Forestry: an exotic investment

Forestry managed investment schemes have become the most popular segment of the agribusiness asset class. But there are different sub-segments in the forestry segment and, in recent years, a number of products featuring more exotic species have appeared, offering an alternative to blue gum plantations.

Indian sandalwood

Tropical Forestry Services (TFS) has offered an Indian sandalwood scheme based in the Ord River irrigation area of Kununurra in Western Australia. Sandalwood schemes are not new, and a native version of the tree grows in Western Australia.

In the late 90s, another manager began planting sandalwood trees in the Ord River based on studies by the research arm of the WA Government — CALM.

Sandalwood is a parasite and needs a host tree to provide water and nutrients via the root system. Usually, the sandalwood tree kills the host, so investment schemes feature a variety of host trees.

The original thinking was to host the sandalwood trees with mahogany trees but, as TFS chief executive Tom Cullity explains, this did not work out as planned.

“The mahogany trees were not killed off by the sandalwood and, in fact, the reverse has happened with the mahogany trees being much stronger than the parasite,” he says.

TFS has started again and, after testing, uses three host trees during the early growth phase of the sandalwood tree’s life. It has also built a nursery at Kununurra to grow sandalwood seedlings and the host trees.

“The nursery has the capacity to supply 150 hectares of sandalwood seedlings, but we are expanding that to a 200 hectare capacity,” Cullity says.

“We have planted 92,000 sandalwood seedlings during the first eight months of this year, which includes making good for lost trees on existing schemes.”

Cultivation improvements

The success rate for seedlings is 94 per cent, although TFS is looking to push this to 99 per cent with improvements in cultivation.

The hosts are planted at the same time and gradually the sandalwood feeds off each one, killing them one by one until the investor is left with just the sandalwood crop.

While TFS sells plots to investors, the company retains 30 per cent of the sandalwood tree itself. Cullity says this ensures the manager has a vested interest in seeing the trees reach maturity, around 15 years after planting.

However, this might drop to 14 years based on further research.

“We are growing the trees for both timber and oil although the managed investment schemes are just for timber,” he says.

The timber is used for carvings, coffins in China and incense sticks. The main supplies of sandalwood come from India and Indonesia.

Price increases

Cullity says because the Indian market is state controlled and with limited exports, sandalwood timber prices have been rising steadily.

“The benchmark price of Indian Sandalwood heartwood continues to rise, with the July 2005 government auction price in Tamil Nadu, India, reaching $93,000 per tonne, indicating continuing pressure on world supply,” he says.

According to a sandalwood market overview by the Australian Agribusiness Group (AAG), legally sourced Indian sandalwood trades at between $30,000 and $85,000 a tonne.

“Such price increases have resulted from large market demands and the continued rapid decline in the global resource,” the AAG report says.

“As a result of this, it is not known how the international market will react when significant volumes of the [Australian] product comes onto the market from plantations.”

The trees also produce oil that is highly sought for use in perfume, aromatherapy and fragrant body care products. The oil is extracted by crushing the tree and roots.

TFS is currently investigating building a crusher plant at Kununurra. The oil content of Australian-grown sandalwood trees is between 1 and 2 per cent, which compares to 6 per cent from Indian trees. TFS is hoping to achieve an oil production figure closer to the Indian trees.

AAG found prices paid for the oil were hard to determine, as sales figures usually are for whole logs, which are subsequently crushed.

However, the company is confident of future markets and has launched another sandalwood project for this year.

New projects

TFS has been actively promoting the sale of the first 50 hectares of the latest project that could eventually see up to 250 hectares cultivated. TFS expects to see this latest project completely sold by the end of June next year.

With the company’s experience in managing sandalwood plantations, the growing period has been cut back to 14 years and each half-hectare plot is expected to yield 5.9 tonnes of wood.

Lonsec has given a ‘recommended’ rating to this latest TFS sandalwood scheme — the same rating as earlier schemes.

Lonsec Agribusiness Research head of agribusiness Jim Blackburn says the researcher has been positive about TFS’ previous schemes.

“Sandalwood is a boutique forestry product and we are interested in the operational management of the schemes,” he says.

“Sandalwood needs to be intensely managed and the management of the tree relationships (host and parasite) is crucial, as we have seen with past attempts.”

Blackburn says Lonsec has been impressed with the way TFS has set up the operational management team in Kununurra.

“Tom has built a tight team on the ground and has got good on-ground management despite the difficulty of getting proficient staff in the area,” he says.

Water recycling

Lonsec was also impressed with the recycled water program the company is developing for future plantations. Despite the Ord River enjoying good rainfall (800mm a year) there has been a growing problem with the water table in the area rising due to intense cultivation of cash crops.

The tree plantations, including sandalwood, have been lowering the water table, which is being welcomed by water conservationists.

“These are all key points in favour of the scheme,” Blackburn says.

“Although they have still got to manage risks to the trees carefully, we have seen the company putting in supplementary watering where the soils are less friable.”

Because the sandalwood trees are still young, no contracts for the sale of the timber have been agreed to. Cullity says the plan is to deal directly with the end user and cut out the middleman.

“Middlemen only tie up companies while taking an extra fee, and that is the downside,” he says.

“When we start harvesting trees, TFS will be a significant player in sandalwood with about 15,000 hectares of plantations eventually,” he says.

Buyer relationships

Blackburn admits the question of building relationships with potential markets has not been tested yet.

“It is a popular misconception that if the timber has a high value, there is no volatility in buyer relationships, but this hasn’t been addressed by TFS yet,” he says.

“At present, the ongoing good management at TFS is positive and we would expect them soon to be defining their strategy and putting into effect sales and marketing agreements.”

Sandalwood seems to have overcome early growing problems, but will Australian producers achieve the high prices or flood the market?