John Varley - Exmoor Society Spring Conference Presentation
Potential for forestry in the private sector
John Varley - Clinton Devon Estates
27th April 2012
Thank you for the opportunity to talk to the Exmoor Society. I do however feel that perhaps you should have a real forester here talking about private sector opportunities rather than an ex-global telecoms executive who just happens to have make a radical career shift to run a rural estate in Devon!
When your chairman asked me to speak it was in my capacity as a member of the Government's Independent Forestry Panel. I told her that I couldn't talk about the Panel's conclusions beyond what was in our Interim Report which some of you may have seen. Our Final Report to Government will hopefully be published in the near future. But those of you who know Rachel Thomas will appreciate that she doesn't let you off the hook that easily.
So today, over the next 20 minutes or so I have been asked to talk about the potential for private sector forestry.
The definition of "potential" is: "Having or showing the capacity to develop into something in the future".
Defining the "private sector" is more challenging... - it is complex and wide ranging. Since the First World War, with the beginning of the break up of the large rural estates, forestry ownership and segmentation has continued to get more and more fragmented and the drivers of ownership many and varied. But potential in the private sector should not just be the preserve of ownership - the opportunity to add value across diverse markets and non-market areas is huge.
My view is a personal one, based on 12 years running Clinton Devon Estates, which has 17% woodland cover, nearly 5,000 acres of commercial forestry plus ancient woodlands, amenity and road side trees and some lovely parkland specimens. The Estate is fortunate to have one of England's best foresters looking after our woodlands as well as a remarkable forestry legacy; indeed the current Lord Clinton's great grandfather was a founder member of the Forestry Commission in 1919 and its second chairman. Lord Clinton himself was President of the Royal Forestry Society in 2003.
For me, the big difference between being in a leadership role at Clinton Devon Estates and a large corporate business is the principle of stewardship. Handing over something in a better condition to future generations than was originally handed to you. It is the essence of successful family businesses and coupled with this is the principle of the generational mindset - ie not focussing on the next shareholder's meeting. To my mind, stewardship and generational thinking are also key differentiators for forestry, for those who own and manage woodlands, and for those that do business with them.
So, when we come to think about the private sector and its potential we need to understand what we mean by the private sector, what motivates it, how it is transforming and how it can achieve its objectives. We also need to understand the role of global markets and how they enable potential to be exploited.
Forestry is a long-term game. Historically, over many generations, it was also fairly predictable and it's ownership and stated purposes clear. For centuries many private forests were managed for future generations of monarchs and noblemen to hunt. More strategically important perhaps, English ships continued to be made of timber for many rotations of oak forest. Today forestry has been caught up with the blur and speed of change facing wider society and markets - and changing they are! "Attention" is the scarcest resource available to Western society.
Society, businesses and individuals now no longer tend to think "long" - it is more all about instant gratification, instant financial returns and meeting the needs of today. Even governments, not known for thinking beyond electoral cycles, today appear to be unable to plan beyond the next week's headlines. Along with this shift, global consumer demand, fuel security, exotic diseases, the fight against obesity, technological advances and demographics are shaping very interesting business challenges and future potential for the outputs from our woods.
To me these changes represent "breakpoints" and despite the uncertainties, may present huge opportunities for those prepared to invest in the future, maybe seek lower long run returns or take more risk.
It strikes me that whilst policy makers and enlightened private investors continue to seek the holy grail of a truly sustainable model for business, which delivers public benefits, tackles global environmental challenges, is not a drain on the public finances and can provide a return for both philanthropic and commercial investors - England's woodlands may offer a "shovel ready" solution. Woodlands possess the ability (is it a unique ability?) to deliver conservation, landscape and recreation gain while producing a truly renewable resource - TIMBER. Whilst much may be required to deliver this nirvana, it is fair to say that the private sector in England has not stepped up to the challenge yet.
So, who are these investors in forestry and its value chain?
Private ownership is important, it represents over 65% of all woods in England and today ranges from large estates with professional forestry expertise in house or contracted in, to individuals with small lifestyle woodlands and not a clue about what silviculture or arboriculture is. In addition, to a more limited extent in the UK, there are larger-scale "investment woodlands" owned by investment funds. And for some it has been a sound investment in troubled times. Over the past three years forestry has returned investors an average of 13% total return compared to commercial property at (-2%). Over 10 years forestry has returned 18% versus 7% for commercial property.
Although not strictly "private sector", in addition to the Public Forest Estate, the charity sector owns considerable forestry resource and impacts on the local supply chain.
The mix of ownership is diverse and the mix of owners' objectives is equally diverse. Some are looking for a low risk income stream, some a tax shelter, some conservation and access benefits, some to provide a backdrop and landscape for sporting shoots. Some are looking for nothing at all - just tranquillity.
Beyond private sector ownership, we should also be thinking about private sector supply chains, logistics and contractors and professionals associated with the industry. Large scale chip board manufacturers and small sawmills play a critical role in the private forestry sector.
Potential will mean different things to different players and a large part of clearly identifying and unlocking potential will be about encouraging a much better understanding of what is possible across those with a stake in the industry today, and those who may wish to take a stake in the future. For some though, the fact that growing trees requires an inter-generational timescale, with increasing levels of future uncertainty, it is enough to put them off seeing it as a real business opportunity (ie one that you talk to your bank manager about). Others, who take the stewardship view, see significant rewards for future generations. And for some, who are motivated with a different risk / return profile, there are indications that global markets present today's West Country foresters with a remarkable opportunity.
Let's look at some of these opportunities. I want to take some thematic approaches to forestry (mine, not the Forestry Panel's) and consider how these might help provide the conditions for a successful private sector and shape and transform it.
Lets look at four...
I mentioned Stewardship and hinted that trees maybe the ultimate example - handing over something in a better condition (or more value) to that when it was handed to you. Stewardship is only sustainable if you have the cash-flows today to indulge in it, so my first theme is:
1. Get more out of what exists today -
Around 40% of England's woodlands are assessed as being "unmanaged". All the evidence points to better managed private woodlands delivering more added value. In many cases "better management" is simply another term for implementing a cycle of thinning. That is "get into the woods, work them and add value!" More timber, better quality timber, more wildlife, and maybe even more and better access.
I believe that a significant driver to encourage better management will be new markets, or a new twist on the oldest and globally largest use of wood- heating and cooking. Bio mass markets are slowly springing up in rural areas, delivering security of supply, new local jobs and income streams. Localised industry investment - new kit, better training, apprenticeships results in improved competitiveness for a local resource in a global traded commodity.
It is interesting to compare active management, with multiple benefits (ie new income streams and better environmental outcomes) with "conservation" management for its own sake i.e pulling out of active management and leaving it to natural processes. The latter idea is very laudable but the frequency of a natural cycle of 300+ years, interrupted only by storm & fire events, means very long periods of little change and potentially low diversity. With so little active management across fragmented woods in England, coupled with the domination of grey squirrels and increasing deer numbers does such a policy on non-intervention make sense for anyone?
Getting more out of what exists today is not all about direct grants to woodland owners - a wood fuel boiler in a local community hall or school will begin to change behaviour.
The economic engine of China is sucking huge volumes of quality Douglas Fir from New Zealand, Russia and even Germany. The rise of Asia is presenting direct and indirect opportunities for West Country Douglas Fir, if volume can be marshalled and logistics put in place. And this is where we have a competitive advantage. Across England the private sector has 50% more Douglas Fir stocked area than the Forestry Commission and the South West represents over 60% of England's Douglas Fir volume.
Timber prices are rising - driven by a cocktail of global demand and exchange rate shifts. In real terms prices have risen by 71.2% over five years, although the picture over 20 years is more depressing - a fall of 35.3%.
For many years we have imported over 80% of our timber for domestic use. Since 2008 that figure has dropped to around 60% - predominately driven by exchange rates but offering a window to establish processing and sector investment to build a productive base for the future.
The biomass, wood fuel market is presenting an interesting opportunity, both small scale and larger scale plants. If all planned schemes came on stream by 2014 there would be a demand for c 50m tonnes of wood fuel. Expected maximum supply is c 20m tonnes. You can only reflect on the impact on prices. Some observers say the shortfall will come from overseas, Canada for example. As in all markets you need to look carefully at who controls the key elements of the value chain. A very small number of Japanese shipping companies own the merchant fleets capable of transporting this material around the world. Shipping wood chip (or timber for that matter) around the globe may not be as cheap as some may hope.
2. To begin to think truly landscape scale -
The private sector needs to take advantage of the opportunities presented by the very real trend to landscape scale policy, planning and now incentive. It is a "wake up and smell the coffee" moment. The Natural Environment White Paper, Lawton Review - Making Space for Nature and now England's first twelve Nature Improvement Areas - receiving £15M of tax payers money. All these are pointers to how woodlands, private and public, will be viewed in the future. There are undoubtedly opportunities to get engaged with National Parks, AONBs and other bodies to secure support and funding to improve the delivery of a wide range of woodland benefits, aligned with others across a wider landscape geography and ownership boundaries.
It is all about joined up strategies - farmland, woodland, conservation sites and multiple outcomes. Proactive private woodland owners and those involved in private woodland value chains (wood fuel for example) should invest time and energy engaging with those organisations who are facilitating the new agendas.
Opportunities may emerge to invest in local sawmilling and processing supported by a combination of market driven investment and conservation funding. Marks and Spencer and Kwik Fit are sponsoring woodland which supports their wider corporate objectives - there is no reason why private sector forestry can't get engaged here.
3. Contributing to tomorrow's generation -
This is all about long-term thinking with stewardship at its heart, underpinned by sound economics. Planting new woodlands on existing and new sites are at the centre of my thinking - but planting new woodlands with a far more flexible view of the future from when woodlands were being planted for the Royal Navy or coal industry.
We need to really understand the economic reality of what is being planted. At the moment there are some significant roadblocks in encouraging the private sector to plant new woodlands - not least where are you going to plant them! Economics dictates low value land and conifers - Exmoor could be ideal but there may be other voices who take a very different line based on past history - not least what happened post 1919, in the 1920s and 1930s (early Forestry Commission and Government policy for a "strategic" timber resource) and then 1960s and 1980s (driven by tax incentives) especially. Today I feel that we are in a different place. Commercial conifer planting today does not have to be the ridged lines of monoculture in the wrong place. As old plantations are thinned and replanted, they can be restructured to more appropriate designs, as can new plantations. It has already started with the re-planting of P. ramorum infected larch sites with more suitable species - a shift to mixtures and different silvacultural sytems. For example natural re-generation of Sita and Douglas Fir with a mix of broadleaf offers much potential.
If the private sector is to be encouraged to plant purely hardwoods the incentive needs to be understood from the start. It is a fact that hardwood planted today will never result in quality timber without unrealistic amounts of protection. The Grey Squirrel will see to that. The only future hard wood timber market of value is currently firewood.
One of the single biggest motivators to owning private woodlands in England has been as a shelter from tax. IHT at 100% relief; no income tax from timber sales and CGT exempt. This model appears to remain sound today with land values up 32% since 2010 and an acute shortage of supply. The tax man is getting more interested in proving that woodlands are truly commercial - at the same time as opportunities to become more commercial are falling like rain from the sky...
Changing climates should offer West country private owners interesting opportunities to compete more effectively in future world markets. If predictions are correct growing conditions for Spruce will be more favourable than Germany - especially the wetter parts, for example Exmoor. We may, over a few decades be a source of high quality Sitka and have a lively export market. As it happens last year Clinton Devon Estates has already started this trend when we exported 1,500 tonnes of high quality Sitka to Germany by boat from Bideford. Around 2,500 tonnes a month are being exported - the normal destination - Wales - cannot match the price. It indicates that if circumstances are right the West Country can rise to the challenge! It is clear that we have the resources to satisfy the growing demand for quality timber; most of our current supply goes out of the region - up the M5 or further afield for processing. There may even be potential for the development of a regional brand and perhaps we might even encourage Asian investment in some serious sawmilling capacity, subject to the securing of supply and volumes. We do need to address costs - £15 / cu m to process timber in China versus £80-100 / cu m in UK.
One area where there is much rhetoric and little tangible benefit for the private sector is payment for eco system services. That is "the benefits that we derive from the natural world and its constituent ecosystems". A world leading government study conducted between 2009 and 2011 has identified that out of 14 indicators, woodlands score positively on 8, neutral on 5 and negatively on one (and that is tree diseases and pests). Eco-system services associated with woodland include:
2. Carbon storage
3. Water quality and flow
4. Air quality
With woodlands scoring so highly and now being recognised as delivering such value for the environment and society the opportunities for the private sector to benefit should be huge. The fundamental problem is that at the moment - other than timber - the vast majority of the identified "services" are not linked to any form of direct payment. Undoubtedly this will come - indeed the Forestry Commission's Carbon Code for new woodlands provides a small incentive to plant. Others talk about Green Bonds for global investors who seek environmental as well as financial returns over the long term. It is early days but I am convinced that within ten years or so things will begin to look interesting...
4. Helping to tell the story -
Forestry is England's best kept secret and the only way it's potential will be realised is if it is promoted to Government, City investors, entrepreneurs, health and education professionals, communities and wider society. From this new and exciting opportunities will come.
In telling the story we should reflect on how we attract the best people into the sector, at all levels and roles. We need to promote forestry careers and the profession itself, along with developing a wood culture. Compare the status of the UK Forester with that of Germany, Switzerland, Austria and France...
Potential is constrained by circumstance - forestry's legacy is far reaching - can it really move at the speed demanded of today's society and markets? Clearly not in terms of short term, political, change. That has been the problem! Regarding resource the market responds to that which is available. Many in the conservation world proclaimed the closure in the late 1970's and early 1980's of the "old processing industries" as the death knell of commercial forestry. What arose on the back of the Forestry Commission and private sector twentieth century plantings, whilst controversial today, still rates as one of the largest inward investments in mainland UK manufacturing, giving us the vibrant processing sector in Scotland, the north and Welsh Marches.
We have moved from a very polarised world to one of blur - whilst the forestry offer may be more complex, it's time has come - to make a clear difference across a far greater section of society.
So I believe that given the transformations in global markets, global fuel security, human values and technology, the forestry private sector has considerable potential to shift from a relatively passive to an active mode and take advantage of a wide range of opportunities presenting themselves. It is not going to be a quick return - but it should be a satisfying one.
The bottom line for me is that to exploit these " breakpoints" the potential will have to be driven by people. The current generation will have to change its' existing forestry mind-set and new generations will need to be inspired. It will not be the usual suspects either, I think that for forestry to maximise its potential there will have to be interesting alliances between public and private sectors - owners of woodlands and local communities, local authorities and environmental bodies. Underpinning it all will be new jobs and increased consumption, be it timber consumption in a school boiler or payment for woodland's contribution to a local flood defence scheme or a regional right of way.
Not everyone shares my view that, given the right people and circumstances, the private sector has massive potential. Just to be a little bit controversial I shall leave you with a quote from "The Forester c 1910":
"the State is the only possible landowner that that can be expected to create large compact blocks of woodlands in the UK, to be managed on silvicultural principles, with the twofold object of providing supplies of timber in the future and of fostering and encouraging rural and wood-consuming industries. If this is a duty at all, it is the duty of the State, and not of the private landowner. The State is the only landowner that never dies nor is called upon to pay estate and succession duty, and is the only landowner that can make large investments without being compelled to desire quick returns in the shape of income; hence the State is the only landowner that can be sure of remaining free from the temptation to thin timber-crops at an early age and to a great extent - or, in short, that can afford to grow the best classes of timber upon rational principles."
Food for thought.