Farmwood Australia - export markets for farm-grown wood

Despite the competitive nature of most of Australia’s rural industries, there are often benefits in cooperation and coordination between industry members, and a collaborative approach can boost marketing efforts, both nationally and internationally.

This short report considers some of the features of collaborative group marketing, based on data gathered from pine and hardwood timber marketing ventures undertaken by the Farmwood Tasmania Co-operative Society Ltd.

The report concludes with a discussion on Farmwood Tasmania’s efforts to establish an Australia-wide marketing arm for 14 treegrower cooperatives, to be known as Farmwood Australia.

Project objectives

Demonstrating that farm forestry can generate viable returns

Organised, regional coordinated marketing
Collaborative marketing has the potential to overcome the impediments associated with fragmented, small-scale forestry; as well as those of long-term, cyclical, and sporadic harvesting of timber.

Harvesting timber from a family forest or plantation is usually a once-in-a-lifetime occurrence. Given this, individual farmers are unlikely to develop the necessary skills to manage their trees sustainably, or develop the knowledge required to market their timber resource effectively. Most farm foresters have tales to tell of exploitation and poor treatment by processors from the traditional timber industry.

Aggregation of resources overcomes the problem of delivering timber of variable quantity and quality—ensuring consistency of supply of products of guaranteed quality—two attributes sought by any buyer of timber products, whether for woodchips or fine furniture.

Single-desk marketing via a regional, coordinated structure ensures that marketing experience is developed, resources to fund promotion are pooled, and economies of scale are provided, which enables effective servicing of export markets.

Two legal structures available to farm foresters in order to engage in collaborative marketing are: 1) a producer company 2) a trading cooperative.

Farmwood Tasmania chose to take the cooperative route, which will be further explored in the final section of this report.

While governments have invested heavily in encouraging farmers to plant trees, considerably less effort has been spent on how they might sell the products generated through farm forestry.

This project starts from the premise that the major inducement to farm forestry is a demonstration that reasonable returns are possible. Farmers want evidence that ‘money can grow on trees’ before they will invest—either in new plantations or in better silvicultural management of existing privately owned native forests.

This section discusses, first, the contention that aggregating and cooperating can help farmers to obtain a fair share of timber profits. As its very first point, the draft discussion paper calling for the formation of Farmwood Australia argued that, ‘The widely dispersed growers with their equally dispersed species, quality and quantities of resource are of limited use to themselves or to industry.

Aggregated they have the opportunity to be part of the real world.’ This section then considers how small-scale growers of plantations and private native forest are suited to pursue a niche-market, value-adding approach that maximises returns to them from their low-volume plantation or forest woodlot.

In Tasmania, and much of the rest of Australia, many mature family-owned forests consist of regenerated native forests, dominated by eucalypt species, that have been periodically harvested for generations.

With more than 8 000 000 hectares of native forest privately owned in Australia, encouraging sustainable harvesting would deliver both ecological and economic benefits.

Pursuing niche markets, rather than chasing commodity markets
One option for smaller enterprises is to avoid direct competition with bigger and better resourced industry competitors. Small-scale foresters can seek to differentiate themselves from traditional timber industry processors, providing products and services that no-one else can.

The large-scale timber industry is capital intensive, relying on fast and efficient production of high volumes of low margin commodities such as woodchips, logs and, increasingly, kiln dried flooring. The experience of Farmwood Tasmania has shown that even where farm foresters are able to aggregate such commodity markets for mass export, traditional industry providers will eventually undercut and outcompete. The scale of large timber industry operations produces natural competitive advantages at the capital-intensive, high-volume, low-value end of the market.

By their very nature, the competitive advantages of family foresters lie in pursuing labour intensive, high value, niche markets.

Where farm forestry is small in scale and forests or plantations consist of diverse timber species, family foresters are ideally placed to deliver personalised service aimed at high-value, niche products.

As self-employed people with a broad range of experience, family foresters are capable of delivering premium grade, silviculturally-managed products, rather than vast quantities of timber commodities such as woodchips, posts, poles or firewood.

Where farm foresters control the supply chain through structures like Farmwood Tasmania, they can offer tailor-made solutions to suit buyers. An added competitive advantage is that farm foresters can offer buyers traceability between the grower and the buyer, guaranteeing the source of the timber. Selling to middlemen, such as sawmillers, breaks the chain of custody between the grower and the targeted buyer.

So while aggregation delivers horizontal integration, leveraging via a single-desk marketing structure that controls the supply chain, delivers vertical integration.

Seeking out niche export markets
Farmwood Tasmania’s experience shows that domestic timber industry buyers pay the minimum to keep growers interested. Low timber royalty rates set by State-owned forestry authorities exacerbate this practice. This is understandable: a sawmiller could hardly be expected to pay aboveaverage stumpage to a farm forester, when similar resources are available from State-owned forests at minimal royalty rates.

Exporting not only provides entry into a more diverse range of competitive markets, but also puts upward pressure on domestic timber market prices.

Exporting puts small-scale foresters in touch with the real value of timber products on world markets.

There is, however, no future for cooperatives of small-scale farm foresters exporting commodity products. When Farmwood Tasmania attempted to export container loads of pallet-grade logs to China, industry competition applied pressure.

Farmwood Tasmania was selling the logs for $US 88/m³ with an acceptable profit margin of $A35-40/m³. Within a year, a traditional industry player had moved in and undercut Farmwood Tasmania, reducing the cooperative’s profit margin so it was getting not much more than the going price for pulp ($A12/m³).

Farmwood Tasmania’s response has been to move from bulk shipment to the delivery of higher grade pallet logs. In other words, the cooperative is making use of established relationships that guarantee the quality of the logs delivered to the client—a personalised service that is beyond the capability of the traditional, commodity-focused timber industry exporter.

Orienting towards Asian export markets
Farmwood Tasmania has considerable experience in exporting to Asian markets. Because of Australia’s proximity to Asia, this region would seem the logical starting point for freighting timber by ship.

This is not simply to take advantage of lower freight costs, but also the distance between Asian markets and other developed economies in the northern hemisphere gives Australia a competitive advantage.

 Moreover, Australia’s image as a small, ‘nonthreatening’ nation and our location within the Asian region offers a head-start in opening negotiations with prospective timber buyers.

Asian markets hold enormous potential, especially China. While it is probably the toughest market to service, the opportunities of opening up niches would seem limitless. Practically any region within China would be able to absorb all of even the largest timber cooperative’s resources in any given year.

Techniques for servicing niche export markets

While there are abundant market opportunities in the Asian region, they can only be reached through active marketing on the seller’s part. A cooperative interested in exporting needs to pick a target region, and send a representative there to survey possible markets and establish ‘face-to-face’ relationships. Marketing in Asia is often built around personal relationships—this trait is well suited to the nature of cooperatives and the way they operate.

Farmwood Tasmania has accumulated considerable export experience. These experiences, amongst others, form the basis of the observations on servicing niche markets in Asia:

Strategic alliances
Once a cooperative is in the export business, the word soon gets around among importers. The hard part is initially gaining a reputation for delivering a product of a specified quality, at a specified price, on time. Once the cooperative’s track record demonstrates an ability to meet those three essential conditions, the buyers will actively seek their business, and are often prepared to pay a bit extra for their services.

When starting out in export marketing, cooperatives can utilise existing expertise and experience from like-minded joint-ventures, such as other cooperatives. For the inexperienced export entrepreneur, the initial establishment of procedures can prove very expensive, as everyone in the production chain may inflate their overheads as a contingency hedge against your inexperience.

Another reason for a first-timer to seek a strategic alliance is that obtaining an export license can be time-consuming. For Farmwood Tasmania’s first export venture to Korea, the market for pine logs, initially booming, had plummeted by the time the cooperative had acquired an export license.

When moving into any new market, cooperatives should start slowly, only giving the importer a taste of what they can deliver. Written references should by checked thoroughly, and the reliability of potential buyers can be picked up by local discussion. Cooperatives should scrutinise in detail any letters of credit, to minimise the risk of buyers backing out of payment.

Relationship marketing
As aggregates of farm foresters, cooperatives can play to their strengths, by building personal rapport around specialist niches.

In Asia, face-to-face contact is indispensable in securing business opportunities. While initial contacts through email or fax can be effective,
 
Ornate Taiwanese table 
carved from the roots and
butt of timber similar to 
cypress stumps, readily available 
in Australia.

Basic principles of successful export marketing
Creatively pursuing niche market opportunities and calculated risk-taking should be accompanied by basic business prudence, and negotiations and transactions should be documented.

Marketers will need to obtain a letter of credit, backed by a reputable bank, from any buyer. All imaginable contingencies should be covered in the freight instructions accompanying the letter of credit. As an example, a process of independent arbitration ought to be specified in the event there is a dispute over log measurement.

Payment is either by f.o.b. (free on board) or c.i.f.
(cost, insurance and freight). Under f.o.b. the letter of credit is deposited in the buyer’s bank and is paid when the ship’s captain signs the bill of lading that all the cooperative’s timber is on board and locked down.

 Under c.i.f. the buyer does not pay until the timber arrives—which means the seller needs more capital to pay for the freight, but the opportunity arises for the seller to make a margin on the freight. A freight margin of $2 per tonne delivers an extra profit of $60 000 on a 30 000 tonne shipload of timber.

The down-side is the risk of delays to shipping.

Demurrage, (i.e. detention of a vessel beyond the agreed time of loading or unloading) can cost up to US$25 000/day.

The following issues are specific to the export of timber:

Containers
Resist the temptation to overfill: if logs are forced in, the containers will lose their shape and therefore stackability. A standard container is 6m long, 2.4m high and 2.4m wide.

Containers have to be clean. A certificate of origin is required for quarantine, declaring there is no mud, disease or rot inside the container.

One of the problems with exporting cypress roots to Taiwan was that they required expensive, high pressure hosing to remove all traces of dirt.

Loading
A continuous flow of logs should be maintained under the slings when loading at dock. Any breaks in flow reduces the loading rate, increasing port charges (demurrage).
 
Locally grown
E. grandis logs near
New Delhi, India,
that will provide
small dimension
componentry
for furniture
manufacture.
An excavator loading 
logs into a standard container.

Measurements Every log has to be tagged and measured, with a log list drawn up identifying each log. The volume supplied is deduced from tables and has to be accurate to avoid time consuming and costly disputes.

Moisture levels
Moisture loss or gain is not an issue with green wood in transit. For kiln-dried wood, however, variations in moisture levels can prove critical.

Beijing, for instance, has almost no humidity, and buyers specify that kiln-dried moisture levels of 8% must be met at docking. In more humid southern China, clients know that kiln-dried will pick up moisture, and they will accept a 2-3% variation.

Unloading
It is advised that unloading be supervised at the destination to avoid costly mistakes, such as a container falling off the back of a truck and cracking the contents.

Kiln-dried wood versus logs for export
There are practical reasons for focusing on exporting kiln-dried wood rather than logs, as well as the benefits of value-adding.

Logs contain 50% water, with another 20% of heartwood and sap. In the export of logs, a large proportion of freight costs are for a useless component of the product.

Furthermore, container loads of logs have air gaps, whereas a container of sawn boards can be packed tight: a standard 6m container will hold 22m³ of sawn timber compared with 18m³ of logs.

Milling and drying of Australian timber species is unfamiliar to Asian markets. As a result, mistakes are more likely. Supplying kiln-dried timber avoids customer dissatisfaction and blame for damage.

One major disadvantage of exporting kiln-dried timber is that tariffs, in China at least, are high. The following section discusses an option for alleviating these.
 
Pine logs in a sling being swung aboard. 
The author at right supervises loading of 
Farmwood Tasmania exports as a matter 
of course.

Export shorts
Rapid drying of short lengths of timber (~1m) reduces costs prior to export, and thereby offsets high tariff costs.

As it happens, exporting shorts is a perfect match for a number of Asian markets —such as India and China—for which timber has traditionally been a scarce resource. Consequently, these markets are accustomed to both small dimensions and short lengths of timber. Both the Indian and Chinese industries, for instance, practise expert fingerjointing of small pieces of timber .

In China, floating wooden floors on a cement base are generally made up from 900x19x100mm tongue-and-groove, moulded-end joints. Eucalypt species such as mountain ash and messmate are ideally suited. As flooring, only one good side on the board is required, with the short lengths further increasing recovery rates from sawlog material.

Farmwood Tasmania has developed a technique to kiln-dry green, off-sawn timber in just 18 days, a considerable advance on the 8-9 months usually required.

The opportunities for exporting shorts are not confined to flooring. Fingerjointing has become entrenched as a standard timber production process, extending in its range to everything from panels and beams to tables.

Returns to the grower
Returns to the cooperative and grower are substantially higher than the $12/m³ for woodchips, $20/m³ for pallet grade and $80/m³ for veneer grade logs.

The export sale price of 920mm long floorboard (19mm X 90mm) to China is approximately $A900/m³. The costs associated, detailed in Table 1, total $703/m³, presenting an above-average profit margin of 21.9%.

Exporting pine
Exporting pine worked well for Farmwood Tasmania until the resource ran short.

Prior to exporting, returns to plantation growers of radiata pine in north west Tasmania were a meagre $8, at best. There was no multi-grading: growers were given a single price regardless of timber quality.

In contrast, New Zealand family foresters gained a premium price of $A160 for their pruned pine logs, and for top veneer grade logs the best domestic returns were $50/m3.

Returns to growers quadrupled as a result of Farmwood Tasmania’s second shipment of unmanaged pine logs to Korea. After muddling through the first shipment, the cooperative achieved returns to growers of between $27-32/m³ for logs and $8/m³ for pulpwood, but more importantly these contracts opened doors for further exports around the Asian Pacific region—from India to Ecuador, from Papua New Guinea to south China.

As a result of personal recommendations stemming from this contract, the cooperative was approached to deliver 6000 tonnes of pine logs to India at the same price as they received from their Korean buyer.

Most of the pine shipped would not have had any market in Australia. Knotty pine, for instance, has been exported to India for use in concrete form work.

Table 2 demonstrates the effect exporting has had on moving prices paid for pine over a range of grades.

Craftwood
Farmwood Tasmania has received enquiries from potential overseas buyers for craftwood blanks for woodturning. Species such as blackwood, banksia, casuarina, sassafras and myrtle hold the potential to deliver substantially higher returns to growers where the cooperative could assemble container loads. This is a goal that a national marketing organisation such as Farmwood Australia might pursue. Farmwood Australia could set up a database of rare woods and their availability.

On the domestic market, top grade blackwood and myrtle logs are attracting $80/m³ for veneer.

Domestic craftwood contracts are paying $60/m³ for casuarina and for wild cherry.

Turning blanks of feature wood, fiddleback, hobnail burls fetch up to $100 per piece (300x300x50mm); or about $22 200/m³.

Providing up-to-date market information

Gaining timely information has been difficult for Australian small-scale foresters, as the timber industry maintains secrecy about their costs and prices. Without up-to-date market information, small-scale operators are severely disadvantaged.

In contrast, in New Zealand timber costs and prices are published weekly in rural papers alongside lamb and beef prices. Tropical timber market information is regularly and widely circulated via email.

Farmwood Tasmania originally instigated what has developed into the Australian National University (ANU) Forestry Market Report, which is distributed widely on a quarterly basis by Dr U.N. Bhati, Marketing Research Forestry at ANU . Farmwood Tasmania is still actively involved in the supply of information, and is a member of the overseeing committee led by Dr Peter Kanowski, Professor of Forestry at ANU. Other supporters and members of the committee are the Joint Venture Agroforestry Program, Private Forestry Council Victoria, the Federal Department of Agriculture, Fisheries and Forestry (AFFA), the 2002 Vision and the Australian Bureau of Rural Economics.

Published quarterly in such sources as the Australian Forest Grower magazine, Agroforestry News and the National Association of Forest Industries Newsletter, the ANU Forestry Market Report has regular features on market trends on prices and costs. New Zealand radiata pine log prices are published quarterly. These are sourced from the New Zealand Ministry of Agriculture and Forestry, which produces them as a regular service for growers.

A recent innovation is the stumpage case studies, which are collected from other treegrower cooperatives and regional plantation committees, on actual stumpages received by small-scale growers in various regions of Australia.

Another source of information is regular email reports from well-placed international sources.

Industry processors need to be encouraged to be more transparent with market information, as the ANU Forestry Market Report still relies heavily on anecdotal evidence from cooperatives and individual growers.

For its members, Farmwood Tasmania holds regular information nights for members to discuss prices and market trends, as well at least one public meeting a year. Information is also passed on to government agencies for further dissemination.

Farmwood Tasmania has also supplied information on export procedures and costs for stockpiling, measuring, tagging, stevedores and certifications to other cooperatives and groups as they enter the export trade.

Farmwood Tasmania was instrumental in initiating the irregular Treegrowers Co-operative Newsletter published by Australian Forest Growers and funded through the Federal Government’s Natural Heritage Trust Program. This newsletter is mailed out to all known forestry cooperatives, regional plantation committees and like-minded groups.

Aggregating niche market resources to secure long term viability

A spot sale price is always lower than that paid for large-volume sales. No matter what farm product is being sold—whether wheat or faba beans, woodchips or craftwood —scaling-up is almost guaranteed to ensure a better price from buyers.

Within farm forestry, it is commonly understood that small-scale growers can only improve their market position by planning and aggregating their harvests. This provides the continuity, volume and reliability of supply that timber buyers seek. Garry Cronan, the executive officer of the Australian Centre for Co-operative Development and Research emphasises that their initial scoping has shown that size does matter in the marketplace.

Northwest Treegrowers Co-operative grew to 447 members partly by amalgamating with the other two Tasmanian cooperatives and then becoming Farmwood Tasmania. It now has a significant resource from which to base its operations.

In the rural sector, the producer cooperative is traditionally the legal structure of choice for aggregation of enterprises. Cooperatives are egalitarian in nature, they foster collaboration and they reward loyalty.

By the end of the 1990s, there were 19 treegrower groups around Australia that were either cooperatives or in the process of forming cooperatives. Farmwood Tasmania had reached the stage where it realised that to achieve bulk shipments to China, in particular, it would have to aggregate resources with other like-minded groups or cooperatives. single-desk marketing structure for all treegrowing cooperatives. It was envisaged that the move to a single marketing entity would deliver both economies of scale and better access to overseas marketplaces. The Farmwood trademark indicates that a cooperative’s timber has been grown sustainably.

In November 1999, the AFFA-sponsored, National Farm Forestry Co-operative Workshop allowed groups from across Australia to meet and coordinate activities. Gordon Banks, from Queensland’s Cooloola Forest Growers Co-operative, and Ross Henderson, from Farmwood Tasmania, were delegated to prepare a paper for the Australian Forest Growers Conference in Cairns, in September 2000, proposing a framework for a national ‘cooperative of cooperatives’.

Ross Henderson’s paper at the Cairns Conference called for treegrower cooperatives around Australia, to put up $200 per organisation as a ‘grub stake’ demonstrating their commitment to working together. Funds raised would be used to disseminate a prepared draft discussion paper for comment, and to start an e-commerce web site that would act as an electronic ‘sort yard,’ matching cooperatives’ existing timber resources with market opportunities on a nationwide basis.

The draft discussion paper was prepared with assistance from Peter Byrne, from the Queensland Department of Primary Industry. Farmwood Australia, the paper said, could be ‘a linking of the like-minded organisations around Australia electronically… Each cooperative or organisation would maintain their individual entity but be able to pass on problems solved, request assistance, give advice, post opportunities – such as orders they are unable to fill alone, or post resource that is looking for market outlets.’ The paper suggested Farmwood Australia could fulfil four key roles:

1. Setting and maintaining standards by ensuring the Farmwood Australia trademark gave buyers confidence in product specification, green credentials,
contract performance, organisation probity and creditworthiness;

2. Coordinating marketing efforts via resource aggregation for both domestic and export markets. This would include marketing

Development of Farmwood Australia
The concept for Farmwood Australia grew from the realisation that Australia has one per cent of world forests and the private, non-industrial part of that is less than half.

In October 1999, Tasmania’s three treegrower cooperatives formed a marketing organisation covering the whole of the State, known as Farmwood Tasmania Co-operative Society Ltd.

At the same time, Farmwood Tasmania registered Farmwood Australia as a trademark for branding farm forestry timber Australia-wide, whether plantation grown or regrowth native forest. The aim was to establish Farmwood Australia as a the cooperative movement itself to members, prospective members and the public;

3. Facilitating communication and networking between cooperatives through the newsletter and the website, providing exchanges of commercial information and market opportunities;

4. Promoting the use of forest products as a renewable resource, particularly solid wood products.

Farmwood Tasmania established a website for Farmwood Australia. An individual letter to each cooperative was followed up with extensive publicity in the Treegrowers Co-operatives Newsletter and personal contact, but there was a lower rate of response than was hoped for.

Farmwood Australia continues as a loose alliance with several other groupings, such as the Tasmanian Oak Growers Ltd, a small group of the State’s biggest forest owners and Queensland’s Cooloola Forest Growers Co-operative.

Farmwood Australia’s website (www.farmwood.com.au) still exists as the springboard for national marketing by small scale treegrowers. The website has a ‘log sort yard’ which can be used for promoting timber products for sale—eventually, it is hoped, across Australia.
 
Bundles of small dimension timber packed and
ready to go in India (often by bicycle – see left
foreground).

As aggregates of farm foresters, cooperatives can play to their strengths, by building personal rapport around specialist niches.

In Asia, face-to-face contact is indispensable in securing business opportunities. While initial contacts through email or fax can be effective,

Researchers’ details
Gib Wettenhall
Waalimma Productions
15 Dawson Street, South
Ballarat VIC 3350
Phone: 03 5334 4643
Fax: 03 5337 2911
Email: gib@netconnect.com.au		 Ross Henderson
TFGA Farmwood
Po Box 470
Devonport TAS 7310
Phone: (03) 6427 0507
Fax: (03) 6427 0507
Email: farmwood@southcom.com.au


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