"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 forevermore.

When considering the relative value of pasture land against the potential value of woodland, it is therefore important to take a very long term view. There is currently a strong market for the sale of plantable upland grazing, with values of up to £1500 per acre being achieved on good sites.

Long term, established commercial woodlands can have significantly higher capital values than agricultural grazing ground. However, the financial models for grazing and woodland are very different and this must be taken into consideration before any decision on changing land use is made.

A recent example in Ross-shire provided 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. Based on this example, it is possible to construct generalised financial models which allow comparisons to be made between the two land uses.

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 still have excellent potential for growing quality timber, whether native or non-native. In many cases such pasture ground will be let on a seasonal or annual basis. The rent may be relatively low but the inputs in order to achieve this income are also relatively low, perhaps only re-seeding every ten years or so.

The overall cash flow of pasture land can be summarised by the chart below:

Graphic: The financial model of pasture

The main features are:

• A consistent but low income.

• Regular and predictable expenditure.

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 so they must be able to fund the initial inputs. Maintenance grants are then available for the next five years to ensure successful establishment.

With sufficient scale (usually around 50 ha plus) it is possible for woodland creation projects to return a profit over this first five year period. For smaller sites, it is possible to top up the grant income by selling the carbon which is captured on the site as the trees grow. The carbon market appears set to increase substantially over the next few years as carbon offsetting requirements hit the aerospace industry.

Once a commercial woodland is established, it will take between 25 and 35 years to reach the stage when it can first be thinned. 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 5 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 the access routes.

The timing of clear felling varies greatly depending on the species that is planted and the site conditions. Sitka spruce may be ready for clear felling at age 40, however 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 they are clear felled. This means that a peak of income is followed by a peak of 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.

An illustrative cash flow based on a clear felling approach is summarised in the chart below:

Graphic: The financial model of woodland creation

The main points to note are:

• There are peaks of income and expenditure rather than a steady cash flow.

• The income is more difficult to predict and is dependent on the markets at the time of the sale and the quality of the timber grown.

• The profit margin is much greater, but does not manifest significantly until about year 45.

• There are significant peaks of income and expenditure at either end of the timber rotation due to the costs of establishing or re-establishing the woodland.

These models are necessarily very general but they demonstrate well 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. Productive forestry on the other hand can be summarised as high input, high profit financial model with significant peaks and troughs of income and expenditure.

It is worth bearing in mind though that there are a number of site specific factors which directly affect the profitability of productive forestry operations. Most importantly, the scale of a proposed woodland directly affects its efficiency and profitability. The larger the woodland is; the easier it is to generate profit. Secondly, accessibility is key to maximising the value of the woodland. Although most woodlands can be accessed with modern machinery, if the cost of extracting the wood is too high the profitability of the operation will fall.

When considering diversifying farmland by planting trees it is important to consider the long term impact of any change, particularly the cash flow implications. On the right site, forestry can be a very good alternative income stream – for those with patience and time on their side.

For more information on forestry, contact Louise Alexander at Galbraith – email: Louise.Alexander@galbraithgroup.com