RIRDC Short Report:
Trees for Profit - an integrated economic model shows how farm forestry can boost regional economies

A recently-completed project funded by the RIRDC/LWRRDC/FWPRDC Joint Venture Agroforestry Program demonstrates that tree plantations can produce good financial returns for farmers. More than that, though, the regional benefits of a developing farm forestry industry are potentially enormous, generating significant employment and flow-on to other industries.

Profitable Research

In 1993, the Victorian Department of Natural Resources and Environment (DNRE) and the School of Forestry and Resource Conservation at the University of Melbourne commenced the Trees for Profit Research Program (TfP). Under it, they established eight trials in northern Victoria to demonstrate and test the benefits of tree-growing for multiple benefits-particularly wood production and salinity control.

The TfP team envisaged that about 40,000 hectares of commercial farm forestry plantations could eventually be established in the vicinity of Shepparton and other northern Victorian towns. This would be a dramatic change in land use, one that could have profound implications for the operation of the regional economy. But what are they? Will tree plantations be a boon to regional development? How will they impact on other industries?

It was in this context that the Joint Venture Agroforestry Program agreed to fund a project to develop an integrated economic model for the region. This would help local councils and regional development organisations develop policies related to plantation development, not only in the region under study but also in other regions if the model could be adapted to local circumstances.

The modelling process

 Models, be they of aeroplanes, climates or economies, are approximations-usually in a simplified form-of the real thing. They are useful because they inform us about the real thing but are of a manageable size and structure. If they are realistic enough, they can be used to make predictions about the future, and can thus help planners and managers. In this study, statistical models were used to give us a picture of a regional economy in which a farm forestry industry develops.

The region that formed the basis of the study is the Goulburn Statistical Division (referred to as the Goulburn region throughout this report, but not to be confused with the Goulburn region of southern New South Wales). It extends from the Murray River in the north to near Toolangi in the south, Seymour in the west and Mansfield in the east. It includes the towns of Cobram, Nathalia, Shepparton, Benalla, Euroa, Broadford,

Marysville and Alexandra.

Researchers Bill Loane and Charles Todd used several models to first process information on forest growth and the regional economy and then integrate it to produce an overview of the region-wide effects of a large-scale tree plantation program.

On farm costs and revenues

The FARMTREE model developed by the Victorian Department of Agriculture was used to estimate annual wood volumes and cashflows of cost items and revenues in farm forestry stands. Separate simulations were run for eleven typical planting regimes: four in the irrigation zone and seven in the dryland zone (Table 1).

These regimes gave estimated rates of return ranging from 2.5-15 per cent per year, with final harvest revenues (at on-stump values) of $7,000 to $28,000 per hectare. These estimated returns included the benefits that trees can provide to agriculture through shelter effects and salinity amelioration, and the cost of 'losing' land for agriculture. Most regimes yielded more than a 7 per cent annual return.

Regional aggregation

A regional estimate of the costs and benefits of tree plantations was done using a newly developed computer program called the Farm Forestry Transaction Program (FFTP). This took the costs and returns of individual stands of trees generated by FARMTREE and aggregated them up to give a regional picture over time.

The central assumption used in the program was that the total area planted expands by a constant amount each year until, at the time of final harvest of the first crop of trees, a target area of two per cent of the region is occupied by trees of various ages. From then on, each block is replanted after harvesting so that the total plantation area is maintained over time.

The target of two per cent was considered a feasible and economically viable goal consistent with the targets for tree planting recommended in salinity management plans for the Goulburn region. If the target were achieved, the total area planted would be 38,000 hectares in the drylands and 10,000 hectares in the irrigation zone (as shown in Table 1).

Farm forestry and other sectors

The acts of establishing and managing tree plantations have a direct impact on other rural sectors: fencing, for example, requires labour and the purchase of fencing materials. The FFTP was used to predict the direct impact of the new farm forestry industry on other sectors for any given year in the future. Table 2 shows the costs associated with farm forestry management and the sectors to which these were assigned. 

Table 2: Assignment of costs for implementation of farm forestry

An evolving industry

Since farm forestry often does not produce commercial products for a number of years after planting, the researchers decided to look at three points in time (or 'snapshots') over the next few decades to illustrate the development of the farm forestry industry over time.

Table 3 shows the regional cashflow for the three snapshots over time taken using the FFTP.

They were taken at:

• year 10 (2004): farm forestry is growing in the region through the establishment of plantations. This growth stimulates the growth of industries that supply it with materials and services, but there is little or no output yet;
• year 25 (2019): farm forestry is in a transition phase at this time. Maintenance and thinning are taking place, new plantations continue to be established and some areas are yielding commercial products. A positive net cashflow has been achieved;
• Year 40: there is now equilibrium between harvesting and replanting.

A steady state has been achieved and there is a strong positive cashflow.

Figure 1 shows the projected development of the farm forestry industry in the region over a period of 60 years.

Table 3: Projected regional cashflows for farm forestry industry in the Goulburn region: threee snapshots in time

Regional input-output table 

The next step in the process involved the use of input-output tables. These represent the structure of the economy by showing the value of sales by each sector (or industry group) to every other sector. In the study, an input-output table showing the existing industrial structure of the Goulburn regional economy was constructed using the computer software program GRIT (Generation of Regional Input-output Tables).  

A comprehensive input-output table is only available at the national level for Australia (1989-90 being the most recent at the time of analysis). The role of GRIT was to establish relationships between the industry sectors at the regional level by adjusting the national table on the basis of industry employment statistics for the region in 1993. For later years, regional output was assumed to grow at a compounding rate of 1.9 per cent per annum from the base year of 1994, the same average growth rate for all Victoria over the previous nine years.

Including the new industry

Using the predicted farm forestry transactions generated by the FFTP program, the researchers added farm forestry as a new industry to the regional input-output table. This was done with the aid of another computer software package, this one known as GRIMP (Grit IMpact Program). GRIMP was also used to calculate the multiplier effects of farm forestry on other industries. 

The impact of farm forestry

The models allow an analysis of input-output tables for the region with and without farm forestry. Table 4 shows the effect a farm forestry industry would have on the regional economy once it had reached a steady state in 2034.

This takes into account:

The figures are dramatic. If the model is correct, the additional output from wood manufacturing in the year 2034 would be some $535 million, on the basis of a farm forestry output of $35 million. Overall, the establishment of farm forestry in the region would increase the value of output for all industries by $1.3 billion, or 6.1 per cent of total output. Regional income would increase by 4.8 per cent, or $302 million, and 5,748 new jobs would be created.

Because wood products have a high ratio of value-adding relative to raw resource value, the main employment impact lies in the 'downstream' industries rather than in on-farm activities. 

About three-quarters of the new jobs would be in the wood manufacturing sector: since log transport is expensive, there is considerable financial incentive to process locally. Local firms would carry out nearly all logging and carting, some sawing and production of posts and a relatively small but still significant proportion of higher-value processing such as furniture manufacture. Pulp and paper manufacture would probably be done outside the region, but niche segments would develop to take advantage of the distinctive characteristics of farm forestry products.

The main other sectors sharing in the stimulus would be wholesale and retail trade, 'other manufacturing', transport, forestry & logging, and finance.

Table 4: The additional output, income and employment generated in all sectors by a farm forestry industry in 2034 (Goulburn region)

What it all means

First, a qualifier

It is important to bear in mind that statistical models such as the ones used in this analysis are valid only when their underlying assumptions are met. This is rarely true, particularly in complex systems such as regional economies. The authors acknowledge, too, that the models can and will be improved over time as better information from ongoing trials becomes available. Thus, the information presented here should be treated more as a rough guide to the future than as a dead-set certainty.

The impact of farm forestry 

A farm forestry industry based on about 38,000 hectares of plantations will become a significant force in the Goulburn regional economy after about 20 years, generating considerable income and employment within the region. Flow-on benefits would be spread across a wide range of industries, with the expansion in manufacturing and tertiary industries much larger than that in the primary industry base.

The economy is not the only aspect of the region that would change. The landscape would take on a new look, and the sight of log trucks on the roads would become a common sight. Perhaps one of the advantages of the slow-growing nature of trees is that people in the region would have time to adapt to the new industry: time to acquire new skills in the management of plantations and the processing of timber and to plan the infrastructure that will be needed to facilitate its introduction.

The environment should benefit, too: if properly planned, farm forestry plantations can help lower the water table, reduce erosion and increase wildlife. Water quality in the Murray River should improve, benefiting not only people in the Goulburn region but also those downstream.

The study described here adds considerable economic weight to the argument for farm forestry. And, armed with the insight provided by the study, farmers, businesses, local councils and regional development organisations can start planning now for the changes that farm forestry will bring.