An energy crisis

Late rains have caused an energy crisis in Panama.  Hydroelectric generators, as with most tropical economies, are this country’s main source of energy; so when weather patterns don’t hold up, the whole system falters: Schools have been closed, A/C prohibited during certain times of the day, public offices have shortened business hours, and rolling blackouts may follow.  People are angry.  A national group of engineers has demanded a government plan for alternative energy, parents are confused and don’t know what to do with their children, and in cattle country, ranchers are demanding subsidies for feed, the problem has affected everyone.

Deforestation means reduced evapotranspiration (evaporation of plants and soil) resulting in both a decrease in rainfall and changing annual rainfall patterns with unusually dry conditions

In a recent newspaper article describing the predicament, the ranchers complain of climate change, expressing frustration at their parched fields and demand government action.  The problem, however, lies at their feet and looking for a bail-out is like sweeping dust under the rug.  Long-term watershed management has to be a part of the conversation.

Latin America’s #1 driver of deforestation is the cattle frontier. Photo credit: Andy Berry

In other words THE essential ingredient for your operation (water), be it agriculture, forestry or ranching is directly dependent on natural forests.  We can assume this (water cycle) process, can happen elsewhere, but there is significant evidence that suggests forests have an effect on precipitation in their immediate area.  (See TED talk ‘How to Restore A Rainforest’.)

There is simply NO conversation about the effects of deforestation on the water cycle.  Trees, brush and spores play an integral cycle in the tropical water cycle.  But because more pasture, means more cattle and more meat, (and therefore money) cattle ranchers will generally clear as much land as possible.  Right to the edges of their land.  It is no secret that the vast majority of deforestation in Central America is driven by the cattle frontier.    The process goes something like this:

1. Sell family plot

2. With the money, buy cheap land in remote areas (usually tree covered)

3.  Extract and sell all and any valuable lumber on property

4.  Burn

5.  Apply herbicide

6.  Introduce/establish hardy exotic grass for pasture

7.  Truck in cattle

8.  Make 2, maybe 3% annual profit

There’s a saying here: “A cattle farmer lives poor and dies rich”.  This isn’t because cattle eventually become profitable, it’s because of land-value appreciation.  And its true, cattle ranchers occasionally end-up owing significant real-estate.  Recently, while pitching an environmental restoration project to a cattle ranching association, a colleague of mine posed the question: what would your land be worth without water?  Unanimously, they all agreed that it would be worth close to nothing.  Interestingly they all understood, from firsthand experience no-doubt, that forested areas have more water and more rain.  The idea then is to convince them that if they can each allocate a small percentage of their holdings to conservation, particularly along waterways, that there is tangible economic upside.  I wrote about this concept in an earlier post.  Its an uphill battle I’m sure, but based on the receptive conversation I think these situations do make people reconsider their role climate change .   Conversation about drought, particularly in the tropics, must include reforestation and conservation.  Governments would do well to incentivize cattle operations that conserve forested areas or employ forward thinking silvo-pastoral systems instead of exacerbating the problem by buying them transported feed, or subsidizing beef.

The case for Genuine Mahogany

Last month, an article about Genuine Mahogany was featured in National Geographic magazine.  In it the author discusses its threatened state, demand, and solutions to curbing its illegal harvest.  Since most large Genuine Mahogany (Swietenia macrophylla) stands are found in the remote forests of South America controlling its illegal harvest has been difficult, despite its endangered species status (cites.org).  Apparently logging companies will buy or lease legal forest concessions, usually quickly depleted, but then will use these permits to sneak into adjoining protected forests or indigenous territories.  These circumstances are met with increased patrolling and stricter trade laws but in the end, like drugs, the product will make its way to the consumer.  Its a great read, but I ask myself why one of the world’s great timber species is still rejected as a plantation crop.  I know the answer, I’ve worked with foresters and timber investors my whole life, it all come down to a pesky insect.  The Mahogany shoot borer (Hypsipyla grandella), damages trees when its larva bores into and kills the terminal shoot. A lateral branch grows upward to replace the lost terminal shoot, resulting in a crooked main stem. Also, the damage to the terminal breaks apical dominance, resulting in excessive lateral branching. (Howard and Meerow 1993). Small trees whose terminal shoots are attacked repeatedly in successive years become extremely deformed, severely reducing its commercial value/potential.  The shoot borer has created a situation in which the only considerable plantations are located on islands (exotic to mahogany) where the moth doesn’t exist, namely Fiji and the Philippines.  That said, and despite what you may hear, the shoot borer can be controlled.  We’ve been doing it for years.  There is a cost effective, easy method for doing so, the only requirement is consistent management.  The big argument is that individual control is too labor intensive and therefore too expensive.  In Guatemala, we recently did a cost study of shoot borer management for 13000 trees.  In the first year we averaged $0.16 per tree, in the second year when the trees are taller and more difficult manage, that increased by 25%.  By the third year, no more control was necessary due to height and hardening of the shoot.  Furthermore mahogany requires less formative pruning than other species because it naturally grows vertically.  There is significant data on its growth, recently a comprehensive study conducted by the University of Munich estimated optimal rotation length for mahogany at roughly 25 years, which is more than competitive when compared to other hardwoods.  This estimate is roughly in line with our own growth predictions.

Geniune Mahogany stand with zero bifurcation

Genuine Mahogany stand with zero bifurcation on lateritic soil

The biggest advantage of Mahogany against, say Teak, is its incredible robustness.  Mahogany can grow on very poor  and diverse soils, which is evident when you consider its wide distribution from Mid-Mexico all the way down to the Southern Amazon.  Meaning, even if the labor requirements are slightly higher, you can establish it on cheaper lands.  In Panama’s Western Darien “teakable” lands cost anywhere between $4000 and $7000 per hectare, marginal lands may be procured at half of that price.  That ratio remains roughly consistent throughout Central America and I speculate Brazil is similar.

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Mahogany’s wide distribution is a testament to its vigor and durability

Mahogany is a “cites” listed species, meaning endangered.

The other side of this story is calculating market value for plantation mahogany and how it sizes up to Teak expectations.  And of course a quality comparison between natural and plantation mahogany.  I will be discussing both subjects in an upcoming entry.

Forest management & investment basics

Speaking to a few of my readers I have been asked to write a bit about the basics of timber management and investment.  And just for kicks I’m going to include a tidbit of its history:
HISTORY
In the fifth century a group of Romanian monks established a pine forest on the Adriatic coast.  This was one of the first examples of timber management established to provide the monastery with a source of fuel and food.  This (now) massive forest was mentioned by Dante Alighieri in his 1308 poem Divine Comedy.   In China the Han and Ming dynasty adopted forest management practices, and in Germany forest management and sustainable harvesting were practiced as early as the 14th century.  In almost all cases these forests consisted of different types of Pine and Oak.
The practice of actually establishing forests, at a large scale at least, came about in conjunction with the invention of the steam engine and the great navy’s of the colonial era.
TROPICAL FORESTRY
Tropical Forestry is the branch of forestry which deals with equatorial forests that yield woods such as teak and mahogany.   Tropical forest management, particularly with hardwoods is relatively new.  These forests weren’t really “managed” until the 20th century, which explains why we are still identifying best practices for the region.  However, there is speculation that the Mayans did indeed plant and manage certain tree species.  Unfortunately very little of this knowledge was passed down after the great cities were abandoned.  The advantage of tropical forests is that they grow year-round with no significant dormant period; tropical hardwoods can grow up to ten times faster than its temperate counterparts.
FOREST INVESTMENT
As I mentioned above, forest management has been practiced for centuries, however forest investment as we see it today is, in relative terms, new.  Since natural forests are finite and evermore protected, there has been and always will be a real necessity to establish “man-made” plantations.  When people or institutions invest in forestry, generally they are investing in the raw material for pulp or lumber.  Naturally, these are considered longterm investments since most timber species require between 15 and 40 years before they become “harvestable”.  That said, many plantations today are bought and sold at different stages of the harvest cycle.  Most of the large plantations, particularly in Latin America, have been sold at least once.  For example there are risk averse investors who prefer to enter once the forest has been established, at say, year 4 or 5.  The reason for this is that new forests are more prone to damage, be it physical or biological, when they are young.  An established forest (4+ years old) is generally more robust and has a higher survival rate.
Investments in the establishment of new plantations usually include costs for: land purchase, legal fees, nursery/germination efforts, planting costs, management, and the subsequent maintenance of a timber forest.  These investors often seek to exit at that 4 or 5 year mark.  (By the way, a well-prepared forest manager should be able to facilitate this transaction.)  Investors who come in at that secondary mark should expect to pay ongoing maintenance costs, as well as a start-up premium for entering at a low-risk stage.
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MARKET
Timberland investment has grown substantially as market volatility and inflation rates have boosted demand for tangible-asset investments.  The good news for timberland investors, is that no matter what the market is doing, the trees will continue to grow as long as the sun continues to shine and the rain continues to fall.  So, for example: if timber prices are down in a particular year (Due to housing market slumps, etc) the investor may simply choose to delay harvesting, and in the meantime the wood volume will continue to grow/increase.
Historically timber investments have shown market resiliency through the decades, several factors can be attributed to it continuing this performance trend:
  • Global population/demographic changes: expected to reach 7.5 billion in 2020
  • New environmental policy and regulation will limit natural-forest sources of timber
  • Increased demand for alternative energy sources
  • Global economic growth (as measured by GDP) is expected to double by 2030
  • Scarcity!
  • Demand from emerging markets, particularly in Asia (link to chart)
SUSTAINABLE/IMPACT TIMBER INVESTMENTS
This blog, as it were, aims to promote and discuss impact reforestation investments.  In theory these should not only perform financially but also:
  1. create stable job creation and economic development in the rural areas
  2. promote transparent and non-corrupt business practices
  3. promote environmentally friendly forest projects
  4. provide the investor with returns with 5 to 12% IRR’s
  5. mitigate pressure on standing natural forests
  6. create biodiversity protection
  7. at least partially rehabilitate degraded ecosystems and improve natural habitats
  8. sequester greenhouse gases in the atmosphere
  9. protect natural forest stands

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Tonewoods

Tonewoods are basically defined as those woods used in the construction of musical instruments.  There are many species used, in the tropics, the most popular are: Mahogany, Rosewood, Koa, Cocobolo and Ebony.  These are species chosen for there ability to carry “tones” and their aesthetic value.

mandolins

Tonewood buyers are extremely picky, pay high prices, and are dealing with a disappearing commodity.  Every major tropical tonewood species is cites listed,  meaning facing extinction if harvested at current rates.  Many, (possibly most) tonewood buyers are buying FSC certified lumber, and I believe they understand the value of their raw materials.  Makers of fine instruments have a direct, unmistakable, interest in preserving these species so it is logical that they take steps to purchase responsibly.  That said, I believe this effort is only half honest in that there are no tropical tonewood “reserves”.  Remember these species, for the most part are harvested from disappearing natural forests and are facing (rightfully) stricter trade laws.  To truly ensure the long-    term supply of tonewood hardwoods, an effort must be made to establish, manage and protect tonewood plantations.  The problem, as always, is convincing major instrument makers that an investment made today is worth the 25 (Mahogany) to 40 (Cocobolo) year wait.  But when you consider the legacy of companies like Gibson, Taylor, Yamaha, Martin and others, longevity is a necessity. That said, there ARE one or two established tonewood forests, mostly family projects, with trees 10+ years old, meaning the “wait” is reduced.  Why not partner with them?  Investing in the establishment, maintenance and preservation of rare tonewoods will be an essential part of the effort in preserving the tradition of wood instrument making.  As the owner of several guitars I can’t imagine a synthetic replacement for these beautiful woods.  A tonewood forest would not only be a model project to be emulated, but also the only answer to future shortages of precious tonewoods.

The value of conservation within an investment scheme pt 1

I am a firm believer in the protection and establishment of conservation zones in a plantation setting.  Aside from the nice dose of karmic energy that you are sure to receive, conserving natural forest stands can yield tangible benefits to your project.   These areas may function as small habitats and essential sources of food to local wildlife, which will no doubt add to your farm experience.  The aesthetic value too, is surely a consideration.  That said, I want to discuss the commercial value of conservation zones.

In Central America a typical farm might have between 5% and 25% of its total land area classified as natural forest.  Since these forests usually represent a reduction of the productive area, they are usually reduced to small areas of difficult topography, or along waterways; most are threatened.  There are, however, good reasons to protect and indeed expand natural forest areas in your project.  The first function is that of a buffer zone.  For example conservation areas bordering riparian or agriculture zones can function as a natural shield by reducing the threat of disease and pests (depending where you operate).  Similarly they’ll form natural barriers against wind and livestock, reducing risk and the possibility of damage.  With its well-established shade, a secondary natural forest may prevent the spread of invasive species like introduced grasses and therefore suppress the negative impacts that these may have on sensitive ecosystems and your plantation.

Simply put a well-balanced plantation system will see reduced forest diseases and insect outbreaks.

Rainforests make water.  The California Academy of Sciences puts it well: Since water vapor needs something to condense upon, airborne particles become the seeds of liquid droplets in fog, mist and clouds. With examination, the researchers found that tiny grains of potassium salts are the basis of raindrops in the Amazon.  The salts are not generated by soot or the nearby Atlantic Ocean, but by the living things in the rainforest. Fungal spores seem to be one of the biggest contributors. In other words, the forest itself is causing the rain.  In other words THE essential ingredient for your plantation, is directly dependent on natural forests.  We can assume this process occurs elsewhere, but there is significant evidence that suggests forests have an effect on precipitation in their immediate area.  See TED talk ‘How to Restore A Rainforest’.

Erosion control too, and the preservation of topsoil, around or near your plantation, particularly in the early years, will reduce run-off and preserve land area.  For example, natural vegetation will keep banks from falling into waterways or embankments.  The restoration and protection of forest wetlands and mangroves may effectively cleanse and filter water pollution and other wastewater management challenges.  The upsides are extensive..

Natural forest have monetary value too. The carbon-credit market for example, while developing as a platform, shows great promise.  Most people I know, even those that don’t directly invest or promote the carbon market believe it to be a fundamental instrument in giving natural forest more value.  This is a big issue so we’ll talk about it more at a later date, but I believe once the world’s financial woes settle down, the carbon market will see quick maturation.

Important also, particularly in the tropics, is the natural seedbank you are protecting.  Even in secondary forests, it is likely you will find genetic material for your native species plantings.  Additionally, these will be naturally adapted to the area in which you operate.

One of the obvious advantages is the potential upside for tourism and real-estate you are creating.  Those forests, often ignored even if they are protected, offer opportunities for nature trails, bird watching and more.  In Costa Rica I know of several plantation projects that were once considered strictly farmland (with no particular tourism potential) that today play host to lovely establishments.  I recently visited an old hotel in Bocas del Toro, Panama set in an abandoned cacao farm.  The owners thoughtfully removed exotic species, cleaned the understory, promoted the growth of native flowers and plants and built several lovely cabañas whilst reviving the cacao operation and conducting limited reforestation.  They’re booked solid.  A project that promotes responsible tourism, while functioning as a productive farm is a compelling prospect.  Highest and best use, means thinking outside of the box and envisioning land-use for all of its potentials.

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Last month we visited la Loma Jungle Lodge in Panama

My final thought: In the end natural forests are beautiful, provide eco-system services and should be respected.  That in itself is enough, don’t you think?

How much should I be paying for land?

How much should I pay for land?  As always, it depends.  In the past I’ve mentioned the rising demand for high-quality arable land, a finite resource in an age of infinite growth and consumption that will undoubtedly have an effect on farmland prices.  According to farmland.org, it is estimated that 1/32 of the worlds land mass is arable.  Moreover, much of this area lies in politically or geographically isolated areas.  In Panama, Nicaragua and Guatemala, where I have worked the last few years we have seen tremendous increase in farmland prices.  A recent report estimates farmland in Brazil has quadrupled over the last decade.  On the one hand, at least from a real-estate perspective, the upside could trump concerns about rising purchase and establishment costs, on the other we will face rising costs both as consumers and investors, meaning of course plantation costs, at all levels, will continue to rise.  In Panama we still find properties in the $2000 – $3000 per hectare range, however these are consistently in areas of isolated or difficult access or poor quality broken land.  Viable reforestation farmlands are fetching upwards of $4000, assuming medium to high scale hectareage.  Guatemala, a country with a strong commodity sector has seen a similar rise due to aggressive African Palm, Rubber and Sugar Cane projects.  It is reasonable to assume therefore that, particularly for small and medium scale forest investors, will see a significant drop in scale, due to higher per hectare costs.  One possible alternative is to revisit those cheaper lands..  Specifically, I’m referring to those lands that cost less due to soil and land conditions and will therefore be less appealing to industrial teak and agriculture investors.  Naturally, you can conduct an independent analysis of what exactly might growth on these “poor” quality soils, but it is likely that you will end up with a list of native species, naturally adapted over millenia, to local conditions.  Using hardwoods as an example, you can establish nitrogen-fixing species, to degraded areas and over time restore nutrient cycling and fertility self-reliance.  Pioneer species can also play an important role in degraded lands (I’ll write more on the subject next week).    The issue here is that there is a perception that plantation native species will garner less return within the 22 to 25 year rotation cycle expected of Teak.  Now, while I refute this perception, let us assume it is true simply because that’s what you may encounter.  The question is: do I ignore these cheaper lands, based on “teakability” or do I reanalyze how I might use, and likely improve, these lands?  In other words will I achieve my goals (whether financial, social or environmental) by ignoring degraded or deforested lands? or do I plant something that I know will grow well and in all likelihood produce something valuable?  Its the difference between doing nothing and making a sound investment.  My advice in a nutshell: let your property decide what grows best!

Site characteristics, like soil and topography, will make or break your plantation.

Site characteristics, like soil and topography, will make or break your plantation.