This is a financial model that calculates the Internal Rate of Return (IRR) from an investment in one hectare of commercial blackwood plantation. The model is setup in an Excel spreadsheet:
Here’s the link to find out more about the IRR function in Excel:
This model is a work in progress and is designed to encourage feedback, comment and updating.
You can download the model and use your own numbers if you wish.
Contact me if you want help modifying the model to your personal requirements.
To begin with I went back to the New Zealand Blackwood Growers Handbook that contains an financial model on page 77. I set this model up in a spreadsheet and came up with the same values as shown in the handbook.
I then modified the model according to my own recommended simplified plantation regime. This simplified plantation regime reduces the initial establishment and management costs, and reduces the workload required in the first 10 years.
I also changed some of the values in the model to better reflect what I consider are current costs.
- A 35 year rotation length;
- In 35 years time there will still be a high demand for quality appearance-grade timbers. Technology is rapidly changing many timber markets, including construction-grade timbers, but I think there will always be a demand for premium solid appearance-grade timbers;
- The objective is to grow the plantation to an average stem dbh of 60 cm, with all trees pruned to 6.2 metres. This should produce approx 300 cubic metres of premium blackwood sawlog;
- The plantation is established on a site suitable for growing commercial blackwood;
- The land is already owned (ie. no land purchase costs are included). But go right ahead and add land costs and see what it does to the investment;
- The simplified plantation regime is used planting 200 blackwoods per hectare;
- One of the largest costs in blackwood plantations is protection/fencing to protect the trees whilst they are young. Blackwoods are highly palatable to a wide range of domestic and wild herbivores, so good protection is essential. Protection costs will vary considerably according to plantation size, shape and location/terrain.
- Annual weed control (spot spraying) is essential whilst the trees are becoming established. Blackwoods do not like competing against heavy grass/weed cover. After 5 years I have included a general weed control (slashing) every 5 years for general maintenance. By about age 20 years the blackwoods should have the site under control with little need for ongoing weed management.
- Actual costs will vary according to individual circumstances. Most of the costs are my best guesses. If anyone has some real data to contribute that would be appreciated;
- No harvesting or transport costs are included;
- Other costs can be included fairly readily, such as rates and other overheads, and management costs;
- The sawlog price is my current best guess at a competitive market price for a large parcel of quality blackwood sawlogs. For example the December 2015 Hydrowood log tender had 14 quality blackwood logs sell for an average of $625 per cubic metre.
The model shows an internal rate of return on Tasmanian blackwood plantation investment of around 10% over 35 years.
For a 35 year investment that is a decent return. Fixed term deposits are currently offering around 3.00% over 4 years (updated Feb 2016).
If a very good site is planted and hence the rotation shortened to 30 years the return on investment increases to 12%. Alternatively if the value of the plantation after 35 years is only $100,000 per hectare the rate of return is still 9%.
In other words the investment is quite robust to changes in conditions and markets.
Commercial blackwood plantations are a profitable investment under current market conditions.
I wouldn’t recommend buying land just to grow commercial blackwood. Blackwood is not a broad-acre crop but requires certain site characteristics to grow successfully.
Many Tasmanian farms have areas that are currently underperforming or neglected; covered in weeds, bracken and blackberries. These areas are not contributing to farm income, but many of these areas are suitable for growing commercial blackwood.
If a farm has a number of these areas, the investment and the workload can be spaced over time, for example by planting an area every 5 years. After 35 years a set of periodic incomes is achieved from regular harvesting and replanting of plantation blackwood.
Now the one major feature missing in the forest industry is greater market and price transparency to help encourage this investment.