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General Info on Teak
 
 


Teak plantation investment schemes have created considerable controversy in several countries including Costa Rica, India and the Netherlands. Probably the most high-profile case concerned a Netherlands owned company, Flor y Fauna, involved in establishing teak plantations in Costa Rica.

Flor y Fauna commenced planting teak in northern Costa Rica in 1989. By 1994 it had planted 1,300 ha. Investors were invited to purchase teak trees with a down payment of around US$2,600 and annual contributions of US$300 for 20 years. The scheme envisaged investments of US$65,750 per hectare, which would yield projected returns of between US$600,000 and US$1.4 million, at an internal rate of return (IRR) of 15 to 25 percent per year.

Many of the price, growth and yield assumptions used in projecting returns were, however, highly optimistic in comparison with current documented levels. The teak plantations were expected to yield 40 to 48 m3 per hectare per year, and the wood was to be sold at prices varying from US$720 to $2,100 per cubic meter (based on annual price increases of 4 to 8 percent per year). Independent estimates suggested that more viable mean annual increments at harvest would be in the range of 9 to 20 m3 per hectare per year and that mature teak logs were likely to fetch US$400 to $550 per cubic meter.

The assumptions behind the estimated rates of return were examined by a Netherlands advertising standards authority and Committee of Appeals, which concluded that advertised returns on investment were misleading. The commercial teak investment package was withdrawn from the market in late 1996.

The key point is that long-term forestry investments with uncertain returns lend themselves to overly optimistic (and unrealistic) investment projections, which are initially highly attractive but are likely to lead to investor disillusionment and bring the sector into disrepute in the longer term. Governments need to be aware of this potential and to establish regulations accordingly, and investor education.

Teak is a very good investment, but one has to look at the investment required, and true wood production that can be expected. At US $65,000 per hectare the investor was getting ripped off as the costs of growing teak are not anywhere near that and of course return on money is not nearly as good as it is when the investment is $12,000 to $20,000 per hectare, which is more in line with the true costs of a teak farm.

Much of the variance in cost has to do with extras that are included and the size of the parcel purchased. As the administrative cost of one hectare are about the same as the administrative costs of a larger piece so the cost per hectare goes down. These costs include the surveying of each parcel and title transfer. Many people prefer to set up a Panamanian company in which to hold the investment, which costs about $1,800 all told, so these costs explain much of the variances in the pricing of the teak lots, within the $12,000 to $20,000 range pricing much above that is just unreasonable profit taking by the plantation operators.

Source: Adapted from Centeno (1996).


   
 
 
Jeff@Panamaforestry.com
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