way to get the most quality lumber out of a planting. The lumber from additional thinning harvests prior to the final harvest is treated as marketable for the purposes of these calculations. Market conditions at the time will determine actual prices for the lumber produced.

We are assuming a conservative 6% rate of lumber value inflation. The actual rate of increase has been closer to 13% for tropical hardwood lumber. We have applied this same rate of increase in the cost of milling, harvesting and processing. We are basing the yields, thinning and harvesting rates on the experience of other tree farms in Hawaii and in Central America, but the amount of this charge will be based on the actual cost at the time of harvest. The actual timing and amount taken at any thinning or harvest will be determined in consultation with our forestry team and be based on best practices and the most current scientific information. The projection table is intended to give you a better understanding of the process, but actual results may differ from these estimates in either direction. The 10% maintenance and care fees are not charged to the tree owner until their lumber is either ready to deliver to them or is sold for them. If it is sold for them it is deducted from the proceeds of the sale. If the lumber is to be delivered to the tree owner or another designated party, the harvesting, milling, processing, care, maintenance and shipping costs will be billed at that time.

The growth rate of trees and the market value of lumber are both influenced by a wide array of factors. It is possible to get a feeling for the future value of trees planted today from the historical trends and expert opinion of what the future holds for the tropical hardwood markets. The first table of projections is a blend of what we consider both conservative and likely. Dozens of contributing factors have been gleaned from a wide range of sources to arrive at this compact and readable table. There are many possible variations of this table based on changes to some of the basic assumptions. To get a feeling of how changes in some of the assumption affect the results, we have included two additional tables showing what would happen with some of the possible changes.

Carrying Capacity

One of the factors that greatly affect the yield of tree farms in general is the carrying capacity of the land. One of the ways this is quantified is as basal area per acre. This is the total cross sectional area of the bases of all of the trees in one acre of land. To get a starting value for the carrying capacity of our unique planting site we examined a high density test planting within the property. It had a basal area of 477 square feet per acre. For our projections we utilized a carrying capacity of 250 square feet per acre. This results in the values obtained for the thinning and harvesting rates shown in the primary table. In our two comparable tables we reduced this carrying capacity to 175 square feet per acre. This would result in higher thinning rates and less trees in the final harvests. One could develop limitless tables just by varying this parameter between the reasonable ranges of 150 to 475 square feet per acre. 250 square feet per acre seems a reasonable expectation.

The Cost and Value of Early Harvest Timber

Another variable that has been considered is the value of early harvest timber. In all cases we assign no value to the trees that are culled or thinned in years 1-7. We do however value the wood derived from the year 8 thinning harvest. Our projections are based on marketing this lumber at the projected lumber value at that time. As mentioned above, this value has been obtained by taking a current discounted value of €9.00 per board foot for hardwood and adding an annual price increase percentage. For the two alternate tables we reduced the value of this thinning harvest by cutting the value in half. That is intended to offset any difficulty in marketing early harvest lumber. Our market research leads us to believe that a full value market can be developed for that timber. Additionally, it was a concern that costs of processing smaller timber might be higher than anticipated so for the alternate tables we doubled the cost of milling and processing.

Lumber Value Increase Rate

As mentioned in above we have assumed a rate of price increases for marketable lumber of 6% per year. The actual rate for all tropical hardwoods as a group has been around 13% per year. Some of the hardwoods vastly exceeded even the most generous of these increase rates. To adjust for that possibility we used rates of price increase of 7% per year and 9% per year in the alternate tables.

Summary

Any projection of future yields, of either timber or financial value, is greatly influenced by the assumptions made in creating these tables. We strive to be balanced in our choice of these values. The alternate tables are presented to give the tree owner some insight into the processes involved and aid them in making their purchase decisions. We encourage everyone to make every effort in evaluating the reasonableness of these assumptions. Many other factors will influence the outcome of a given tree crop. As the science evolves, HLH will adjust procedures to maximize yields.

Projection Tables for Sandalwood Sustainable Hardwood Timber Investment


Year

Number of Trees Harvested

Marketable Wood per Tree in Board Feet

Value Per Board Foot

Gross Proceeds

Milling Harvesting and Processing Costs

Net Harvest Proceeds

Maintenance and Care

Harvest Net Profit

Cumulative Net Proceeds

1 to 7


Non-Marketable


Thinning and selection





8

37

22

€13.53

€11,013

€407

€10,606

€1,061

€9,546

€9,546

13

10

78

€18.11

€14,126

€515

€13,611

€1,361

€12,250

€21,796

17

10

152

€22,86

€34,747

€1,277

€33,470

€3,347

€30,123

€51,919

21

17

260

€28.86

€127,561

€4,685

€122,876

€12,288

€110,588

€162,507

25

11

354

€36.44

€141,897

€5,218

€136,679

€13,668

€123,011

€285,519

















Total Proceeds


€285,519


This projection table is based on the following assumptions:
The market price for sandalwood in today's market is €9.00 per board foot
The rate of increase in market prices for sandalwood will average 6% per year
The carrying capacity of our planting site is 175 square feet of basal area per acre
The average growth rate is 1" of diameter per year
The overall mortality and initial culling rate is 15%
The milling and harvesting costs will remain the same for small diameter trees
The market value for 8 year old timber will be consistent with the overall sandalwood market

Sandalwood Projection Table Alternate #1

Projections for 100 tree lot


Year

Number of Trees Harvested

Marketable Wood per Tree in Board Feet

Value Per Board Foot

Gross Proceeds

Milling Harvesting and Processing Costs

Net Harvest Proceeds

Maintenance and Care

Harvest Net Profit

Cumulative Net Proceeds

1 to 7


Non-Marketable


Thinning and selection





8

43

23

€7.23

€7,146

€989

€6,157

€616

€5,541

€5,541

13

16

91

€20.27

€29,513

€961

€28,552

€2,855

€25,697

€31,238

17

9

155

€26.57

€37,065

€921

€36,144

€3,614

€32,530

€63,768

21

3

260

€34.38

€27,167

€515

€26,653

€2,665

€23,987

€87,755

25

9

356

€45.65

€146,263

€2,115

€144,148

€14,415

€129,733

€217,488

















Total Proceeds


€217,488


This projection table is based on the following assumptions:
The market price for sandalwood in today's market is €9.00 per board foot
The rate of increase in market prices for sandalwood will average 7% per year
The carrying capacity of our planting site is 175 square feet of basal area per acre
The average growth rate is 1" of diameter per year
The initial culling and mortality rate is 15% with another 5% over 25 years
The milling and harvesting costs for small diameter trees will be double the average
The market value for 8 year old timber will be one half the overall the overall sandalwood market

Sandalwood Projection Table Alternate #2

Projections for 100 tree lot


Year

Number of Trees Harvested

Marketable Wood per Tree in Board Feet

Value Per Board Foot

Gross Proceeds

Milling Harvesting and Processing Costs

Net Harvest Proceeds

Maintenance and Care

Harvest Net Profit

Cumulative Net Proceeds

1 to 7


Non-Marketable


Thinning and selection





8

43

23

€8.23

€8,135

€989

€7,146

€715

€6,431

€6,431

13

16

91

€25,31

€36,851

€961

€35,890

€3,589

€32,301

€38,732

17

9

155

€35.73

€49,843

€921

€48,923

€4,892

€44,030

€82,763

21

3

260

€50.44

€39,343

€515

€38,828

€3,883

€34,946

€117,708

25

9

356

€71.20

€228,125

€2,115

€226,010

€22,601

€203,409

€321,117

















Total Proceeds


€321,117


This projection table is based on the following assumptions:
The market price for sandalwood in today's market is €9.00 per board foot
The rate of increase in market prices for sandalwood will average 9% per year
The carrying capacity of our planting site is 175 square feet of basal area per acre
The average growth rate is 1" of diameter per year
The initial culling and mortality rate is 15% with another 5% over 25 years
The milling and harvesting costs for small diameter trees will be double the average
The market value for 8 year old timber will be one half the overall sandalwood market