Economics of woodland

[James M]

Hi, We have 12 acres of Sitka, mid rotation (20 years old).

Only now are any of the trees approaching a useful size, but the small volumes and very depressed timber market means its just not of any commercial value - nowhere near it. The sawmills just dont want to know.

Sitka Spruce has 2 uses - aircraft frames many years ago (remember Howard Hughes' Spruce Goose?), and paper pulp, bceause it's very white and needs little bleaching. Well they ain't building Spitfires any more and a lot of paper is recycled.

In another 20 years the large trees may have some value, but we are not counting on it. You do need very large areas to make it commercially viable.

At 12 years though, too much volume is resinous bark rather than wood to make it of much interest to biofuel producers.

This breaks your heart - you'll get more money from selling the thinnings as firewood.

Depending on where the woods are, in this economic climate I think your offer per hectare is reasonable. Even then, you'll not get that money back out per hectare unless you sell it.

You'll minimise costs by doing the work yourself, or you could just leave it alone to self thin - that's one school of thought about how to manage spruce.

The best you can do is cut in some access racks, thin out some interesting bits and let the rest sort itself out. Working with Sitka draws blood! It's a hard environment.

However, I knew all this before we bought, it's value isn't just about money - it's all about what value it has to you. Every day I spend in the woods is another day added to the end of my life - that's the value to me.

Can I ask where the wood is - or even which country? It sounds familiar :-)

J

[Stephen1]

From a financial point of view though the "value" of small spruce woods doesn't derive from potential income relative to capital investment - as would be the case when valuing a business - it is largely factored on the tax benefits to a 40% tax payer with a capital gains liability from selling a business assett. As I said this keeps the price of these properties artifically high and disproportionate to their potential value as a small business. They have a demand and value over and above their potential to generate income in the short to medium term.

[Smarticus]

I am struggling to make any sort of business case for buying commercial woodland - but surely there must be a business opportunity here somewhere ? Maybe I have my statistics wrong - so would welcome any help on refining my assumptions.

Lets do a 100 acre example with say 50% 10 year old and 50% 60 year old timber, all Sitka Spruce.

Say the woodland costs £150,000 to buy.

The annual costs are small (negligble ?) and the annual income is non existent (tiny ?)until say the 60 year old timber is felled in say 5 years time and the 10 year old timber is thinned again in say 10 years time. From what I can tell the net return (sales revenue less costs of felling, transporting etc) from 50 acres of 65 year old timber is about £12,000 (based on prices prevailing today and average yields per acre and low cost of transport as the customer - commercial chipboard plant - is relatively close). The cost of replanting 50 acres is then all of the £12,000 net return. The cost of thinning appears to be covered )just) by the income from selling thinnings. So I can't see how there is any return (cash generation) from the original £150,000 investment. And the tax benefits are pretty illusionary as tax is only "saved" if profit is generated - and there doesn't appear to be any profit at all.

Maybe I have missed grant income, or my yields are wrong, or current timber prices are much lower than will prevail in 5 years (if biomass really gets going perhaps?)or I am exagerating costs. I would be grateful if anyone can help me refine my assumptions here or confirm that the answer is as poor as it appears.

[James M]

There's a reason we all have main jobs ! - with Sitka, commercial income from selling timber is about economy of scale. You need to be doing it on large industrial clearfelling scale to make meaningful money - we are talking thousands of acres. The FC own large chunks because that is how the governemt subsidises the industry - without that there'd be no industry.

100 acres is in no mans land - not enough income to cover purchase price and running costs, and too large to manage on your own as a hobby. If you are serious about making money go and buy a near rotation, post thinning 10,000 acre plantation and do it properly. I'm not being sarchastic.

There's a reason the likes of woodland.co.uk split them into small parcels - it places them squarely in the hobby market, with perhaps a few quid from selling firewood from the back of the land rover to offset a few costs.

I saw lots of 100+ acre plantations for sale, but it took longer to find one smaller that suited me.

You may make money by selling on after a while and realising a capital gain because a) the trees are growing, adding some small value, and b) with woods that small there will always be a leisure market.

The CGT is a bit of an illusion because all you are doing is deferring payment on tax from the original asset you sold to buy the woods.

People who buy woods to avoid things like inheritance tax probably have the money to buy thousands of acres anyway! Most people are not in that league!

You can't offset running costs against tax because you don't pay tax on selling timber, although you can claim back VAT but it's hardly worth the effort.

I know half a dozen owners, none bought for tax benefits.

So, to recap:

No profit from selling timber.

It does have annual running/maintenance costs.

Inheritance tax benefits, but you'll be dead then so do you care?

No running cost tax benefits.

Huge time commitment - have to do the work yourself, at £150+ a day for a forester you cant afford not to.

No chance of adding value by building anything decent on it.

Natural risks - e.g. frome, windthrow - if your wood blew down tomorrow you've lost your investment, and then have to pay more to replant it.

This all sounds depressing and cynical until you realise that if you buy it for your own enjoyment, then none of the above really matter. If you put yourself in a position where you are under pressure to make money, you'll end up hating it.

Buy for this reason, and this reason alone => buy it because you love it and it makes your life better.

Anything else you'll be disappointed with.

Can I ask again whereabouts they are? Dont worry - I don't need any more trees - 16,000 is enough to be going on with!

[Stephen1]

James I think you are mistaken with regard to the impact tax concessions has on the price small parcels of spruce go for. I don't think you need be quite so dismissive of other people's experience. Averaged over the last ten years about 40% of my income is from forestry. In Wales parcels of spruce in the 50-200acre range, which as you rightly say are too big for a hobby and too small to be commercially viable, are mainly sold to people who "justify" the purchase financially from a cgt or iht tax planning point of view.

The only other suggestion I might offer to Smarticus about 50-100 acre conifer parcels is to try and find one that is classed as a Planted Ancient Woodland Site(PAWS) in Wales on a well drained lowland site. The grants in Wales for restoration of sites like these are very attractive indeed. You can do the work, and claim the grant, yourself. It is now widely understood that the best practice to restoring these woods is to open things up very gradually - meaning it is well within the capabilities of a fit person to slowly acheive this over a decade. You won't have the overheads a contractor would.

Between selling 3 loads of firewood (1 ton each) a week and restoration grants you could quite reasonably expect a net income of £12000+ a year from a 50acre spruce (or better still douglas fir) PAWS - for about a 30 hour week. Not a lot of money, but a great way of life, and the satisfaction of watching a conifer plantation gradually restored to its former glory.

In the longer term as the wood gradually becomes "prettier" it will gain value as its perceived amenity value increase. Its obviously hard to predict the future, but in 15-20 years the capital value of the now prettier wood would be much higher (if the market, and aspirations of potential purchasers, at that time is what it is today, a big If but not an unreasonable thought) - you could parcel it up and sell of the lots at a considerable profit in real terms - can be thought of as a pension pot paid in to over the years working with the wood to make that £12K look a little better.

I suspect that the connection you would develop with the land would make selling it impossible at that point though. I've been working with our wood for over 10 years now and even Richard Branson couldn't afford to buy it off me!

[Smarticus]

So spiritually uplifting but financially and physically crippling. Perhaps I am going to have to rethink this whole thing......

[James M]

I wasn't dismissing your experiences, I wasn't even talking about them - I'm talking about mine.

Smarticus is going through due diligence as he should, I went through the same process with a similar type of wood and if it's helpful to him to hear my experiences then he can make use of them - if there was a PM system here he could call me and talk about it. You can't decide you're right and censor the other side of a debate because you dont like it.

I'll dismiss them as being being irrelevant to our experiences in Scotland. We wont make 12k a year for firewood when for miles in all directions from our wood people can walk out of their front doors and come back with an armful inside 5 minutes for free. Nobody talks about PAWS up here, there's so much land there arent any to speak of. Grant aid is either non-extistent, meagre or tortuosly extruded via the SRDP machinery to the extent that for a £50 an acre thinning grant it's not worth the bother, and that's the word direct from the FCS. They don't care about CCF or replanting with broadleaves - as long as the timber supply is there. The whole system is geared towards mega plantions. When the market collapses it doesnt bother them because they know the trees will still be there when the market comes back up. It doesnt matter if owners go bust in the meantime - the trees will still be there to fell.

There's another 90 acres next door and 15 acres the other side which I've been offered but I wont touch it. I own two businesses and I know that without heavy tax payer subsidy the woods will never be a third. I end up giving timber away to people I know and local neighbours.

That's why I made sure I don't rely on my woods for income, I rely on them for fun and they generate a lot of that. If their value dropped to a penny it wouldnt affect me in the slightest. Compared to the most basic one bedrommed flat near where I live, I got those woods for peanuts.

Seems elsewhere in the UK the largest tax benefit to be had is having the tax payer subsidise forestry activities.

It's OK though, you don't need to thank me as a tax payer - just think of me next time you plant an Oak the government has paid for with my tax dollar and put a little tag on it - 'Donated by James M with love' ;-)

[Stephen1]

James

Thank you for your tax - a silver linning!

Stephen

[Stephen1]

Smarticus wrote: "So spiritually uplifting but financially and physically crippling. Perhaps I am going to have to rethink this whole thing...... "

Sorry to hear that Smarticus - hope you come up with something!

Best wishes

Stephen

[tracy]

This is such good information for many people- thanks folks. If you do want to be in private contact so that you can talk more about specific issues, let me know and I can put you in touch through email.