Good things come to those who wait

19 July 2017

Claire Wightman compares the long-term gains from woodland creation with the low steady profits from pasture management.

When considering farm diversification, forestry is often at the end of the list of possible options.

In large part, this is because it is a permanent change of land use, unlike most habitat management of agricultural land. Once ground is planted with trees it is legally required to remain so forever.

When considering the relative value of pasture land against the potential value of woodland, a long-term view is imperative as well as careful consideration of the financial model required for grazing versus woodland, both of which vary considerably.

A recent example in Ross-shire, in which Galbraith was involved, provides an interesting case study where the option of planting with productive woodland was considered alongside carrying out improvement works to increase the profitability of grassland pasture. Generalised financial models were established to allow comparisons to be made between the two land uses.

The financial model of grassland pasture

The main opportunity for diversification into productive forestry on farm land is on pasture land, where the farming potential can be low and the forestry potential can be high. Some ground which has limited cropping opportunities can can still have excellent potential for growing quality timber, whether native or non-native. In many cases, such pasture will be let on a seasonal or annual basis at a relatively low rent. However, the inputs to achieve this income are also relatively low, perhaps only re-seeding every 10 years or so.

The overall cash flow of pasture land is summarised in the chart below.

The main features of this model are:

  • Consistent but low income
  • Regular and predictable expenditure

The financial model of woodland creation

There is currently good financial assistance available for the creation of new woodlands through the Forestry Grant Scheme. However, applicants do need to pay for the establishment work before they can claim any grant. Maintenance grants are then available for the next five years to ensure successful establishment.

Once a woodland is established, it will take between 25 and 35 years to reach the first thinning stage. There is now a healthy and growing market for both small conifer products and hardwood firewood, so most first thinning operations should return a small profit. Thinning can then be carried out on a five to 10-year cycle. As the trees grow and the quality of the woodland improves, the profit from each thinning intervention should also improve. There is no requirement to restock (re-plant) after a thinning operation, however there are maintenance costs for productive woodlands, particularly with regard to maintaining access routes.

The timing of clear felling varies greatly depending on the species that is planted and site conditions. Sitka spruce may be ready for clear felling at age 40, while Douglas fir or Scots pine is best harvested at between 80 and 100 years old. Clear felling generates significantly more income than thinning but there is a legal obligation to restock (re-plant) woodlands after this process. Thus, a spike in income is followed by a spike in expenditure.

The costs of restocking are similar to those of establishment but there is much reduced grant income available for restocking. However, foresters are increasingly experimenting with continuous cover systems which use natural regeneration and special thinning techniques to avoid clear felling and the associated restocking costs.

A typical cash flow based on a clear-felling approach is summarised in the chart below.

The main features of this model include:

  • Peaks of income and expenditure - not a steady cash flow
  • Unpredictable income dependent on timber quality and sales market conditions
  • Greater long-term profit margin manifesting around year 45
  • Significant peaks of income and expenditure and either end of timer rotation cycle due to establishing/re-establishing woodland costs

Comparison

These models, albeit general scenarios, demonstrate the basic differences in the financial models of the two land uses. Pasture management can be summarised as a low input, low profit financial model with a steady and predictable cash flow, while productive forestry can be summarised as high input, high profit with significant peaks and troughs of income and expenditure.

Site specific factors which directly affect the profitability or productive forestry operations must also be taken into account. For example:

  • The scale of a proposed woodland directly affects its efficiency and profitability - the larger the woodland the easier it is to generate profit
  • Accessibility is key to maximising the value of the woodland. Although most woodlands can be accessed with modern machinery, if the cost is too high the profitability of the operation will fall

When considering diversifying farmland by planting trees it is important to take account of the long-term impact of any change, particularly on cash flow.

On the right site, forestry can be a very good alternative income stream for those with patience and time on their side.

Claire joined Galbraith in 2013 and qualified as a member of the Institute of Chartered Foresters in 2014. She is responsible for woodland management on a number of highland estates and involved in all aspects of woodland management from harvesting to new planting.

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