Forestry more profitable than sucklers and sheep

Research tells us that farmers and landowners generally only consider forestry on land that is less productive or unproductive for agriculture, so there is a need to know the financial implications of planting land that was previously in agriculture.

Forest income is made up of 15 annual premium payments and timber income from later thinnings and clearfell.

A simplistic comparison looks only at the value of the forest premium versus the return from agriculture for a particular farm system, in a particular year.

However, this can be a bit like comparing apples and oranges, as it does not take into account the returns from the timber crop or the long-term and permanent nature of forestry.

Even when income comparisons look at the returns over the lifetime of a forest crop, they generally fail to take into account the permanent loss of agricultural income on the planted land.

The analysis presented here takes the difference in time period between forestry and agriculture, as well as the gain from timber sales and the loss of agricultural income on the planted land into account, to compare forestry and agriculture on a more even basis.

We do this by incorporating the loss of agricultural income on planted land for each year of a forest rotation, giving us an estimate of the long-term opportunity cost of changing from agriculture to forestry.

Incomes

We then present the return from planting in annualised terms, so that it can be compared with annual agricultural income measures such as gross margin or Family Farm Income (FFI) per hectare.

The agricultural opportunity cost is made up of income from the market, as well as subsidy income, and Teagasc National Farm Survey (NFS) data are used to derive incomes for different farm systems.

However, relative incomes between agriculture and forestry can change from year to year as agricultural costs, prices and subsidies change. For instance, following a period of stability in recent years, average FFI increased by 5% in 2015. However, income still lags behind the record levels of 2011, when FFI averaged over €30,000 across all farming systems.

Forestry outperforms the returns from cattle enterprises by up to €228/ha

On the other hand, one of the advantages of forestry as a crop is that average timber prices have kept pace with inflation over a long time period. In addition, it is possible to capitalise on high timber prices by harvesting a year or two earlier or later.

As the productivity of both agricultural enterprises and timber yield are determined largely by soil type, we need to be able to compare agriculture and forestry on the basis of soil type.

Forest research undertaken by Teagasc determined the relationship between the productivity of a range of soil classes where soil class (SC) 1 and yield class (YC) 24 represent the best soils and SC 6 and YC 14 represent the poorest soils.

Long-term net gain or loss from planting

Analysis undertaken by Teagasc calculates the afforestation income resulting from the planting of a conifer by using forest growth (yield) models and historic average timber prices to project the annual forest costs and incomes forward to the end of the rotation.

The analysis assumes that:

The analysis is undertaken for each Teagasc NFS farm system and soil category and converts annual costs and revenues throughout the forest rotation into today’s money, before generating the equivalent of an annual forest income (annual equivalised value) for the forest rotation on a per-hectare basis.

The agricultural income lost is included as an opportunity cost and held constant for each year of the forest rotation. Therefore, the annual equivalised income generated is net of the agricultural opportunity cost, that is net gain or loss over time from planting.

Differences between farm systems and soil types

From an individual farm perspective, soil productivity and farm system both have a large impact on the long-term net return.

As dairy farmers have the highest incomes, they also have the highest opportunity cost, so they stand to lose significantly more by converting to forestry. Therefore, unsurprisingly, we see that the long-term annual return from replacing dairy with forestry is negative.

This is the case regardless of the soil type planted. The relatively high opportunity cost for the dairy other and tillage systems mean that this is also the case to a lesser degree for these systems.

However, there is a different story for the cattle-rearing and cattle other systems. The average annual net return across all but the best and worst soil types is positive for cattle systems, meaning that the long-term return from forestry is positive when replacing cattle with forestry.

The return to cattle systems is also highest on land of limited use, which is marginal for agricultural use, but which has a high yield class and is thus more profitable under trees.

On these farms,

n. The net return from changing from a sheep system to forestry is also largely positive, but not as high as for the cattle systems.

Summary

This article presents a long-term perspective which smooths out annual fluctuations. It shows that the returns from forestry for cattle and sheep farms are positive, even when comparing agricultural and forest incomes on a basis which takes the long time-scale of a forest crop and the loss of agricultural income on planted land into account. The analysis shows that:

However, it should be noted that agricultural and forest incomes presented here are pre-tax incomes and do not take into account the different treatment of agriculture and forestry as income from forest premiums and timber sales is not liable for income tax.

Dr Mary Ryan is researcher in environmental economics and rural development at Teagasc.

Prof Cathal O’Donoghue is dean of the College of Arts, Social Sciences and Celtic Studies at NUI Galway.

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