The Agricultural Industry

The holiday season is over and New Year’s resolutions have you considered investing in a company, such as sustainable forestry?

In deciding whether to invest in forestry in Uganda, it is interesting to note that, for example:

In the U.S., over the past two decades, the U.S. timberland returns were negative on two occasions and gave an average of 12.7% per year between 1990 and 2008.This is significantly better than a return of 7.32% over the same period was reached to invest in the S & P 500 Index.

In Great Britain in 2006/2007 was the best performing of forestry asset class with returns of 26% versus 17% for stocks.

In Uganda, on the basis of information from the National Forestry Authority (NFA) and the Sawlog Production Grant Scheme (SPGS) of the European Union (EU) in order to promote commercial forestry in Uganda return on investment is approximately estimated by 9 – 16%.

In this sense, then you have to invest in forestry, taking into account not many Ugandans, as have enough experience with forestry? There are three options to consider:

Option 1: Direct investments in private forests. This means that the investor incurred the costs include the costs directly.These; purchase / lease of land, planting, weeding, thinning, forest management, et al.

Option 2: Hire National Forestry Authority (NFA). In this case the leased land is one of several state forest reserves. The investor has a lease to harvest the trees given in exchange for rent paid to the NFA. I’m personally not a fan of this option and the option to pay bribes in order to obtain the concession / license. There is also the bureaucracy of the process. I will not analyze this new option.

Option 3: Forest Fund. A forest fund is essentially that the investor contributes a fixed amount to say £ 10,000 a swimming pool together with other investors. The Forest Fund is essentially a company or other legal structure, which invests in forestry in the different species of trees and in different geographical locations.The professionally managed funds and in return the investor receives an annual return to or at the end of maturity of the trees and beyond. The advantage of this model is that it’s similar to investing in stocks, the investor is not about managing care on a daily basis. You get regular reports (usually quarterly) on the investment performance, and they can be expected from the audited financial statements as part of the professional management of the Fund. I do not know know Forest Fund in Uganda, but the Ugandan example, the investor can invest in a fund based in the UK. The Ugandan investors are likely to need for information (show proof of identity, address, proof of the origin of money / wealth, references) enhanced due diligence necessary to provide that Uganda generally classified as high risk jurisdiction due to a weak regulatory framework. A word of caution if you look at the forest fund to ensure that they are regulated by the competent authority, or is it a kind of fallback position. This ensures that your money is literally beaten into the wind. Also, make sure you understand what the management fee and other such as expected return can be achieved by fund managers, high fees are a percentage of the total portfolio of funds under management reduced.

I am now an overview of the advantages and disadvantages of forestry and if necessary discuss them because they are considered two options for the financing of private forest vs. forest (as mentioned above, the possibility of using two of the NFA is not better for me because of the politicization of the expected investments, in addition to the bureaucracy).

FIRST CONS (of course)

1) the deadly bacteria. How many agricultural diseases is a central theme. Trees grown in Uganda are mainly pines and therefore it is of interest to ensure that it is not destroyed by this deadly disease.

2) The high cost of investment. Forestry in addition to the high cost is a long-term strategy in general. According to estimates by the NFA and SPGS show that it costs about $ 730 – $ 1000 per hectare (ha). This includes the cost of the plant, cutting, weeding, work et al.

The EU has SPGS grant program is funded currently playing imburses part of the cost of that investment, in return for the investments that are a minimum of 25 ha imburse. Sun assumption that the minimum cost of 25 ha for the investment of the investor at least $ 25,000. At an average exchange rate of $ 1 = 2.414 (December 2011) it works at SHS. 60,350,000th

If you are considering the possibility of forestry funds, the investment costs will vary, but I saw some of between £ 10,000 and £ 18,000. £ 18,000 at current exchange rate (December 2011 3776.2) is 67.9716 million Shs.

3) Uganda Land complicated system. Forestry requires a lot of ground and although there is no shortage of land in Uganda, with the complex traditional country, where the land is usually the community / village and held without land title, it can be a challenge investors. The course can navigate through this challenge by lease of land by representatives of the village.

4) The liquidity of investments. Forests, by nature, is a long-term investments with maturity of the trees for the dominant species in Uganda, can be made:

Pinus caribaea var hondurensis (pins) – 15-20 years.
Eucalyptus grandis (Kalitunsi) – 8-12 years.
Eminii Maesopsis (MUSIZ) – 18-25 years.
Tectona grandis (teak) – 25-30 years.

The question can be partially mitigated by illiquid investment in a forestry fund instead of direct investment that forest funds usually have a mechanism for investors to sell their “share” in the forest fund to other investors. Investors should ensure they ask the fund manager on the forest for the plant.

AND NOW THE PROFESSIONALS

First High yield / low risk investment. Despite the long period of maturity, forests have a double advantage over many other investments. Wood is an asset, land (especially the private rented) is a plus as well.

In addition, they offer excellent returns. Earilier as emphasized in the UK and the United States, were forests classified as some of the best asset classes. Except in the UK, believes that the best class commercial forest, which generally qualify for various tax breaks than the absence of capital gains (taxes on sales of investments). I can not wait it’s the same case in the U.S. This is likely to residents in Uganda and the United States and Great Britain born to address.

I now estimate the profitability of investments in this sector.

Option 1: Profitability and Return on Investment (ROI) to fund forest

Start-up capital: £ 18,000 to the current exchange rate (December 28: 3776.2) is 67.9716 million Shs.

Operating costs: None. This will be nil as the return to the investor after deducting all operating costs of planting, including costs such as costs for forest management, insurance, legal, planting, weeding, wages / salaries and other costs.

Return on Investment. For example, with investments Melina *** Forest Fund, an investment of € 18 000 to £ 104,189 back over 12 years translates into an annualized profit of £ 8,682.42 per year. Return on investment is:

Equity (A): € 18 000 *

Earnings per year (annualized **) (B): £ 8682.42 *

Return on investment / capital (years to re-capitalize) (A / B): 2.07 years

(Use * pounds in order to eliminate the effects of currency translation

** Due to the long period of maturity of the forest, 12 years, representing an annualized benefit, what would be the advantage in the period of 12 years)

*** Please note that I have no connection with investments Melina got, I have information from my research and I’m just using it as an example for the expected return on investment of a forest fund.

Option 2: NFA position. Not rated

Option 3: Profitability and Return on Investment (ROI) for private investment in forest

I’ll go out in this case, assume that the investor will invest the standards of the Sawlog Production Grant Scheme (SPGS). Investing SPGS standards allow investors a subsidy, which is a re-payment of half the cost of establishment of the investor. The current grant (to run until 2013 so fast!) If, however, to meet the standards depending SPGS and successfully passing an inspection / compliance (grant to ensure that only serious investors, this right.)

Based on the above, I estimate the cost of the SHS to 100m a year and return on investment (ROI) to approximately 2.5 months.

SUMMARY AND THE LAST WORD

First the numbers:

Based on my analysis:

Option 1: Forest Fund

Equity (A): £ 18,000

Earnings per year (annualized) (B): £ 8,682.42

Return on investment / capital (years to re-capitalize) (A / B): 2.07 years

Option 2: Foreign Direct Investment

Equity (A): Shs 22.02775 million

Earnings per year (annualized) (B) 104 493 000 Shs

Return on investment / capital (years to re-capitalize) (A / B): 0.21 years

Last word:

Who coined the term “money does not grow on trees grow” was correct, but perhaps they should have a place called “money grows on trees!”

For over 8 years I worked with several clients in auditing, accounting, tax and advisory services in areas such as agriculture, mining, entertainment, financial services and technology. My portfolio of clients in Uganda, the Bahamas and the Channel Islands, was the United Kingdom also different and this experience gave me a “well rounded” view of the company.