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  • Global Timber Investing:

    Benchmarking Returns

    with Land and Environmental Costs

    Presented at the:

    4th IQPC Timberland Investing Latin America Summit 2011

    29-31 March 2011

    So Paulo, Brasil

  • Co-Authors and Affiliations

    Fred Cubbage, NC State U, USA Gustavo Balmelli, INIA, Uruguay

    Virginia Morales Olmos, Weyco, Uruguay Adriana Bussoni, UdelaR, Uruguay

    Peter Hall, SCION, New Zealand Carmelo Hernndez, CONAFOR, Mxico

    Richard Yao, SCION, New Zealand Roger Lord, Mason, Bruce, Girard, USA

    Patricio Mac Donagh, UNAM, Argentina Jeff Wikle, Consultant, USA

    Mauro Murara, U Contestado, Brasil Vitor Hoeflich, UF Paran, Brasil

    Rafael Rubilar, U Concepcion, Chile Heyns Kotze, Komatiland For, S Africa

    Rafael de la Torre, CellFor, USA/Colombia Omar Carrero, NCSU/Venezuela

    Jin Huang, Abt Associates, USA/China Ronalds Gonzalez, NCSU/Venezuela

    Elizabeth Monges, U Asuncin, Paraguay Robert Abt, NCSU, USA

    Paul Adams, Forestry Tasmania, Australia

  • Outline

    Forest areas

    Factors affecting global timber investments

    Macro and Economic

    Institutional

    Forestry sector

    Land, transportation, & management

    Conclusions

  • Macro & Economic Factors Affecting Investments

    General economy

    Gross Domestic Product (GDP)

    Growth

    Domestic and foreign capital

    Exchange rate / stability

    Taxes

    Rates

    Complexity

    Administration

    Trade / openness

    Political risk

    Personal risk and securityAdapted from IADB, 2010

  • Institutional Factors Affecting Investments

    Infrastructure

    Economic, physical, social

    Transportation costs

    Business environment

    Contracts and rule of law

    Credit access

    Licenses, permits

    Opening and closing a business

    Labor availability and relations

    Legal environment

    Agriculture policies

    Land use and ownership lawsAdapted from IADB, 2010

  • Forestry Sector Factors Affecting Investments

    Markets

    Domestic

    Export

    Forests and plantations

    Inventory, growth, removals, land change

    Productivity and input costs

    Timber prices & marketing

    Regulations & Certification

    Reserves, harvesting, planting, biodiversity, etc.

    Rigor, enforcement, and predictability

    Incentives and subsidies

    Amount, rate

    AvailabilityAdapted from IADB, 2010

  • Total World Forest Area By Region, 2010

    1005

    864

    678 674592

    191

    26

    0

    200

    400

    600

    800

    1000

    1200

    Euro

    pe

    S. A

    mer

    ica

    N. A

    mer

    ica

    Afr

    ica

    Asia

    Oce

    ania

    C. A

    mer

    ica

    Mil

    lio

    n H

    a

    FAO 2011; 4.033 billion ha total

  • Area of Planted Forests by Function, 2005

    10798

    44422

    3833

    21615

    17133

    11326

    2370

    20474

    32

    6028

    986 31519204

    0

    10000

    20000

    30000

    40000

    50000

    Africa Asia Oceania Europe North

    America

    Central

    America

    South

    America

    Millio

    n H

    a

    Productive Forest Protective Forest

    FAO 2005; 109.6 million ha productive (78%); 30.1 million ha protective (22%); 140.1 million ha total

  • Total Productive Plantation Area

    For Major Countries in the World, 2005

    17061

    11888

    53843399 2661 1997 1968 1832 1792 1766 1573

    28530

    0

    8000

    16000

    24000

    32000

    Chi

    na

    U.S

    .A.

    Rus

    sian

    Fed

    Bra

    zil

    Indo

    nesi

    a

    Chi

    le

    Thai

    land

    Fran

    ce

    New

    Zea

    land

    Vie

    t Nam

    Aus

    tral

    ia

    Mal

    aysi

    a

    Th

    ou

    sa

    nd

    Ha

    FAO 2007

  • Total Productive Plantation Area

    For Major Countries in the World, 2005

    1426

    12291067 1053

    751 754627

    312164

    72 43

    1471

    0

    500

    1000

    1500

    2000

    Spa

    in

    S A

    fric

    a

    Arg

    entin

    a

    Por

    tuga

    l

    Indi

    a

    Uru

    guay

    Per

    u

    Ven

    ezue

    la

    Col

    ombi

    a

    Ecu

    ador

    Mex

    ico

    Par

    agua

    y

    Th

    ou

    sa

    nd

    Ha

    FAO 2007, Asoplant 2007 for Venezuela

  • Industrial Roundwood Harvest

    from Plantations

    172

    152

    30

    147

    100

    32

    20

    50

    100

    150

    200

    Europe S.

    America

    Africa Asia N.

    America

    Oceania C.

    America

    Mil

    lio

    n M

    3

    FAO 2006; country reports; Brown (1999); DANA; SOUTHEM, Siry et al. 2005

    Total = 635 million m3; ~40% of production of 1 542 million m3 in 2000s

  • Macro, Economic, and Institutional

    Factors Affecting Investments

  • Gross Domestic Product (GDP) and Growth, 2008Country Population

    (000)

    GDP 2008

    (Billion $US)

    GDP 2008 per

    capita (000 $US)

    GDP Growth,

    2008 (%)

    Argentina 40 570 14.3 6.8

    Brazil 192 1 978 10.3 5.1

    Chile 17 242 14.4 3.2

    Colombia 45 395 8.7 2.5

    Paraguay 6 19 4.7 5.8

    Peru 29 245 8.5 9.8

    Uruguay 3 43 12.7 8.9

    Venezuela 28 360 12.8 4.8

    S America Total 384 4 020 10.4 5.4

    Mexico 109 1 601 14.6 1.8

    USA 312 14 445 37 2.4

    Africa 987 2 753 2.8 5.2

    World 6 750 70 097 10.4 1.7

    FAO SWF 2011

  • Selected Country Investment Classification, 2011

    Classification Foreign

    Rating

    Country

    Investment Grade AAA Australia, Canada, Finland, USA

    AA+ New Zealand

    AA- China

    A+ Chile

    BBB/+ Mexico / South Africa

    BBB- Brazil, Colombia, India, Peru

    Speculative Grade BB+ Costa Rica

    BB Indonesia, Turkey, Uruguay

    BB- Venezuela

    B+ Paraguay

    B Argentina, Bolivia, Honduras

    B- Ecuador

    Standard & Poors 2011 Note: Major LAC upgrades since 2008

  • Export and Direct Investment Risk, 2009

    Country

    OECD

    Export

    Credit Risk

    ONDD Export Polit. Risk ONDD Direct Investments Risk

    Short Term Long Term Expropriation Transfer Risk

    Argentina 7 4 7 5 6

    Brazil 3 2 3 2 3

    Chile 2 1 2 1 3

    China 2 1 2 4 2

    Colombia 4 1 4 3 4

    Mexico 3 1 3 2 3

    N Zealand 0 2 5 Na 5

    Paraguay 5 3 5 4 5

    Peru 3 1 3 3 3

    S Africa 3 3 3 3 3

    U.S.A. 0 1 1 1 1

    Uruguay 4 2 4 1 3

    Venezuela 7 5 7 7 5

    OECD, ONDD 2011; Range of 1-7; Lowest number is least risky

  • Ease of Doing Business, 2010

    Country

    Rank in World by Factor Out of 194 Countries

    Overall

    Start

    Business

    Register

    Property

    Protect

    Investors

    Paying

    Taxes

    Trade w

    Borders

    Argentina 115 142 118 109 143 115

    Brazil 127 128 122 74 152 114

    Chile 43 62 45 28 46 68

    China 79 151 38 93 114 50

    Colombia 39 73 55 5 118 99

    Mexico 35 67 105 44 107 58

    New Zealand 3 1 3 1 26 28

    Paraguay 106 102 60 59 110 152

    Peru 36 54 24 20 86 53

    South Africa 34 75 91 10 24 149

    United States 5 9 12 5 62 20

    Uruguay 124 139 159 93 155 132

    Venezuela 172 144 101 179 178 167

    World Bank 2011. 1 is best, easiest

  • Effort Required to Start a Business, 2010Country Procedures

    (number)

    Time

    (days)

    Cost

    (% of Income/Capita)

    Argentina 14 26 14

    Brazil 15 120 7

    Chile 8 22 7

    China 14 38 5

    Colombia 9 14 15

    Mexico 6 9 12

    New Zealand 1 1 0.4

    Paraguay 7 35 55

    Peru 6 27 14

    South Africa 6 22 6

    United States 6 6 1

    Uruguay 11 65 42

    Venezuela 17 141 30

    World Bank 2011

  • Brazil Taxes - Presumido Tax Regime

    Tax Type Tax Rate-Profits Effective Rate on Sales

    IRPJ (Presumed Profit of 8%, no surtax) 15% 1.2%

    CSLL (Social Contribution, on12% Profit) 9% 1.08%

    COFINS 3%

    PIS (Social Development) 0.65%

    INSS (Rural Fund) 2.85%

    Subtotal 26% 7.7108%

    ITR (property, productive land only) 3% of land value

    ICMS (tax if logs sold to business in another state)

    12%

    IOF (federal transactions tax) ?

    Or may use Real tax regime pay tax on profits like U.S. timber

    basis calculation, but always pay SS: PIS, INSS, COFINs, ITRSource: King, RMS 2010

  • $0

    $20

    $40

    $60

    $80

    $100

    $120

    $140

    $160

    $180

    1980

    1982

    1984

    1986

    1988

    1990

    1992

    1994

    1996

    1998

    2000

    Billion US$ Linear (Billion US$)

    Global Trade in Forest Products expanded

    since 1980, at about 4.5% per year . . .

    AAGR = 4.5%

    Schuler and Ince 2005

  • Trade: Timber Supply Trends

    Supply from S America the Rest of the World will grow;

    N Hemisphere supplies have difficulty expanding

    0

    100

    200

    300

    400

    500

    600

    700

    800

    900

    1961 1970 1980 1990 2000 2010 2020 2030 2040 2050Year

    Millio

    n C

    ub

    ic M

    ete

    rs

    Rest of World

    United States

    Europe

    South America

    Canada

    Sohngen 2010

  • Annual Increase in Production

    by Region, 1961-2005 (%)

    Source

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