Valuation of Teak Production per Hectare of Land on a 15 ...
Valuation of Investment on Teak Plantation Establishment on a 15-Year-Rotation for Intending Small Holders in Nigeria
By
B.O. AGBEJA
Department of Forest Resources Management
University of Ibadan, Ibadan, Nigeria
A Paper Presented at International Workshop on Small-Holder Timber Production Held at World Agroforestry Centre (ICRAF), United Nations Avenue, Gigiri, Nairobi, KENYA,
29 November to 1 December 2004
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Summary
This paper examines valuation of Investment on Teak plantation per hectare of land with a view to encouraging, persuading and sensitizing intending small-holders of timber production on the long term benefit accruable on fast growing tree species establishment. The objectives are to estimate the costs involved in the establishment of small scale teak plantation and to evaluate the benefits per hectare on a -15-year-rotation. These objectives are carried out using measures such as Net Present Value (NPV), Benefit Cost Ratio (B/C) and Amortization Payment. It is recommended that government at local, state and federal levels should encourage and persuade small holders of timber production to join the train of sustainable forest development; foster private investment in tree and forest actions to restore and maintain healthy ecosystems; and to offer technical and financial assistance or incentives to help restore and maintain expanse of land under small holder of timber production.
Key words: Valuation, Investment, Costs, Benefits, Small-holding
1. Introduction
The valuation of forest resources has been a concern in forestry for quite a long time. However, most valuation efforts until the 1950s were limited almost entirely to timber compartment of the forest (Champman and Meyer, 1947;Hiley, 1956). The purpose of valuation is to make the value on each forest use explicit, and not necessarily to put a total value on nature (Michael, 1995). Various techniques have been developed over the years to derive the various measures of value that are appropriate for particular forest valuation situations. There are several comprehensive reviews and appraisals of these techniques that outline how they can be applied as well as their advantages and disadvantages (IIED, 1994; Winpenny, 1991). FAO (1995) suggests that forest valuation should always be attributed only to the commodity studied and to the actual context and situation studied.
Value is the worth of a product or service to an individual or a like-minded group in a given context, often involving a complex set of relationships (Brown, 1984). All economic values are anthropocentric by nature; that is they are human-assigned. A value according to Barbour (1980) is a general characteristic of a thing or a circumstance that a person views with favour, believes is beneficial, and is disposed to promote. Values are not held in isolation but as component of a value system, or ordered set of values.
Investment is the act of producing or purchasing goods that are not for immediate consumption (Lipsey and Chrystal, 1999). This corroborates a-15-year rotation teak plantation used for this paper. Investment demand function shows a negative relationship between the quantity of investment per period and the interest rate, holding other things constant. The volume of teak investment will depend partly on the rate of interest, business trends and profit expectations.
Forestry is a business. However, ownership issue, investment, revenue generation and government policies have impacted forestry in Nigerian economy (Agbeja, 2002).Therefore, most forest lands are regarded as public property (FORMECU, 1993). Public holdings pose the problem of what to maximize. Forestry projects are capital intensive and capital used is not costless most especially if borrowed from the bank for investment.
Teak Plantation is a productive economic activity that produces benefits in the form of goods (timber, poles, etc.) and services (amelioration of microclimate, watershed, reduction of soil erosion, provision for shelter and shade, etc.). In teak plantation, the economic crops being produced are homogeneous, species are selected to suit the object of management; growth is rapid and there is a relatively rapid turn over with quick and high returns on investments per hectare. However, teak plantation involves costs in the form of materials consumed and the time of productive factors like land, labour, capital diverted from other useful employment. According to Worrel (1970), a comparison of these benefits and costs gives information for policy decisions on alternative use of land.
A consideration of benefits and costs leads to basic economic criterion of whether the teak project should be accepted or rejected in respect of financial and social gain of resource utilization from the stand point of the society. An activity should not be undertaken unless its total benefits (revenue, employment, stability, etc.) exceed its total costs.
2.0. Teak Plantation Techniques
The following techniques are usually carried out for teak plantation establishment and each technique is allotted cost as seen in table 1:
i. Site Preparation
- Demarcation
- Blocking
- Brushing
- Felling
- Burning and Packing
ii. Preparation for planting
- Supply of Pegs
- Peg Transportation
- Lining and Pegging
- Potted seedlings/ Transport
iii. Planting and Replanting/Beating-up
-Planting of potted seedlings
-Replanting
iv. Maintenance (Tending operations)
-1st weeding
- 2nd weeding
- 3rd weeding
- 1st Fire tracing and clearing of rides
- 2nd Fire tracing and clearing of rides
- 3rd Fire tracing and clearing of rides
2.1. Dimension of 1 Hectare
1 Hectare = 100 m x 100 m
Espacement for teak = 2.5m x 2.5m (Standard spacing)
Total number of seedlings per hectare is derived as follows:
1 hectare = 100m x 100m
Spacing for planting teak seedlings 2.5m x 2.5m
=1600 seedlings
Total number of seedlings per hectare = 1600 seedlings
1600 seedlings represent the full stock per hectare of land.
[pic][pic]Table 1: Costs of Operation for the Establishment of a Hectare-Teak Plantation
Estimate for Physical Inputs: Direct Labour Establishment of a Hectare- Teak Plantation
|S/N |Operation |Man days |Cost for a Hectare in Naira Value |
| | | |(N) |
|1 |Land Preparation | | |
| |Demarcation of land and blocking |5 man days @ N800 for 4 days |N 16,000: 00 |
| |Brushing of land |10 man days@ N 800 for 2.5 days |N 20,000: 00 |
| |Felling of trees |2 man days@ N 800 for 5 days |N 8,000: 00 |
| |Burning of debris and Packing |5 man days @ N 800 for a day |N 4,000: 00 |
|Sub-Total | | |N 48,000: 00 |
|2 |Planting Preparation | | |
| |Supply of 2,000 pegs |A peg a@ N 5 |N 10,000: 00 |
| |Supply of 1600 potted teak seedlings |A potted seedlings @ |N 80,000: 00 |
| | |N 50 each | |
| |Supply of extra 500 potted teak seedlings for | |N 25,000: 00 |
| |Beating up |-Ditto- | |
| |Lining and pegging |2 man days @ N 800 for 5 days |N 8,000: 00 |
| |Transportation of 2100 teak seedlings and 2000 |4 man days @ 1000 for a day |N 4,000: 00 |
| |pegs to site | | |
|3 |Planting Exercise | | |
| |Planting of 1,600 teak seedlings |10 man days @ N 800 for 2 days |N 16,000: 00 |
|Sub-Total | | |N 143,000: 00 |
|4 |Tending/Maintenance Operations | | |
|1st Year Weeding |Spot weeding |10 man days @ N 800 for 2 days |N 16,000: 00 |
| |1st weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |2nd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |3rd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| | | | |
|2nd Year Weeding |1st weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |2nd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |3rd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| | | | |
|3rd Year Weeding |1st weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |2nd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
| |3rd weeding |10 man days @ N 800 for 4 days |N 32,000: 00 |
|5 |Fire Tracing and Clearing of Rides | | |
|1st Year clearing |Fire tracing and clearing of rides for 5 metre |2 man days @ N 800 for 5 days |N 8,000: 00 |
| |width around 1 hectare plantation | | |
|2nd Year clearing |Fire tracing and clearing of rides for 5 metre |2 man days @ N 800 for 5 days |N 8,000: 00 |
| |width around 1hectare plantation | | |
|3rd clearing |Fire tracing and clearing of rides for 5 metre |2 man days @ N 800 for 5 days |N 8,000: 00 |
| |width around 1 hectare plantation | | |
|Sub-Total | | |N 328,000: 00 |
| |Other Expenditure | | |
|6. Land Rent for 15 |Rent / hectare /year @ N 10,000 |Rent for 15 years |N 150,000: 00 |
|years | | | |
| | | | |
|7. Pick-up van for forest|One pick-up van @ N 350,000 and maintenance @ N | |N 590,000: 00 |
|operation |240,000 for 15 years | | |
|8 Monitoring and | | |N 15,000: 00 |
|Supervision | | | |
|Sub-Total | | |N 755,000: 00 |
| | | | |
|TOTAL | | |N 1,274,000: 00 |
| | | | |
|8. Incidentals |5% of the Total Cost | |N 63,700: 00 |
| | | | |
|GRAND TOTAL COST | | |N 1,337,700: 00 |
Official Exchange Rate of American Dollars (US$) to Nigerian Currency (Naira N )
1 US$ ≈ N 130
Total Cost for I hectare of Teak plantation for a-15 -year -rotation
= N 1,337,700: 00 ≈ US$ 10,290
3.0. Analytical Tool for Economic Analysis
3.1. Discount Cash Flow Analysis: The analysis is used to examine whether the techniques adopted for teak plantation are economically efficient and beneficial to individuals interested in teak plantation establishment. The analysis involves the following measures:
i. Net Present Value (NPV): The NPV estimates the relative probability of a project and the decision criterion is to accept a project with high NPV of teak plantation. NPV measures the profit or surplus income from a project after the project has satisfied the rate of return on capital desired by the investor.
Formula for NPV
[pic]
[pic]
where,
Bt = Benefits in each project year t
Ct = Costs in each project year t
n = Number of years to the end of project (n ranges from 1 to 15)
i = Discount rate (10%)
ii. Benefit Cost Ratio (B/C): The discounted gross benefit divided by the discounted gross cost. The B/C measures the social equity and economic efficiency of resources utilization from the stand point of the society. A decision of B/C is to accept projects with a ratio above one i.e. B/C>1
Formula for B/C
[pic]
Bt, Ct, n, t, I as defined for NPV
Other measures are:
iii. Economic Rate of Return (ERR) : ERR is essentially a break-even discount rate in the sense that the present value of benefit equals the present value of costs. It shows the decision maker what society can expect to receive back in consumption benefits for a given investment of its scarce resources.
Formula for ERR
[pic]
Bt, Ct, n, t, i as defined for NPV
To calculate ERR iteratively, the formula above is manually carried out as follows. It is however, advisable to use SPSS software in order to save time.
ERR = (low rate of discount) + (difference between both rates of discount) x (Positive NPV)
Absolute difference between positive and negative NPVs
iv. Sensitivity Analysis (SA): The analysis is used for treating uncertainty. It is an inherent companion of projects and ex ante assessments (FAO, 1992). Accurately or precisely identifying, valuing and comparing costs and benefits is always a problem. A degree of uncertainty surrounds every estimated value. Information is nearly always not complete and of limited quality. A major function of economic analysis is to test the sensitivity of selected measures of project worth to changes in consumptions concerning inputs and outputs and the values attached to them. There are no rules for choosing the parameters or combinations to be tested (FAO, 1992).
Having obtained NPV and ERR for the project, the alternative value assumptions that were less favourable in terms of project outcome, i.e. higher costs assumptions and lower benefits assumptions are tested.
Discount Rate: The difference between the current price of a bill and its maturity value expressed as annualized interest rate. It carries no fixed interest payments, only a principal value and redemption date (Lipsey and Chrystal, 1999).
Discount Rate Formula
[pic]
Table 2: Discounted Cash Flow Analysis: I hectare Teak Plantation on a -15 -year –rotation
|Year |Cost |Benefit |D.F 10% |PVB |PVC |
| |(in Naira) |(in Naira) | |(in Naira) |(in Naira) |
|1 |692,246.67 |- |0.91 |- |629,944.47 |
|2 |135,246.67 |- |0.83 |- |112,254.74 |
|3 |135,246.67 |- |0.75 |- |101,435.00 |
|4 | 31,246.67 |- |0.68 |- | 21,247.74 |
|5 | 31,246.67 |- |0.62 |- | 19,372.94 |
|6 | 31,246.67 |- |0.56 |- | 17,498.14 |
|7 | 31,246.67 |- |0.51 |- | 15,935.80 |
|8 | 31,246.67 |- |0.47 |- | 14,685.93 |
|9 | 31,246.67 |- |0.42 |- | 13,123.60 |
|10 | 31,246.67 |- |0.39 |- | 12,186.20 |
|11 | 31,246.67 |- |0.35 |- | 10,936.33 |
|12 | 31,246.67 |- |0.32 |- | 9,998.93 |
|13 | 31,246.67 |- |0.29 |- | 9,061.53 |
|14 | 31,246.67 |- |0.26 |- | 8,124.13 |
|15 | 31,246.67 |8,000,000: 00 |0.24 |1,920,000 | 7,499.20 |
|TOTAL |1,337,700: 05 |8,000,000: 00 | |1,920,000 |1,003,304.68 |
N.B. Each teak tree costs N5000 (i.e. at an age of 15 years)
Therefore, 1600 Teak trees cost 1600 x N 5000 = N 8,000,000: 00 if there are no natural disasters.
4.0. Results
4.1. GROSS MARGIN = TOTAL REVENUE – TOTAL COST
= N ( 8,000,000 – 1,337,700.05)
= N 6,662,299.95 ≈ US$51,248.46
4.2. Present Value Cost (PVC) = N 1,920,00
4.3. Present Value Benefit (PVB) = N 1,003,304.68
4.4. Net Present Value (NPV) = PVB – PVC = N (1,920,000: 00 - 1,003,304.68)
NPV = N 916,695.32 ≈ US$ 7,051.50
4.5. Benefit Cost Ratio (B/C) i.e. PVB/PVC = N 1,920,000: 00
N 1,003,304: 68
B/C = 1.9
5. Amortization Payment
A loan with a fixed interest rate is said to be amortized, if its principal and interest are paid in equal periodic amounts. Amortization means loans repayment. Operative words here are equal periodic amounts.
When a business man obtains a loan from a bank, a contract is signed that obligates the borrower to repay the loan and all of the interest. When equal, periodic loan payments are made, the borrower is amortizing the debt. The money the borrower receives now (the present value) is to be repaid with interest as a series of payments. Thus, to determine the amount of each payment, the formula is:
Where,
PV = Present Value of Loan
n = Total Number of compounding periods
r% = Annual Interest Rate
Number of compounding periods per year
An/r = Present Value of interest payment made over n periods at an r% interest rate per
period
Example:
An intending small holder of teak plantation borrows N1, 337,700 (US$ 10,290) from a bank or government for the establishment of one hectare teak plantation. The loan is to be repaid in equal sixth monthly instalments over 15 years. Find the amount of each payment if the annual interest rate is 10% compounded sixth monthly.
Present Value Annuity formula
PV = N1, 337,700 (Present Value of Loan)
n = 2 x 15 = 30 (Total number of compounding periods)
r% = 10% (annual interest rate)
2 (number of compounding periods per year)
= 5%
Sixth Monthly Payment is calculated as follows:
P = V
an/r
an/r = (1 + r)n-1
r(1 +r)n
= (1 + 0.05)30 -1
0.05(1 +0.05)30
= 15.37
Reciprocal of 15.37 = 0.065
For sixth monthly payment
P = N1,337,700 X 0.065 = N86,950. 50 = US$668.85
For 1 year Payment = N173,901 =US$1,337.7
For 15 years Payment = N2,608,515= US$20,065.5
Profit after harvesting
Revenue – Cost
i.e. Sales on 1600 teaks – loan payable every sixth month till 15 years project duration
= N (8,000,000 – 2,608,515)
= N5, 391,485
= US$41,472.96
6. Discussion of Results
Efforts have been made to quantify some teak plantation’s real and potential contributions to intending small holders in terms of revenue generation per hectare of land from two perspectives namely: (i ) the owner of capital to be invested on one hectare of teak plantation establishment and (ii) the borrower of capital either from the government or the bank for the same one hectare of teak plantation establishment.
The result shows that the net return on the capital for the owner of N1, 337, 7700 (US$10,290) after 15th year will be N 6,662,299.95 (US$51,248.46). When the costs and benefits are discounted from year 1 to year 15, the NPV will be N 916,695.32 (US$7,051.50) with a corresponding B/C 1.9. Based on the criterion of the economic measures, the NPV is positive while the corresponding B/C is greater than 1. This shows that the investment on small scale teak establishment for small holders is profitable, economically efficient and socially acceptable. From the perspective of the borrower of N1,337,7700 (US$10,290 ) from the Government on Amortization payment, the net return to him after harvesting will be N5,391,485 (US$41,472.96) while the principal and interest payable to the government by the borrower in the 15th year will be N 2,608,515 (US$20,065.50).
7. Conclusion
The relationship between man and forests has always changed with socio-economic development and will certainly continue to change (Blauberg, 1997). The reason is that Man/Land ratio will continue to be high and more wood products will be demanded in the future. Therefore, in a contemporary world, involvement of small holders in investment of fast growing species like teak will be a major way of achieving sustainable forest development, income generation and abundant supply of timber, transmission poles, cross bars, etc. when demanded from time to time.
This paper has shown that the investment in teak plantation makes a valuable economic, social and environmental contribution to the small holders and the society. This valuation has possibly been masked in the past when demand for both indigenous and exotic tree species was not high and the population was very small as compared with the geometric population nowadays. The climate in Nigeria is favourable for teak plantation establishment. Therefore, if a group of ten small holders could be leased 10 hectares of land by the government for 15 years; this will translate to 16,000 teak trees provided natural disaster does not occur and beating-up is carried out in the first, second and third years of teak establishment. If a lot of people (group of small holders) do the same, then the development goals in the forestry sector will be realized in this millennium.
Development strategies for the enhancement of investment in small-holder of timber production are recommended as follows:
• The local, state and federal governments should review the forest policies to be pursued in developing countries in the future for sustainable timber production. These would include encouragement and persuasion of small holders of timber production to join the train of sustainable forest development; foster private investment in tree and forest actions to restore and maintain healthy ecosystems; and to offer technical and financial assistance or incentives to help restore and maintain expanse of land under small holder of timber production.
• There should be a forum for negotiation aiming at gaining a social agreement concerning land use both in the free areas and forest reserves by small holders of timber production. This will at least solve the conflict of land hunger/landlessness between government and small holders of land for timber production.
• A lot of latent graduates that are productive abound in the society without jobs. Government should use this small holding to assist them to be job providers rather than job seekers via provision of land, motivation with incentives like loans, grants, seedlings, training and retraining in small-holding timber production.
• Government should also promulgate a law that will protect the small holders of timber production to market their timber without too much tax.
8. References
Agbeja, B.O. (2002): Consideration for Sound Forest Policy Investment in Osun and Oyo States, Nigeria. Nigerian Journal of Ecology (2002) 4 (2): 94-100.
Barbour, I.G. (1980): Technology, Environment and Human Value, Praeger, New York. 331pp.
Blauberg, H.P. 1997. Challenges for forestry in a new economic, social and environmental context. In: Proceedings of the XI World Forestry Congress, Vol.7, pp.181, Antalya, Turkey
Brown, T.C. (1984): The Concept of Value in Resource Allocation Land Economics, 60(3): 231
Chapman, H.H. and Meyer, W.H. (1947): Forest valuation, New York, McGraw-Hill.
FAO (1992): Economic Assessment of Forestry Project Impacts FAO Paper 106, Rome 1992. Pp. 101-110.
FAO (1995): Valuing Forests: Context, Issues and Guidelines. FAO Paper 127, Rome 1995. pp. 38-39.
FORMECU (1993): Review of the Nigeria Wood-Based Sector.pp1-10.
Hiley, W.E. (1956): Economics of Plantations. London, Faber and Faber.
IIED (1994): Economics of evaluation of tropical forest land use options: a review of methodology and applications. London, IIED (draft).
Lipsey,R. G.and Chrystal, K.A. 1999. Principles of Economics. Ninth edition Oxford University Press. p. 614
Michael, S.G. (1995): Economic Valuation of the multiple use of forests: the case study of Bwindi Impenetrable Natural Park (BINP), Uganda, University of Edinburgh , UK. (M.Sc. Dissertation). Pp.4 -11
Winpenny, J.T. (1991): Values for the environment a guide to economic appraisal, London, HMSO.
Worell, A.C. 1970. Principles of Forest Policy. New York: McGraw-Hill. 243pp.
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