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What Risks may I Face by Buying Trees?

Who would have thought that a huge number of banks and insurance companies could go bankrupt like they did during the Great Recession in 2008? It's important to know that there are always some risks involved in all kind of businesses. Risk involves uncertainty of the future, and chances that the actual return from an investment can be different than expected. There is also the possibility to lose some or all of the original investment. Risk factors varies from business to business. The higher the expected return, the more risk is involved.

Below, we will teach you about some risk factors involved in our tropical timber business, as well as the advantages of running tree plantations the way we do.

Risks of Running Timber Production in Africa

Producing timber on an industrial level in Africa is not easy for many reasons:

  • It is difficult to acquire big land areas
  • Several areas are unstable and not safe
  • Corruption is an everyday phenomena
  • The laws and regulations can be quite tricky
  • Huge areas are dry land

Our forestry company Better Globe Forestry Ltd. (BGF) however, has been operating in Kenya for a decade and is recognized by the government, and all forestry related departments and companies in Kenya. Our experience is that East Africa—namely Kenya, Uganda, and Tanzania—are among the safest places to build business in Africa. They have been democratized according to English systems and have stable Governments. Land leasing contracts can be made for 45-99 years and works well for our tree business.

Even though it may seem lucrative to start business in Africa, it also involves a lot of work. This includes understanding the land system and working closely with local African authorities and communities to accomplish our goals. It can be difficult if the companies have little cultural understanding. BGF has a decade of experience and have built trust in all levels of society during the years. People behind BGF have also decades of business experience in Africa, long before the tree planting company got its start.

Not many tree planting companies would start their plantations in dry land. They seek arable land and easy access to water. In Africa, many tree planting companies have tried to start plantations with no success. They have been battling with local people and squatters who don't want to leave the land they grew up on. However, our forestry company has specialized in planting trees that can survive in dry areas. We don't grab any arable land, but help the local community in different ways such as:

  • Providing work for people on our plantations
  • Training locals to grow trees in dry areas
  • Supporting locals with microfinancing
  • Funding school construction
  • Making water accessible through different technologies
  • Forming partnerships with local farmers

Better Globe Forestry Ltd. is unique because of its manner of operations, and has successfully endured challenges to manage plantations in less attractive areas for doing business.

Risk Factors Connected with Market Demand and Supply on Tropical Timber

In the past 50 years, approximately 60% of the world forestry coverage has disappeared. Between 1990–2000, the global rate of deforestation and loss from natural causes was close to 16 million hectares per year according to Food and Agriculture Organization of UN (FAO), particularly in Africa and South America. From 2000-2010, the numbers were around 13 million hectares per year.

Source: Global Forest Resources Assessment 2010, by FAO

The supply of wood has been decreasing, especially because the rainforest suffers a loss of between 12 and 15 million hectares every year. As a result, the Norwegian Government donated $1 billion to help save the Amazon rainforest in 2008. A Norway-US partnership contributed the same amount to Indonesia in order to assist the fight against deforestation. Yet the struggle to save the rainforest is not as successful as anticipated. Illegal activities, loopholes in the system, and a combination of strong corporate interests and rampant political corruption make it difficult to save the trees. This again raises initiatives, action plans, and legal measures to stimulate the consumption of legal and sustainable produced timber on the market, especially in environmentally sensitive consumer markets like in Europe.

With greater demand than supply of a product, prices are more likely to increase, which causes more markup for the business.

The demand for tropical timber in Europe is declining, due to their awareness of global warming and concerns for the rainforest, otherwise known as the lungs of the world. We still believe that the consumption of legal and sustainable tropical timber will increase in line with the growth of the world population (7 billion in 2014). The world population forecast from UN Population Division, US Census Bureau, and the Population Reference Bureau estimates a medium growth rate of over 9 billion by 2050.

The rate of deforestation shows signs of decreasing, but is still alarmingly high. Even with the large-scale planting of trees, we will still suffer a net loss for many years. Because of a limited supply, we still expect prices on tropical timber to increase.

Our Forestry Company conducts sustainable production of tropical timber on semi-arid land, and doesn't take away from any rainforest. Based on the facts of deforestation and demand, there will be a market for us in the future.

Risks of Meeting the Quality Requirements on Tropical Timber

Our forestry company BGF in Kenya has the world's largest plantation of Mukau trees. Mukau is a rare Mahogany tree in Africa that was on the edge of extinction a few years ago, until BGF found a way to grow and utilize it in our plantations. To ensure our Mahogany trees keep the standards and quality as demanded by the market, we have conducted testing with The Kenya Forestry Research Institute (KEFRI) to measure the quality of our trees. Listed below are our results, where we also have compared our Mukau trees with other hardwood trees in the market.

Quality Measurement

Characteristics Mukau African Mahogany American Mahogany Teak
Density (kg/m3) 630 497-577 561 (plantation), 700 (natural) 641
Hardness (kN) 6.5 (dry) 3.7 3.1 (green), 3.6 (dry) 3.7 - 4.8
Bending strengths - Modules of Repture (MPa) 85 (dry) 51 (green), 78 (dry) 54 (green), 80 (dry) 70 (green), 101 (dry)
Source: BGF in cooperation with KEFRI

As seen in the table above, Mukau is lighter in weight than natural American Mahogany and Teak wood, but much harder than both species. The bending strength of Mukau is better than both species of Mahogany and green Teak. The specifications of our Mukau tree shows that it can be used in many areas like furniture production, flooring, etc., and retain high standards compared to other competitive products on the market.

Risks Related to Future Market Price on Tropical Timber

Our Mukau trees are still too young to be sold on the market. Since they are rare, there is no market price to acquire. What we can do is collect information about comparable and competitive trees in the same segment. The table below shows export sawn wood prices from July 2014.

Export Sawn Wood Prices (Euro/m3)

Ghana sawn wood, FOB Air-dried Kiln-dried
Afrormosia 855 945
Asanfina 480 564
Ceiba 220 272
Dahoma 315 369
Edinam (mixed redwood) 409 534
Emeri 385 550
African mahogany (Ivorensis) 593 627
Makore 580 646
Niangon 580 710
Odum 610 807
Sapele 567 701
Wawa 1C & Select 275 340
Source: ITTO Tropical Timber Market (TTM) Report, vol.18 no. 14, July 2014

The quality of our Mukau tree is higher than for an African Mahogany, but we can use the same valuation. A fully grown Mukau tree is at average 1/3 m3. The value would be 209 Euros today (627 Euros * 1/3). Our deal is that you receive a fixed price of 107.50 Euros in return of the trees you buy through our website (7.50 Euros in year 10 and 100 Euros in year 17). If your trees were fully grown today, we could already sell your trees for twice as much money than what our forestry company BGF will pay back to you. Even without any price increase during the next 17 years, you will still receive 107.50 Euros.

Tree Business versus Other Businesses

If we compare tree business with other businesses, there is one particular thing that distinguishes them from each other: trees. As trees grow, they generate value as the years pass by. The tree business is less influenced on finding new solutions for increasing revenue, and the risks are usually also a lot less. The demand has always been high and so are the sales and return. The only downside is that it takes time to grow trees until they give a good return, which is not suitable for short term profit.

Better Globe Forestry's nursery of Mukau trees in Kiambere, Kenya (April 2014)
5 year old Mukau trees at Better Globe Forestry's plantation in Kiambere, Kenya (April 2014)
7 year old Mukau trees at Better Globe Forestry's plantation in Kiambere, Kenya (April 2014)

Environmental Risks Related to Running a Plantation
Jan-Tore Øvrevik, Director of Development, T4E

Trees can be Attacked by Insects, Pest, Diseases, and Fungus

Most insects and fungi are selective of the host species. In their natural environment, trees and shrubs normally attain a state of equilibrium with indigenous pests. However, when exotic trees and shrubs are planted, exotic pests can also be introduced. Quite often, these exotic pests readily adapt themselves to the conditions of their new habitat. In general, the risk of damage from pests is higher when the plants are physiologically weakened from planting on unsuitable sites, improper site preparation, inefficient planting, adverse climatic conditions, or neglect of weeding and other maintenance operations. But even healthy trees and shrubs are attacked at times. For many insects and fungi, no control measures are available; when this is the case, the best precaution is to plant tree and shrub species or varieties known to be resistant to the pests.

 

Our research activity is concerned mostly with identifying the pests and diseases that attack our species. It is conducted with support from The Kenya Forestry Research Institute's (KEFRI) phytopathologists and the University College of Ghent. In the above picture is Korneel Neysens, an MSc student of Ghent University (Belgium).

 

The main precautions to be taken in guarding against possible future damage from insects and fungi are to plant tree species that are suitable to the climatic and soil conditions of the site, and to take surveys of indigenous pests to ensure that none are among the known forms to which the selected species is susceptible. That is also why we have selected the mukau and acacia trees, which are indigenous to Kenya.

 

To obtain this needed information, we have conducted carefully controlled experiments in our small-scale planting programmes, in cooperation with some of the most well-known forestry laboratories in Kenya and Belgium. We are working on perfecting the protocol for making our own in vitro production of Mukau trees, with unique qualities taken from more than 100 plus trees (superior in quality and growth), and the plan is to start cloning Mukau at our laboratory by 2015. The cloned mukau trees are expected to be much stronger than the regular trees and we expect the mortality rate to be between 5-15%.

 

Animals can Cause Damage to Trees and Seedlings

Damage to forest plantations by wild animals mainly takes the form of tree browsing or de-barking. The principal methods of controlling damage by wild animals involve the use of fences, hedges or ditches, trapping, and removal. When it comes to domestic animals, grazing or browsing by sheep, goats, and cattle can be a menace to young plantations. At times, hedges and fences are used to prevent intrusion by domestic animals. Where fencing costs are high, trespassing by livestock can be controlled by guards.

 

Wild animals have never caused any problems to our plantations, despite our lack of fences. We have stable relationships with locals and most of them make sure their livestock are not entering our plantations. BGF has security guards working 24/7. After experiencing some locals stealing grass from our plantation at night, we spoke with them and instead gave them the grass they needed for free. They kept their goats happy and we kept our seedlings safe from harm.

 

Can Trees Grow in Arid and Semi-Arid Land (ASAL) with Minimal Rainfall?

Tree survival in harsh environments depends on various production factors. They mainly concern terrain preparation, nursery techniques, planting practices, and choosing the right species to plant. In semi-arid zones, available mosture is the main constraint. Even trees that are accustomed to drought need water to survive. Young plants are dependent on water, especially during the juvenile stage. Proper development of the root system during the nursery period, terrain preparation, and correct planting methods are crucial for the survival of young trees in the field. Water infiltration techniques such as building structures as micro catchments, terraces, etc., are widely used in Africa to provide water for trees.

 

A view of a smaller water storage basin
(capacity 25,000 litres).

 

BGF has expertise within agriculture, water conservation and utilization, and is familiar with the challenges of planting Mukau trees in ASAL land, where the company's projects are located. We have gone through a 6 year Mukau pilot project together with the biggest forestry research institute in Kenya (KEFRI), and made the necessary research and development to start a large-scale planting program of Mukau.

 

The Mukau tree we plant naturally grows in dry bush land or dry wooded grasslands, where it often stands out because of its height. It is fast-growing and produces high quality timber. Moreover, the species is resistant to termites and drought. BGF's trials have shown that it can be planted year-round, provided it receives adequate care and irrigation. The growth is excellent, with trees reaching 3 meters in height after barely one and a half years.

 

Land Contracts Must be Based on Relationships

Land is very central to identity, livelihoods, and food security. Large scale land investments in Africa and land grab can result in food insecurity, the displacement of small farmers, conflict, environmental devastation, water loss, and the further impoverishment and political instability of African nations. What is disconcerting about the current large-scale land investments in Africa is the lack of transparency of the deals.

 

Our plantations are located in semi-arid area, where the living conditions already are too harsh for people to make a living. That means we are not taking any arable land away from the locals. On the contrary, we form partnerships with farmers, and it is easier to work through a sustainable land contract that can be respected and followed by all parts.

 

We have spent 4-5 years working in cooperation with the local society and authorities where our plantations are located. As a result, we signed an MoU (memorandum of understanding) which led to a 45 year renewable leasing agreement of land, with the Kenyan Government's approval. We do not own the land on which its projects are located. The land is acquired through the above-mentioned long-term lease agreements with the legal administrative guarantee that the trees belong to BGF.

 

Trees can Burn Down

When protecting forest plantations, it is important to remember that where there is insufficient combustible material, there is little or no fire risk. This stops fires from developing at ground level, which is the number one cause of dangerous and damaging plantation fires.

 

It is unlikely that plantations burn down. At any rate, our forestry company Better Globe Forestry Ltd. (BGF) has taken action to mitigate fire risks and has therefore avoided fire on all of our plantations in the decade of our operations.  We understand that it is important for us to have a great relationship with local societies in order to operate our plantation in a safe and productive way. We train our local workers well and help build their communities. A healthy relationship is important in order to minimize risks. To further minimize risks, we use firebreaks, which is a gap in the vegetation that acts as a barrier to slow or stop the progress of a bushfire or wildfire. Additionally, we have security personnel employed in several areas.

 

The Prospected Growth of the Trees can Fail

There are many reasons that a tree does not grow properly, such as over-fertilization and over-pruning. BGF has done a lot of test over several years in order to find the right balance of fertilizer and pruning.

 

A 17 year old Mukau tree is projected to be approximately 40 cm in diameter (1/3 m3). BGF is planting two trees for every tree we sell, and we plant in several plantations. The second tree acts as security in the event that the first one suffers damage. BGF will use the backup trees as a security to be able to pay you the fixed return as explained on our website