To meet the demand for tropical hardwood lumber, growing populations are under pressure to cut old growth forests for cash and to provide space for agriculture. The World Resource Institute has calculated the current rate of tropical rainforest destruction at 50 million acres per year. They also estimate that less than 700 million acres remain, with growing global pressure to protect much of that resource. The confluence of these forces will create a global shortage within 14 years (as of 2009). Currently, tree farms and plantations supply only 1-2% of the tropical hardwood market. Even given the most optimistic projections, it is highly unlikely tropical hardwood farms will fill more than a few percent of the current worldwide demand.
The rate of increase in tropical hardwood prices has averaged 13% per year since records started being kept in 1972. To remain conservative, we have based our estimates on the more conservative value of the 6-7% annual price increase that has been documented for lumber in general by the forest industry over the last 100 years. In the case of tropical hardwoods, this is very conservative. The limited range of koa was a major consideration. Demand and limited supply has resulted in a price increase of almost 1000% in just the last 10 years.
Koa is a truly magnificent tropical hardwood that is unique to Hawaii. It has developed an international following as a superior wood for musical instruments. Furniture makers in Hawaii have turned this native tree into fine works of art. Agriculture and clear cut lumber practices of the past century have eliminated over 90% of the koa forests. Strong preservation measures are defending the remaining native stands. This has fostered a new interest in cultivating koa for the wood artesian market. Knowledge is growing rapidly, but koa’s behavior as a plantation tree is certainly not as well understood as other species. In developing our projections we have analyzed the performance of a diverse range of tropical hardwoods in plantation settings. Much of our data comes from the performance of Acacia mangium a very closely related tree from the same genus. The potential rewards and the satisfaction of bringing a sustainable source of this wood to market have led to our focus on koa for this year's planting. Koa has tremendous diversity in appearance and accordingly commands a wide range of prices. In typical lumber outlets in Hawaii, it can have a retail range from $20 to $65 a board foot. Wholesale information is difficult to come by, but conservatively it could be 50% of these numbers. Only the potential tree owner can decide if koa is right for them.
Assumptions and Projection Notes
Trees are sold in 100 tree blocks. Even though tree growth can vary between species and location, for the purpose of this analysis, we will use the growth rates typical of other plantation-grown tropical hardwoods. Intensive management practices such as supplementing major and minor nutrients, selective thinning of stands as the canopy closes, and protection from competitors and pests is expected to result in growth rates similar to plantation-grown Acacia mangium and other tropical hardwoods. A very conservative starting price for wholesale koa was set at $9.00 per board foot.
We are assuming a conservative 6% rate of lumber value inflation. The actual rate of increase has been closer to 13% for tropical hardwood lumber. We have applied this same rate of increase in the costs of milling, harvesting, and processing. We are basing the yields, thinning, and harvesting rates on the experience of other tree farms in Hawaii and in Central America, but the amount of this charge will be based on the actual cost at the time of harvest. The actual timing and amount taken at any thinning or harvest will be determined in consultation with our forestry team and be based on best practices and the most current scientific information. The projection tables are intended to give you a better understanding of the process, but actual results may differ from these estimates in either direction. The 10% maintenance and care fees are not charged to the tree owner until their lumber is either ready to deliver or is sold for them. If it is sold for the tree owner, it is deducted from the proceeds of the sale. If the lumber is to be delivered to the tree owner or another designated party, the harvesting, milling, processing, care, maintenance, and shipping costs will be billed at that time.
The growth rate of trees and the market value of lumber are both influenced by a wide array of factors. It is possible to get a feeling for the future value of trees planted today from the historical trends and expert opinion of what the future holds for the tropical hardwood markets. The first table of koa projections is a blend of what we consider both conservative and likely. Dozens of contributing factors have been gleaned from a wide range of sources to arrive at this compact and readable table. There are many possible variations of this table based on changes to some of the basic assumptions. To get a feeling of how changes in some of the assumption affect the results, we have included two additional tables showing what would happen with some of the possible changes.
One of the factors that greatly affect the yield of tree farms in general is the carrying capacity of the land. One of the ways this is quantified is as basal area per acre. This is the total cross-sectional area of the bases of all of the trees in one acre of land. To get a starting value for the carrying capacity of our unique planting site, we examined a high-density test planting within the property. It had a basal area of 477 square feet per acre. For our projections, we utilized a carrying capacity of 250 square feet per acre. This results in the values obtained for the thinning and harvesting rates shown in the primary table. In our two comparable tables, we reduced this carrying capacity to 175 square feet per acre. This would result in higher thinning rates and less trees in the final harvests. One could develop limitless tables just by varying this parameter between the reasonable ranges of 150 to 475 square feet per acre. 250 square feet per acre seems a reasonable expectation.
The Cost and Value of Early Harvest Timber
Another variable that has been considered is the value of early harvest timber. In all cases, we assign no value to the trees that are culled or thinned in years 1-7. We do however value the wood derived from the thinning harvest in year eight. Our projections are based on marketing this lumber at the projected lumber value at that time. As mentioned above, this value has been obtained by taking a current discounted value of $9.00 per board foot for koa and adding an annual price increase percentage. For the two alternate tables, we reduced the value of this thinning harvest by cutting the value in half. That is intended to offset any difficulty in marketing early harvest lumber. Our market research leads us to believe that a full value market can be developed for that timber. Additionally, it was a concern that costs of processing smaller timber might be higher than anticipated so, for the alternate tables, we doubled the cost of milling and processing.
Lumber Value Increase Rate
As mentioned above, we have assumed a rate of price increases for marketable lumber of 6% per year. The actual rate for all tropical hardwoods as a group has been around 13% per year. Koa vastly exceeded even the most generous of these increase rates. To adjust for that possibility, we used rates of price increase of 7% per year and 9% per year in the alternate tables.
Any projection of future yields of either timber or financial value is greatly influenced by the assumptions made in creating these tables. We strive to be balanced in our choice of these values. The alternate tables are presented to give the tree owner some insight into the processes involved and aid them in making their purchase decisions. We encourage everyone to make every effort in evaluating the reasonableness of these assumptions. Many other factors will influence the outcome of a given tree crop. As the science evolves, HLH will adjust procedures to maximize yields.