Eucalyptus nitens, recovery and economics of processing 15 year old trees for solid timber

Report Date: May 2015

Author: Dean Satchell, Sustainable Forest Solutions, R.D. 1 Kerikeri, Northland 0294
+64 21 2357554

Appendix 1: Assumptions in Discounted Cash Flow Analysis
Appendix 2: Sawn timber price estimates
Appendix 3: Literature review - Value-based survey pricing methods
Appendix 4: Literature review - Estimating profitability of growing E. nitens for solid timber production
Appendix 5: Sawmilling method
Appendix 6: Flooring price survey instrument
Appendix 7: Survey results table
Appendix 8: Survey analysis
Appendix 9: Wood physical properties, test results
Appendix 10: Glossary of terms
Appendix 11: Case study stand plot
Appendix 12: Comparison between levels of internal and surface checking
Appendix 13: Air drying experiment
Appendix 14: Sensitivity analysis

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Appendix 14: Sensitivity analysis

Drivers that most influenced profitability for the grower in this case study included sawmill profit, price for sawn timber, land price, transport distance and implementing steam reconditioning as a strategy for overcoming collapse defect. These are addressed individually below:

1. Land price: High land prices in the locality of the case study stand are a result of lifestyle values and proximity to Christchurch city. The site is very productive with high E. nitens growth rates and is within 50 km of the case study sawmill. A land price of $5,000 per hectare produces a NPV of $3,269 per hectare, whereas a land price of $20,000 per hectare produces a NPV of - $7,318. Profitability would improve if equally productive sites were available with lower land prices that did not incur additional transport costs.
2. Logging, loading and transport costs: By reducing land value to $5,000 per hectare and increasing logging and loading costs from ‘easy to flat’ with 50 km transport costs ($44 per tonne, $36,976 per hectare) to ‘moderate to steep’ with 150 km transport costs ($77 per tonne, $64,708 per hectare), NPV reduced from $3,285 to -$6,494. In practical terms there is a trade-off between lower land price and higher harvesting/transport costs. Even with a nil land value NPV was -$2,964 under the high harvesting/transport cost scenario.
3. Sawn timber revenue: By increasing sawn timber revenue by 20%, NPV between the two pricing and two grading scenarios averaged $10,359. By decreasing sawn timber value by 20%, NPV between the two pricing and two grading scenarios averaged -$10,879. This range shows the importance of timber price to NPV. Improving the price estimates for E. nitens timber would require actual sales data or refined pricing techniques.
4. Drying degrade: Checking defect and collapse defect together accounted for 7.42 % of sawn timber production, averaged between grading methods. Checking degrade that was not sufficient to be categorised as defect, although not quantified, resulted in further loss of value as drying degrade. Increasing average sawn timber value by 7.42% and including the additional cost of steam reconditioning for all boards improved average NPV to $2055. By only including the additional cost of steam reconditioning for boards from log one and log two, average NPV could be further improved to $2,705.
   With steam reconditioning applied to all boards and assuming this process removed all collapse skip from profiled boards but did not remove checking defect, NPV improved to $2,367 per hectare. By applying the steam reconditioning process only to sawn timber originating from logs one and two (buttlogs), average NPV across grading and pricing scenarios increased to $3,017.
   Further work on reducing drying degrade is justified given the significant influence this has on NPV. Selective tree breeding or improved drying methods are both strategies that could potentially provide meaningful improvements to profitability, along with more consistent quality of sawn product.
5. Sawmill profit: Lowering management and overhead cost for the processing operation from the base scenario to 5% of sawn timber value increased average NPV to $2,690. Increasing management and overhead cost for the processing operation from the base scenario to 15% of sawn timber value, NPV reduced to -$3,210. Further work on improved estimates of sawmill profit beyond return on investment is clearly justified given this has a significant influence on returns to the grower.
6. Drying costs: If drying costs not including steam reconditioning were halved from $202 to $101 per nominal sawn cubic metre, average NPV increased to $5,321 under the base scenario. Drying costs that include reconditioning for ash eucalypt in Australia average $100 per nominal sawn cubic metre. Lowering timber processing costs from this base case study benchmark would improve growers’ confidence in producing adequate returns.
7. Grading: The two grading methods produced an average difference in NPV of $1,526, from -$1023 for Australian Standards grading to $503 for Farm Forestry Timbers grading. By grading for specific products such as overlay flooring and flooring over joists, Farm Forestry Timbers grading improved estimated returns from sawn timber. This was achieved by allocating boards to end-uses rather than to general appearance grades. Features that are defective in general grades, for example large knots or other feature that causes structural weakness, do not limit application as overlay flooring where appearance is the primary driver of grade. The resulting improved log residual value reveals this advantage.
8. Pricing survey methods: The two survey methods used for pricing sawn flooring products produced an average difference in NPV between grading methods of $2,036, from -$1,278 for graded-pairs pricing to $758 for constant- sum pricing. Further work on pricing methods is justified and could potentially reconcile differences between these for improved pricing of timber products new to market.

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