Teagasc’s Decision Support for Forest Creation

Tom Houlihan tells us about Teagasc's Forestry Programme 2023-2027 and shares financial insights for farmers and landowners.

The new Forestry Programme 2023-2027 offers farmers and landowners highly attractive opportunities in relation to forest establishment with a range of planting options available. As part of its comprehensive support services, the Teagasc Forestry Development Department is organising a nationwide series of 36 forestry clinics between January 22 and February 13, 2024. These will provide great opportunity for a confidential one-to-one consultation with your local Teagasc forestry advisor and to avail of independent and objective advice, empowering you to make informed decisions.

Well planned forestry can provide financial, environmental and social benefits for you. In this article Forestry Specialist Tom Houlihan gives an example of the financial supports available for the attractive “Forest Types” under the Department of Agriculture, Food and the Marine’s most recent Afforestation Scheme.

Teagasc’s Forest Investment Valuation Estimator (FIVE) supports decision making in relation to potential land use and forestry options. FIVE software can be used to model indicative financial returns for forestry land use (forest creation) and management options (e.g. forest thinning). It provides financial analysis output that supports decision making, particularly in relation to reviewing your pre-planting options and comparing criteria such as tree species, yield classes (productivity index) and forest rotation lengths, based on landowners’ preferences and crop objectives.

Potential timber revenues are generated by FIVE through the selection of appropriate forest characteristics and management regimes. A range of variables are used as inputs in a typical financial analysis. These include tree species, site productivity, forest rotation length, relevant premium payments, establishment and on-going management costs as well as potential thinning and clearfell timber volumes and revenues. Future cost and revenue streams from forestry are generated by FIVE and are discounted (brought back) to present day values and presented as Net Present Values (NPVs).

The NPV refers to the net returns to forestry over one (or more) forest rotation(s). In order to compare forestry with other farm enterprise options (at an indicative level), the FIVE tool expresses different forest crop rotations on an annual per hectare basis by generating the Annual Equivalent Value (AEV) for each forest scenario. The AEV expresses the NPV as a series of hypothetical equal cash flows over the lifetime of the forest.

Figure 1 presents indicative financial returns for one hectare of Forest Type 12 (FT12). This is an important commercial option comprising mixed high forest consisting of 65 percent spruce, 20 percent broadleaves (e.g. birch), with 15 percent of the area retained as area for biodiversity enhancement (ABE). ABEs can include open spaces, retained habitat, hedgerows and environmental setbacks. The annual 20-year premium available for this Forest Type is €746 per hectare per year for farmers. Other assumptions include a forest rotation of 35 years, 3 thinning interventions, employing a discount rate of 5 percent and 10 year average timber prices.

Figure 1: Indicative Cash flow over 35 years for Forest Type 12 - 65% Sitka spruce (Yield Class 24), 20% broadleaf species e.g. birch, 15% Area for Biodiversity Enhancement (ABE = open spaces, retained habitat, hedgerows, environmental setbacks)

Table 1 presents a summary of key financial outputs for Forest Type 12. The Net Present Value (overall net revenue generated and expressed in today’s terms) is €12,648 while the indicative Annual Equivalent Value (NPV expressed as a series of equal cash flows over the rotation) is €689 per hectare per year, for 35 years.

Table 1: Per Hectare Financial Outputs (€) - Forest Type 12

Source: Teagasc 2024

If all costs and revenues associated with forestry land use are compared with all costs and revenues associated with agricultural land use (after adjusting to present values and the one-year cycle per annum basis) then the per hectare Forestry AEV and agricultural family farm income can be considered conceptually equivalent. It is evident that forestry returns, based on proposed new premia levels in the Forestry Programme 2023-2027, can be very competitive when compared to many agricultural enterprises.

It should be borne in mind that this analysis compares observed agricultural incomes with projected future forestry income flows discounted to today’s values and converted to annual equivalent. This allows an indicative rather than absolute comparison. The analysis involving FIVE does not take into account the capacity for eligible forestry parcels to draw down the new Basic Income Support Scheme (BISS) payments as well as the forestry premia. It also does not factor in the potential income-tax free returns and relative efficiencies of the forestry option in terms of potential reduced labour inputs when compared to other enterprises.

FIVE cannot account for uncertainties such as potential subsidies that agricultural and forestry land will attract in the future or what new values may emerge for the services produced by agricultural and forestry land uses.

Multiple Forestry Benefits

People plant trees and forests for a host of very different reasons and considerations. These may include financial returns, timber production, biodiversity and landscape enhancement, recreation provision, climate change mitigation or simply leaving a valuable legacy. While forests take time to mature, they gradually deliver more and more such ecosystem services which can be experienced and enjoyed by the owner, their family and community and wider society.

The upcoming free Teagasc Forestry Development Department clinics will provide an excellent opportunity for you to explore the various forestry options and associated benefits with your Teagasc Forestry Advisor in an objective manner. For further details, log onto www.teagasc.ie/forestry or contact your local Teagasc forestry staff.