Forestry Investment Blog

In 2009 the national farm income in Ireland was down 25% on 2008 and the year on year fall in product prices coupled with cuts in farm schemes has provoked renewed interest in forestry.

Forestry provides an attractive alternative to farmers faced with challenging times ahead as it contributes to the bottom line from the very beginning. The premium is real income and doesn’t have to be reinvested in the enterprise.

Recent trends indicate that significant increases in the areas planted will continue to rise in the next decade. In addition Minister Killeen’s Department announcement of funding for the Afforestation Programme of roughly 7,000 hectares in 2010 boosted confidence in this sector further. So in terms of initial outlay, there is none as the afforestation grant covers the cost of establishing the plantation and maintaining it for four years.

As an added benefit farmers who plant in 2010 receive annual tax free premium payments up to 2030, thus providing farmers with a valuable income stream for years. This payment is not subject to income tax however, it does attract PRSI contributions but even this isn’t bad news as this will qualify the farmer for a contributory old age pension. Even better the returns from forestry now compare favourably with and often exceed those realised from traditional farming enterprises.

A well managed plantation is an ideal retirement enterprise as it is constantly appreciating in value. At today’s prices it is estimated that the value of timber produced from a hectare of land at clear fell is worth €15,000 net of costs. Research has also indicated that farmers who opt to plant trees on some or all of their land are very satisfied with the venture as it provides them with a steady income over the years. This type of venture would best suit farmers who are thinking of or want to exit their existing farming enterprise but don’t want to sell their land.

Today’s market provides the right investment opportunities as with forestry land prices falling the afforestation scheme gives a real opportunity to enable farmers to take their first steps in becoming a plantation owner.

According to Tony Hu, managing director of Toronto’s Monarch Corp. in Shanghai developers are raising less than 600 wood framed houses each year and few of the approximate 1.3 billion people living in China have the luxury of calling a house with a garden their home.

“What I’m talking about is 100 per cent two-by-four housing market. The whole structure is made by wood,” Hu says. “Overall this is a tiny market in China.”

In the past post and beam buildings was traditionally the norm, so it’s not like China is unfamiliar with wood buildings. After the formation of the Communist Party-led country on mainland China in 1949 the People’s Republic of China turned to building soviet style six storey concrete and steel apartment buildings. This accomplished two objectives, first it relieved pressure on China’s already depleted forest resources and it also helped China cope with its growing population migrating to urban areas.

Today there is a new class of people with self made wealth who are in the market for wood framed homes built from Canadian lumber. While this market is small at the moment Hu believes that in the next 10 to 20 years the wood framed residential building market could be “huge”. Hu claims that a greater awareness about the low carbon impact of wood will drive demand especially at a time when the national government is creating policies designed to protect the environment.

Hu works closely with Canada Wood Group and Forest Investment Innovation Ltd, which are two of Canada’s main forest product organisations who have been chipping away at China’s massive but largely untapped potential market.

For the past few years the Canadians have been trying to create a demand for wood. In 2008 they rebuilt a school that was destroyed in the Sichuan earthquake using Canadian wood; it is now designated as a safe zone due to its structural stability. They have also been involved in helping to reform building codes and teaching industry players and academics to consider lumber. The centre of Canada’s wood industry presence in China is in Pudong, a bustling district in Shanghai and China’s financial hub.

At the Shanghai Expo 2010 workers at the Vancouver pavilion are putting up a wooden roof truss to top a facility that will serve as a showcase for B.C. wood products and designs. The demonstration projects, which have had the blessings of Chinese governments, have been a good way to show Canadian products in use. But a big part of the job in China has been engaging the industry and teaching the next generation of architects, designers and developers.

Despite it still being early days for Canada’s wood industry in China inroads have been made. In 2007 Russia imposed a bigger tax export on logs as a direct result of this British Columbia saw exports of SPF lumber to China grow. Currently the tax is at 25% and eventually there are plans to increase that to 80%. Timber imports through the Suifeihe Port, the entry point for Russian wood, were down 40% for the first nine months of last year compared to the same period in 2008. During the same period timber entering through the Taicang Port (northwest of Shanghai and in the Yangtze River Delta) where Canadian timber usually arrives in China was up 79% as of September 2009.

According to Forest Investment in the third quarter of 2009 timber volume from all sources entering through the Taicang Port surpassed one million cubic meters. At that point China became the second largest consumer of Canadian forest products after the US, overtaking Japan.

Hogan from Forest Investment has watched as industry players from countless countries have dropped into China in recent years looking for a quick ‘yes’ or ‘no’ answer on whether there are markets for their products.

“The truth is always in a grey area and Canadians want a black-and-white answer. In Canada, everything is so mature. But in China, it isn’t,” Hogan says. “People show up with these ideas and a bunch of money and mostly they go home with no more money and not much to show for it and they blame the Chinese, but they don’t do the market research beforehand. They don’t hire people to follow through on stuff, they don’t check to see who they’re talking to,” he says. “So you have to do all of that stuff first.”

Hogan also stresses the importance of having a presence on the ground in China when trying to build a market. Now that Forest Investment is doing business in Hebei, Hogan’s organization gets calls daily and weekly to help sort out such logistical issues as delivery routes for lumber. “In Canada we’re very much focused on building with wood so the infrastructure is invisible,” he says.

When talking of the forests of the ocean you might be forgiven for thinking that I am talking about coral. But it is whales that are referred to as forests of the ocean due to their ability to store large amounts of carbon in their bodies. Much like when a tree is cut down, whales release that stored carbon when they are killed.

In fact after a century of whaling it is estimated that more than 100 million tonnes, which equals a large forest’s worth of carbon, has been released into the atmosphere.  Scientists from the US revealed this estimate of carbon release by whaling at a major ocean sciences meeting in the US.

Dr Andrew Pershing from the University of Maine and his colleagues from the Gulf of Maine Research Institute calculated the annual carbon storing capacity of whales as they grew.

“Whales, like any animal or plant on the planet, are made out of a lot of carbon,” he said. “And when you kill and remove a whale from the ocean, that’s removing carbon from this storage system and possibly sending it into the atmosphere.”

In the early days of whaling the animals were a source of lamp oil and when this was burned it released carbon directly back into the air.

“And this marine system is unique because when whales die [naturally], their bodies sink, so they take that carbon down to the bottom of the ocean. If they die where it’s deep enough, it will be [stored] out of the atmosphere perhaps for hundreds of years.” Said Dr Pershing.

Dr Pershing’s team has estimated that 100 years of whaling has released an amount of carbon equivalent to burning 130,000sqkm of virgin forest. In relative terms this is admittedly a small amount when compared to the billions of tonnes produced by human activity every year.  But in terms of the marine ecosystem, whales play a very important part in storing and transporting carbon.

In Brazil reforestation schemes have been set up to allow trees to grow and store carbon, this means that the Brazilian government is able to earn and sell carbon credits. Dr Pershing has suggested that a similar scheme be set up for whales in order to protect and rebuild their stocks.  By simply leaving large groups of whales to grow, he said, could sequester greenhouse gas, in amounts that are comparable to some reforestation schemes.

“The idea would be to do a full accounting of how much carbon you could store in a fully populated stock of fish or whales, and allow countries to sell their fish quota as carbon credits,” he explained. “You could use those credits as an incentive to reduce the fishing pressure or to promote the conservation of some of these species.”

Other scientists have also found that this research poses a fascinating conundrum.

Professor Daniel Costa, a marine animal researcher from the University of California, Santa Cruz, told BBC News: “So many more groups are looking at the importance of these large animals in the carbon cycle. And it’s one of those things that, when you look at it, you think: ‘ This is so obvious, why didn’t we think of this before?’.”

To explain why whales are so good at storing carbon Dr Pershing pointed out that with their massive size whales are more efficient than smaller animals. He expanded this theory by comparing a small dog with a large dog.

“My wife’s 6lb (2.7kg) toy poodle eats one cup of food per day and my dog – a 60lb standard poodle eats five cups of food per day,” he said. “That’s only five times as much food but my dog weighs ten times as much.”

So by taking this analogy further the marine carbon credit scheme could be applied to other large marine animals such as white sharks and the endangered Bluefin tuna.

Dr Pershing said: “These are huge and they are top predators, so unless they’re fished they would be likely to take their biomass to the bottom of the ocean [when they die].”

It seems that community forestry programmes in Indonesia are becoming a victim of their own success. Illegal loggers in Lampung not satisfied with their territory in the Bukit Barisan Selatan and Way Kambas national parks are now targeting reforestation areas managed under community forestry programmes.

West Lampung Forestry Office head Fauzi said large volumes of illegally logged timber had been found recently to have originated from forested areas run by local communities.
“This finding means the logging has also taken place in community forests where local people put in a lot of hard work,” he said.

The forest programme in West Lampung was regarded as the country’s second most successful after Yogyakarta’s. The programme served as an example for others to see measure against when creating the ideal forest rehabilitation project. Now coming into its tenth year 6,537 farming families living around protected and production forests in West Lampung have been involved in the community forest programme.

Besides being a key source of livelihood for farmers the protected forest spanning 12,000 hectares in Register 45 in Bukit Rigis and Register 34 in Tangkit Tebak has been turned into dense forests. Previously this land was stripped bare by conversion and illegal logging.

For those wishing to participate in the community forest programme the local forestry office provides a five year permit to residents in order to manage critical areas in production and protected areas. The condition to receiving this permit is that they form groups and carry out forest conservation. The groups must also have a management system in place and a good set of organisational rules.

”Bukit Rigis is included in West and North Lampung regencies,” Fauzi said. “The Bukit Rigis forest in West Lampung has been kept safe for the past 10 years because residents around the forest monitor it closely and arrest all illegal loggers.”

Jamaludin, a coffee farmer whose land borders the Bukit Rigis forested area said that he often sees illegal loggers at work in the forest.

”I recognize them, but I’m afraid to stop them because they carry sharp weapons,” he said. “I’ve told the authorities about it repeatedly, but they only followed up last week in a raid led by the Way Tenong district chief.”

For the past decade Jamaludin has been on the lookout for illegal loggers.

“I report them to the Way Tenong district chief because I don’t want to be accused of being an illegal logger myself,” Jamaludin said. “I also want to join the community forest program so I can get involved in managing the forest. I’ll register for it at the West Lampung Forestry Office this year.”

So far police have questioned 11 residents of Fajar Bulan as witnesses in the illegal logging case where dozens of trees were felled. A mere 1.5 cubic metres of timber was left behind by illegal loggers who made off with the bulk. With only a few kilometres between the forest and the main road it makes it easy for the illegal loggers to get to and transport the timber.

Satori M. Baki secretary of the Indonesian Crisis Centre at West Lampung blames the widespread illegal logging on negligent law enforcement. He said that when illegal loggers in Lampung are arrested most are released due to insufficient evidence.

”At the end of December last year, the Kotaagung District Court in Tanggamus regency released an illegal logging suspect,” he said. “Some are punished, but they only get light sentences because they’re charged with theft, and that doesn’t serve as a deterrent. “They should face the more severe charges as stipulated in the forestry law,” he added.

Last week the UN Secretary General Ban Ki-moon launched a new high level group aimed at addressing climate change. Heading the group will be the UK Prime Minister Gordon Brown and Ethiopian Prime Minister Meles Zenawi. The aim is to mobilise financing to aid developing countries in order to combat the effects of rising temperatures that they are experiencing.

In December 2009 Secretary Ban observed that “All countries have agreed to work towards a common long-term goal to limit the global temperature rise to below 2 degrees Celsius; many governments have made important commitments to reduce or limit emissions; countries have achieved significant progress on preserving forests; and countries have agreed to provide comprehensive support to the most vulnerable to cope with climate change.”

These commitments have been backed up by $30 billion of pledges for short term adaption and mitigation measures for under developed countries. There are further commitments to raise $100 billion by 2020 to achieve those goals.

Before the commencement of the 2009 conference it was highly anticipated that a signed agreement would result in forest rich countries, such as Guyana receiving funding to battle the effects of rising sea levels and to continue maintaining their forests.

In 2008 Guyana’s President Jagdeo commissioned the US consulting firm McKinsey to assess the economic value of Guyana’s rainforest if Guyana were to begin large scale commercial logging. The figure they came to was a monstrous $580 million annually over 25 years if Guyana decided to log instead of preserve. So to make conservation a viable option President Jagdeo has asked the global community for $580 million per year to launch green initiatives and mobilise Guyana into the green era.

According to Secretary Ban “There will be an even balance between developing and developed countries”, hence, the reason why President Jagdeo might be sitting on this high level panel.

Over the last two years President Jagdeo has been travelling around the world trying to gain support from various governmental and non governmental bodies for his Low Carbon Development Strategy or LCDS. He claims that the scheme should generate money to boost Guyana’s economy, while also protecting its rainforest. In the last few years Norway has invested $250 million in President Jagdeo’s scheme, Conservation International invested $700,000 and the US has helped fund it though REDD although the amount hasn’t been disclosed.

However President Jagdeo and his government have suffered severe controversy in regard to the scheme he created for Guyana. During an interview with British Hard Beat News, President Jagdeo avoided any and all questions about corruption in his government and lack of transparency where money is concerned. He went on to say that under the agreement with Norway Guyana can actually increase their deforestation. Later he told the global community that the Guyanese people are all aware of his plan and fully back the initiative.

Under the surface it looks like all President Jagdeo can associate forest protection with is money and at the same time denying the reality of Guyana by selling the world propaganda.

Guyana appears to be on the cross roads of change and it must be kept in mind that the voice of Guyana is 800,000 strong and they all need to be involved.

In the words of Guyanese Journalist Neil Marks “People in Guyana understand that the LCDS strategy means preserving trees and that they should get money for it – but the understanding stops there.”

It was reported that eleven tropical rainforest countries met on Tuesday. Among them were: Indonesia, Brazil, Gabon, Costa Rica, Congo, Cameroon, Colombia, Malaysia, Papua New Guinea, Peru and Democratic Republic of Congo.

At that ministerial meeting, held in Indonesia’s Bali province, they all agreed to commit to a sustainable forest management system.

The group otherwise known as F-11 said in a joint press statement that the tropical rainforests are home to diverse biological species and storehouses of genetic resources. The forests also serve as sources of livelihood and a repository of cultural heritage. The ministers emphasised that the forthcoming global climate talks in 2010 must include the issue of forests as an integral component.

Mr Marty Natalegawa, the Indonesian Foreign Minister that the meeting was very useful and productive. Other member countries were also able to share their experience on forestry issues.  The topics covered in the meeting were biodiversity, climate change and sustainable forest management.

Belden Namah, the Papua New Guinea Forestry Minister said that all ministers in the meeting supported the initiatives for forest management practices.

“We support initiatives taken by the F-11 in the area of sustainable forest management,” said Namah.

It was also agreed in the meeting to admit Guatemala, Suriname and Guyana to the association.

It has been announced that the Indonesian Forestry Ministry is drafting a decree that will include palm oil plantations in the forest sector to comply with international standards in reducing carbon emissions. Hikmat Soeriatanuwijava a Greenpeace Indonesia media campaigner warned that the policy involving converting palm oil plantations into forest could lead to massive forest conversion. However, the ministry strongly denies this.

“By definition, oil palm plantations will be defined as forest, but its management will be under the Agriculture Ministry,” Tachrir Fathoni head of research and development at the ministry, told The Jakarta Post on Monday.

Mr Fathoni argued that its neighbour Malaysia and the world’s second biggest palm oil producer after Indonesia had included palm oil plantations in its forest sector for years and suffered no massive forest conversion. In return Malaysia can reap financial incentives from the UN Framework Convention on Climate Change (UNFCCC) of carbon trade. They are able to do this as the UN only categorized trees at a certain height as forest trees without identifying their species.
“It is to anticipate the implementation of the REDD scheme,” he said.

The deforestation rate in Indonesia is the highest on the planet with more than 1 million hectares cleared every year due to illegal logging and forest conversion on a grand scale (including palm oil plantations). Reducing emissions from deforestation and degradation (REDD) will allow Indonesia to receive financial benefits by stopping this trend. Environmental activists have said that poor environmental management of oil palm plantations in Indonesia has led to the increase of greenhouse gas emissions.

The Indonesian Agricultural Ministry, who manages the sector disagrees and insists that the palm oil industry does not affect the rate of deforestation. Agricultural Minister Suswono claims that the palm oil plantations utilise critical or marginal land into productive land and cover only 7 million hectares or 6% of the country’s total forest area.

Last year the Agricultural Ministry issued a decree that allow palm oil plantations to be developed in Indonesia’s peat land. On hearing this, the Greenomics Indonesia urged the Forestry Ministry to focus on managing industrial forest concessions (HTI) and forest concession holders.

“The ministry’s much-promoted sustainable forest management also remains in question. The Forestry Ministry should focus on its main core business,” Greenomics executive director Elfian Effendi told the Post.

Even with ongoing international pressure against deforestation and illegal logging, globally tropical forests are being destroyed at a rate of approximately 13 million ha per year. This is roughly four times the size of Belgium and this destruction is responsible for 20% of global greenhouse gas emissions (this is more than all the world’s planes, trains and automobiles combined). Despite this only a measly 1% of tropical forests are certified by third parties as being sustainably managed.

However, times are changing and areas that were once lush rainforests cut down for agricultural purposes and then left barren are now being bought up by forestry investment companies. These companies are using barren land to grow forestry plantations and in the process are solving two problems.

By planting the trees on land that has already been cleared for a number of years it means an area of pristine rainforest is left untouched. So the carbon sink provided by the natural rainforest is not diminished and is actually added to by the plantation (as it grows). In addition where sustainability is concerned, by processing timber more efficiently plantation forests create the option for natural forests to be managed for other forest values.

Plantation forests or sustainably managed forests as they are sometimes known play an important role in the meeting the world’s sustainable supply needs. With increasing global wealth, global demand for paper and timber is projected to grow significantly over the years ahead. However, global levels of production of forest products will fall far short of increasing demand. In tomorrow’s global economy the most prized products will be natural resources that are produced sustainably.

So from financial standpoints forestry plantations make a hell of a lot of sense. From a quality perspective the trees can be modified to achieve uniformity in terms of species and size, this helps to increase the process and manufacturing efficiency. In Brazil for example, eucalyptus trees planted in forestry plantations are capable of supporting superior tree growth and can grow up to three times faster than native tropical species. This rapid growth means that a eucalyptus tree is fully mature after 6-8 years allowing more timber to be produced in a shorter period of time.

Brazil is in a strong position with operations already established and is fully equipped to provide a variety of credible and sustainable alternatives to traditional products in the global market place. What is surprising though is that Brazil is not only on track to export a large amount of its resources but is also set to consume the rest in local markets. By 2016 Brazil’s infrastructure will have been developed significantly enough for it to host both the World Cup and the Olympic Games. If you add this to Brazil’s growing middle class and housing deficit then all the signs are there for a sustained construction boom across the country. This will allow Brazil to become a major consumer of its own products.

In terms of longevity success will depend upon a key shift towards strategies that are sustainable and where managing the crop intensively will ensure that the full mix of end uses are maximised. In my opinion Brazil is definitely becoming an example of this and is most assuredly one to watch in the coming years.

As an investor have you ever considered buying trees to enhance your investment portfolio? For the past twenty years forestry investments have been gaining a reputation as a sound alternative to stocks and bonds. They have gained interest from both institutional and retail investors for their diversification and inflation hedging characteristics. The forestry sector is continually evolving, creating new opportunities for investors to allocate capital for both income and appreciation.

As of 2008 the management of the forestry sector has steadily moved from the manufacturers of timber related products to Timber Investment Management Organisations (TIMOs). The advantage of TIMOs is that they have the market knowledge to maximise productivity and increase investor return. They employ experts in forestry management, research analysts and market experts who can design and execute the appropriate investment strategy.

Why forestry?

There will always be a need for timber, either for building materials, paper, furniture, etc and as forest related product development grows the demand for timber increases. To put it in perspective according to the Society of American Foresters every American consumes a 100ft tree each year. This is in despite of paper recycling efforts.

As mentioned before forestry investment is known for being an inflation hedge. Trees increase in value ‘on the stump’ at a rate greater than inflation. In the last century (1905-2005) timber prices have grown at a rate that is approximately 3% greater than inflation.

So if a recession hits as was the case two years ago and the original buyer cannot go ahead with the purchase then the trees can continue to grow and increase in value until a new buyer is found. This of course does depend on what the trees are being grown for. If you have invested in a eucalyptus plantation in Brazil then the chances are that when the trees are cut down they will be turned into charcoal to be used in the Brazilian steel industry. Since a law was passed early this year whereby all steel producers have to use charcoal from eucalyptus plantations it is unlikely that your investment would be affected by a recession.

A forestry investment is also a lot less risky than playing the stock market and the returns can beat them hands down. When measuring returns using the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, forestry investment returns exceeded those of the S&P 500 from 1990 through 2007. In that period of time, the NCREIF Timberland Index annual compounded return was 12.88% versus 10.54% for the S&P 500 index. This excess in return was also provided with less unpredictability as shown by the Sharpe ratios for the same period (1.06 for timber, versus .45 for the S&P 500), underscoring the risk/return benefits of timber over the overall stock market.

In terms of an investment portfolio the addition of a low correlation forestry asset will increase its diversification, which can only be a good thing. As a point of interest the NCREIF Timberland Index returns from 1990 through 2007 showed moderate to weak correlation against equity and fixed-income indexes and a negative correlation to real estate.

The land required to grow forestry plantations is limited and demand is continuing to grow as population and commercial development increases. While the land needed to grow forestry plantations on it can be leased the majority of forestry investors prefer to purchase the land. Depending on location, some property can be targeted as “higher and better use” land that can be sold to developers at a premium, providing additional appreciation benefits for timber owners.

The risks involved with forestry investments are fairly minimal. While the collapse of markets due to a recession is a potential risk, forestry plantations act as a natural warehouse. Stock can be stored on the stump and when the financial storm is over it is worth even more than when it began. The only other potential risk I can think of is natural disasters, such as fire or flood. However if an investor is smart they spread their investment around and make sure that there is ample insurance to cover any potential loss.
Timber ETFs are a relatively new, less expensive investment option. In November 2007, Claymore Securities announced the launch of the first U.S.-listed global timber ETF, the Claymore/Clear Global Timber Index ETF (PSE:CUT). CUT tracks the Clear Global Timber Index, which includes companies that own or manage forested land and harvest the timber for use and sale of wood-based products, such as lumber, pulp and paper products. Components must have at least a $300 million market capitalization and the index excludes any companies that do not own or manage forested land. Any component in the index cannot exceed 4.5% of the total index.

But by far and away the best reason for including a forestry investment in your investment portfolio is its ability to enhance risk/return characteristics. As well as being an excellent portfolio diversifier and inflation hedge, forestry makes a great investment due to the fact that its returns are equal to or better than many other asset classes.

Looking back 2009 could be considered as a turning point for the forestry sector. During the time of global economic crisis where businesses were losing money regardless of which sector they were in forestry (while taking a hit) was seen as a rock (rather than a tree). In recent months the industry has bounced back better than ever and shows real promise of generating very profitable returns. New investors are encouraged and the entries of investment funds, which seek to inject $4 billion in to the sector, are very welcome indeed.

In addition to the $4 billion already promised, pension funds such as: Previ (Banco do Brazil), Funcef (Federal) and BNDES (National Economic and Social Development) are also investing in this sector. However no numbers have been discussed yet.

The funds will be used in all stages of development, from the buying of the land, to the planting of the trees, to the eventual harvesting and selling of the trees. Naturally this will all take time with the average plantation plot requiring seven to eight years to mature.

“The funds focus on longer terms, because the formation of a forest of eucalyptus, for example, requires at least seven years return. It is a safe investment, long term, with a phased planning, which brings good return,” said Fernando Henrique da Fonseca president of the Brazilian Association of Planted Forests.

The participation of investment funds in forestry plantations is nothing new in Brazil. Today 90% of Brazil’s planted forests are the property of processing companies such as Suzano Papel e Celulose, Eucatex Florestal, Aracruz and Votorantim Celulose e Papel. The remaining 10% of plantations are owned by outsourced companies.

“It is an attractive market, which has a lot to grow and we estimate that even with the influx of investment funds participation grow from 10% to 20%,” analyzes Fonseca.

The growing demand for timber from forest plantations is in part due to greater awareness worldwide of the affects of deforestation on greenhouse gases. In Brazil the government have taken the first steps towards a greener economy and recently passed a law whereby all the steel manufactures have to use eucalyptus charcoal in their factories.

However, even with the planned expansion of the plantation areas in the coming years, the sector is likely to have a supply greater than demand.

“They are high investments that are made in this sector. If we build a new plant, investing $1.5 billion, but needed another $500 million for the formation of new forests, to maintain the operation of this new plant,” concludes Fonseca.

Big news on the US forestry front, International Paper and MeadWestvaco are in talks to transform forestry plantations in the south-eastern US by replacing native pine with genetically engineered eucalyptus, a rapid growing Australian tree that already dominates the tropical timber industry.

The practice of splicing foreign DNA into food crops has become a common sight in corn and soy but until now researchers and companies haven’t dared attempt genetically engineering a crop that is a cornerstone of the US economy.

This hasn’t daunted ArborGen LLC as they look set to overcome the obstacles which have stopped other companies in the past. Of which the biggest one was to control the tree’s fertility and stop it from invading native forests. ArborGen believe they have this solved as they bank on a controversial gene splice that restricts the tree’s ability to reproduce. If this fertility control technology is proven effective it could pave the way for more varieties of wild plants to be genetically engineered for use as biofuels without fear of invasiveness. The only fear with this technology is that seed firms will exploit it to the detriment of farmers.

The American government’s Energy Department has collaborated with ArborGen on this project as they can see the attraction of growing perennial plants on marginal land. Unlike annual farm crops the plants (which include various grasses) can live and grow for many years and be harvested when needed. As mentioned previously there is a fear among scientists about the effectiveness of the fertility system used, which has never been carefully studied over a number of years to test that it can control plant spread. In a report they say that more research is needed before this system can be relied upon.

Regardless of the criticism ArborGen is going ahead with seeking government deregulation of its eucalyptus, which was genetically modified to resist freezing temperatures in 2008. If given approval, ArborGen have said that they would transform the timber industry by becoming the first company to produce bioengineered trees on a massive scale.

The ideal scenario for ArborGen would be a huge jump in productivity from growers buying their seeds and becoming the preferred tree stock for a new generation of bioenergy refineries. Timber would take over from coal as the primary export and this is already in the pipeline as it is whispered that the German utility RWEAG is going to build the world’s largest wood-pellet plant in Georgia to supplement its coal habits.

Its catch up time for the US, as countries such as, Brazil already have vast forestry plantations and have moved from net wood importers to exporters. According to ArborGen pine cannot compete with eucalyptus for sheer growth rate.

“The United States is behind the game on this,” said Les Pearson, ArborGen’s director of regulatory affairs. “Lots of countries around the world have been growing eucalyptus for many decades.”

It is because of the increase in competition from South America that demand for traditional pine has declined.  According to corporate estimates this troubled industry could allow up to 10 million acres in the US Southeast to be used for fast growing eucalyptus plantations.

Curtis Seltzer, a timber consultant who has studied ArborGen and calls its trees a ‘game changer’ said it still remains doubtful if the emerging bioenergy industry will be enough to challenge the Brazilian plantations.

“It’s not clear to me that biomass will pick up the slack for the traditional markets (as they) ebb,” Seltzer said. “But it could.”

But, as mentioned twice before, the bottom line with this project is that ArborGen must satisfy the concern from environmental groups and regulators that its modified trees will not spread untamed through forests. If it does then not even government incentives and a price on carbon will get this project off the ground.

A deal has been struck by British Airways to build the first plant in Europe to produce jet fuel from waste matter.

The plant construction is due to begin within the next two years with plans already in place to start fuel production by 2014. Once the project is completed 500,000 tones of waste will be turned into 16 million gallons of fuel. In total 1,200 new jobs will be created.

In a statement BA said that the plant would produce twice the required amount of fuel to power all of its flights from London City Airport. However, only 2% of flights from Heathrow will be powered by the biofuel.

On an environmental note BA claims that the plant will drastically reduce the amount of waste sent to landfill. This can only be a good thing as landfills produce methane, which is considered by many to be a bigger producer of greenhouse gas than carbon dioxide.

The biofuel is created when waste products are put into a high temperature ‘gasifier’ to produce BioSynGas. The gas is then converted into biofuel using a chemical process called Fischer Tropsch. All waste produced from this process has been earmarked to power the plant as well as supply 20MW of electricity to the national grid. The solid waste from the plant can be used as aggregate in construction. The ideal source material for the plant is waste matter that is high in carbon content.

The US company Solena Group have already been commissioned to build the plant with BA committed to buying all of the fuel produced. It will take four years before the plant is ready to produce fuel and is unlikely to work at full capacity straight away.

The only stumbling block in BA’s way is that the fuel produced by the plant is not yet certified for use in the UK, although it is in other European countries. A BA spokesperson said that BA is confident of getting the certification by the time the plant starts producing fuel, either for use in a blend with traditional kerosene or on its own.

Ever heard of wood pellets as an alternative energy source? No? Well I’m not surprised as I hadn’t even heard about them until the other day.

Wood pellet manufacturers have been around since the 1970s when the first experiments were conducted using animal feed pellet mills to process biomass into pellets. Shortly afterwards a few pellet stove makers started production although at the time the market wasn’t taken very seriously.

Back then the price of oil and gas was relatively cheap, climate change was unheard of and global warming was still a myth. So there was no price advantage for the use of incineration wood pellets and the environmental advantages didn’t influence the market towards using the pellets. Those that were in the biomass market at the time such as the biomass log stove owners, weren’t interested either. The pellets cost more than the logs they were using already and as the true benefit of increased efficiency wasn’t known they didn’t see any reason to change.

It was only when oil and gas prices started to rise in the start of the 21^st century and climate change became a fact of life that bio energy came into its own. The wood pellet fuels market was starting to engage some serious interest from investors as more green carbon taxes were placed on fossil fuels to encourage low carbon renewable fuel.

Wood pellets are formed from a reserve that is already part of the existing carbon cycle. Incineration wood pellets simply reintroduce the carbon collected during the growth of the tree back into the atmosphere, new trees then absorb this carbon dioxide and the cycle continues.

Today these pellets are made from both softwood and hardwood residues such as pine and spruce. The majority of these residues come from timber processing plants, which are used in housing production. The downside to this is that it leaves the pellet manufactures dependant on the housing market.

In 2008 manufactures reached crisis point when the recession hit and the housing market became one of the worst sectors affected.  This meant that with no new houses being built and a reduced demand for timber the waste sawdust used to make wood pellets became more expensive and less readily available.

To stop this crisis from happening again the wood pellet manufactures called for a wider use of different sources for wood pellet fuels. In addition consumers who use the wood pellets for home heating want more fuel flexible pellet stoves to be able to burn the pellets.

Despite the doubts, which surround the REDD project, private companies and investors are putting more and more money into carbon sink projects. The research group Ecosystem Marketplace reported last month that these investments are in the main being made in anticipation of government imposed greenhouse gas restrictions.

During 2007-08 the global forest carbon market was worth an estimated $71.6 million and $21 million in the first half of 2009. Of the 2008 investments 53% went towards afforestation projects (planting seeds/trees on non-forest land). A further 24% went towards REDD focused projects.

Any future REDD project support will be dependant on the efforts of international and domestic policy makers to impose limits on forest related greenhouse gas emissions. Cap and trade programs may be brought in to establish funding mechanisms to support carbon sequestration initiatives.

According to Elly Baroudy, manager of the World Bank’s BioCarbon Fund industrialised and developing countries are likely to continue their efforts to fund and manage forest carbon efforts. “However we move forward, forest carbon is there,” she said.

Would it surprise you if I said that my car runs on chip fat?

Well it doesn’t.

But it could if biodiesel becomes more commercial. Biodiesel can be made from many different types of oil, including chip fat and animal fats. In fact the idea of using chip fat to power a car isn’t so far fetched as some home owners are already using it to make their own home brew of biodiesel for their cars.

Biodiesel is becoming more popular with companies and commercially biodiesel is made from a variety of plant sources. Different countries use different ingredients depending on their resources; the US makes their biodiesel from soy and corn products, whereas Brazil makes it from sugar cane.

While biodiesel is on the up it is not expected to replace oil by more than 25%. The reason for this is that there is a fear that by using food products for fuel will drive the price of those products up so much that no one saves any money by using them. The counter argument to this is that there is enough land in the world to support both fuel and food crops. The problem is managing that land effectively.

Because of this debate supporters of biodiesel are looking at alternatives to food products as fuel. One of the plants suggested was algae and having researched it I have to agree that it does look good. Apparently I am not the only one who agrees as Bill Gates has already invested millions in developing algae as a biofuel.

A few facts about algae:

• Algae is the world’s fastest growing plant
• Algae processes sunlight in on of the most efficient ways on Earth
• Useful algae can be grown in sea water
• When the algae have been processed and the oil removed, the remaining matter can make an excellent mulch, feedstock or even fertilizer
• Algae for biodiesel is still a relatively new concept and its full commercial capabilities are as of yet unknown

As mentioned previously the main criticism of biofuel is that it takes up land growing fuel that could be used to grow crops. However clever companies have taken the initiative to grow algae in tanks. These tanks can be put anywhere where there is a lot of sunlight. Desert areas are ideal, and best of all this does not impact on the amount of available farming land.

The other challenge for biofuel production is how to transport it once it is made without the transport costs out weighing the benefits of using biofuel. So far it has been proposed to build biofuel plants close to the coast and use boats to transport it. Admittedly this is not entirely ideal but it is a step in the right direction.

In comparison home brewers who use algae as a biodiesel fuel source aren’t faced with the same problems as a commercial supplier. Home brewers grow the algae on their own land (presumably their garden) and as they are using it for their own use there are no transportation issues. The only problem they may face is how to refine the process to make it more cost effective.

Already there are many home brewers dedicated to finding the right mixture of growth and production which leaves them paying less for their algae fuelled biodiesel than what they would pay at the petrol station.

UNECE/FAO Forest Products Annual Market Review, 2008-2009, is now available online. The publication provides general and statistical information on forest products markets and related policies in the UN Economic Commission for Europe region (Europe, North America and the Commonwealth of Independent States). Theme for the 2008-2009 edition is “Forest products markets in a global economic crisis”.

Follow the link below to access the United Nations Economic Commission Annual Forestry Products review

http://timber.unece.org/fileadmin/DAM/publications/Final_FPAMR2009.pdf

Despite an ongoing crackdown the number of forestry officials in Laos taking bribes is increasing according to Rangsy Sibounheuang the deputy chief public prosecutor.

According to Sibounheuang logging companies in central Laos have been bribing officials to cut logs beyond their government approved quotas. “If a lumber company’s quota allows them to cut 1,000 cubic meters (35,300 cubic feet) of wood, they will cut 1,500 cubic meters (53,000 cubic feet) instead and then bribe the inspectors for the difference,” he said. “This is happening primarily in Savannakhet and Khammuan provinces and the recipients of the bribes are mainly middle-level officials — we‘ve convicted some of them already.”

But after two to three years of increasing incidents involving bribery of forestry officials the number is finally slowing. This is largely due to stricture penalties, which have been an effective deterrent to would-be offenders.

“[The bribery] is now decreasing because we have been giving out stiff penalties. If the incident is serious enough, it will merit jail time and fines,” he said, adding that penalties differ from case to case and also depend on the level of the official involved.

In the main the bribing of Lao forestry officials is principally committed by logging companies although individuals continue wide scale logging throughout Laos. “It’s not just companies, but also citizens without permits. Citizens continue to illegally cut logs in national forestry preserves as well as in national parks,” Sibounheuang said.

A recent World Bank report stated that a low population density and moderate rate of natural resource exploitation in comparison with neighbouring countries has allowed considerable amounts of natural resources in Laos to survive. However the report named those same natural resources as playing a significant role in supporting rural communities and contributing towards the national economy. In particular Laos enjoys a forest cover that is significantly higher than its neighbours. This is precisely the type of natural resource that attracts investment from abroad.

A wave of foreign investment from China, Thailand and Vietnam is bringing economic growth and generating jobs in Laos but this is also increasing pressure on land and local communities who exploit the country’s natural resources.

“Forest cover has declined from 70 percent to 43 percent over the last 50 years, largely due to clearing of lowland forest for permanent agriculture and unsustainable logging,” the report said.

“If no action is taken to change this trend, Lao’s forests will dwindle to 31 percent by 2020,” the WWF said.

The report also named timber and hydropower as the country’s primary exports, which accounts for two-thirds of total export value.

Royal Dutch Shell, Europe’s second biggest energy company has just signed a memorandum of understanding with Cosan, Brazil’s most powerful bioethanol producer in a joint venture estimated to be worth $12bn. This makes the Anglo-Dutch company the biggest oil major in biofuels as it battles to restore faith in its investors about profitability.

If finalised, the move will cement Brazil’s position as the world’s alternative energy superpower. This will give Brazil the potential to ship large quantities of fuel to the US and Europe. Shell is currently lobbying the US administration to reduce its tariffs on biofuel imports in a move that could transform profitability.

At the moment the company is expected to announce a 40% drop in quarterly profits on Thursday, however the company hopes that their aggressive moves into biofuels it has scheduled for the next two years will signal to investors that it still has growth potential.

Analysts expect the group to report a quarterly profit of $2.9bn. This would take its annual profit to $13.4bn, down on the $31.4bn it made in 2008. There are suggestions the company will make further job losses on top of the 5,000 already announced.

Cosan is Brazil’s leading bioethanol producer in a country where nearly all new cars run on sugar cane. In terms of production Cosan’s existing bioethanol production currently stands at 2bn litres, with this scheme that figure is estimated to double.

The big concern among environmentalists is that as Brazil becomes synonymous with biofuel, agricultural land which is currently being used for food crops could be shifted to fuel crops creating pressure to cut down more rainforest.

Kenneth Richter, who campaigns against biofuels, said: “Massively expanding sugar cane plantations to produce biofuels will significantly threaten Brazil’s rainforest. The biofuels industry is pushing agricultural activity on to forested land where trees are cut down to make space for farming. To be truly green energy companies should invest in clean, renewable and safe forms of energy like wind and solar power.”

Shell’s response is that the sugar cane for ethanol uses approximately 1% of Brazil’s arable land (354m hectares). In addition none of Cosan’s plantations are anywhere near rainforests. Using statistics from the EU Shell pointed out that bioethanol from sugar canes produces 71% less carbon dioxide than conventional fuel. In fact the company is so positive about biofuel that they believe it will become more and more important as an energy source as the number of cars in the world goes up. By 2050 the number of cars in the world is estimated to reach 2bn.

Mark Williams, Royal Dutch Shell’s downstream director, said: “We see joining Cosan as a way to grow the role of low-carbon sustainable biofuels in the global transportation fuel mix.”

A City oil analyst said: “Shell has hitherto focused on the laboratory bench looking at second-generation biofuels. This is the first major big move into biofuels by some way by an oil major.”

Rubens Ometto Silveira Mello, Cosan’s chairman, said: “This new company will be a great force and it will help ethanol to become a real world commodity.”

A recent study suggests that trees are growing faster as a result of global warming. In one of the forests, located at Maryland, US, researchers discovered that an extra 1.8 tonnes of timber per acre is appearing there each year. The scientists predict that the tree saplings are sprouting up more quickly than at any time in the past 225 years.

The scientists explained in the study that the accelerated growth was down to three factors. One the rising levels of atmospheric carbon dioxide, two higher temperatures and three longer growing seasons. Researchers spent more than 20 years tracking the growth of 55 stands of mixed hardwood forest plots to make this discovery. They found that more than 90% of the stands were found to have grown two to four times faster than expected.

Ecologist Geoffrey Parker, from the Smithsonian Environmental Research Centre in Edgewater, Maryland, said: “We made a list of reasons why these forests could be growing faster and then ruled half of them out.” He went on to say that the best explanation was a response to climate change.

Over the length of the study carbon dioxide levels had risen by 12%, average temperatures had increased by nearly three tenths of a degree and the growing season had lengthened by 7.8 days. This meant that the trees had more carbon dioxide to help them obtain energy from the Sun and an extra week in which to grow.

You can find out more about these findings in the journal Proceedings of the National Academy of Sciences or you can follow this link http://www.pnas.org/

There are clear signs wherever you look nowadays that forestry investment is attracting the bigger institutional investments funds. I stumbled across a number of articles over the weekend,  here’s one to mull over…

http://www.hedgeweek.com/2010/01/28/32338/earth-capital-partners-hires-sustainable-agriculture-and-forestry-team

The article focuses on Earth Capital Partners (ECP), which is effectively a private equity company specialising in renewable energy markets for investment. Now that’s becoming a recurring theme here at forestry-invest, and I’ve been banging on about the appeal of wood energy markets as an investment.  Our sponsors, Greenwood Management are obviously very much at the forefront of  renewable energy investments but i do try to retain as much objectivity as possible.  The case for wood energy investments,  as part of a diversified investment portfolio,  does seem to be getting finally picked up by the financial community.

According to the article,  ECT have taken on a forestry investment team from IBIS Capital Management and EMP Global.

What is also notable from the article, is that the forestry and agricultural investment team has a brief to focus on deploying the investment capital into Latin America in particular with a number of institutional grade funds.

Quoting directly Stanley Fink, non-executive chairman of Earth Capital Partners:

“Appointing this new agriculture team takes us one step closer to having a diversified range of sustainable investment opportunities for institutional investors. One of the positive developments to come out of Copenhagen was an agreement regarding deforestation and reforestation, and this will make the sector even more attractive for investors. ECP’s Earth Dividend adds another layer of value in this sector clearly differentiating our product from others in the market.”

Forestry Invest is sponsored by Greenwood Management