I would like to be able to give you a lot of good news about trees on farms, and how they could improve your cash flow, your environment and the value of your farm. There is indeed some good news and I will give it to you, but overall the economic message is caution, careful assessment, sound management and marketing.

Trees on farms have many different purposes, but fall into two overlapping areas.

Firstly, agroforestry - trees grown as an alternative crop principally for economic gain. Radiata pine is the proven species in suitable areas, but there are other possibililties that have interesting prospects particularly in drier areas of our region. Examples include fodder trees, eucalyptus production and fruit and nut trees. Agroforestry can also counter land degradation.

Secondly, trees are grown to counter land degradation, in particular soil erosion, and to remove water from salinity recharge areas. Included in this broad conservation category are trees grown to provide habitats for wildlife. Trees in this category are not grown for direct economic gain, but nevertheless have distinct and measurable economic benefits and costs. Shelterbelts and windbreaks are included in this category.

It is more than of passing interest which category a tree planting enterprise falls into as each category is treated differently under the Income Tax Assessment Act. I will discuss this later in the talk.

Agroforestry

Agroforestry, and particularly Radiata pine, can be a profitable crop in this region providing the conditions are suitable. The critical conditions are:

• rainfall over 700 mm per annum, although some advisers believe that profitable plantations can be established at rainfall levels of about 650 mm providing soil conditions are good or where there is an accessible (to trees) non-saline watertable. In this region commercial tree growing below 700 mm rainfall should be considered experimental(1);

• deep soils;

• accessibility to markets. Currently high value radiata sawlogs are being transported up to 300 km, but pulpwood plantings should be closer than 100 km from the market;

• a potential market should be identified before agroforestry is undertaken.

If these conditions are met, radiata pine plantations should be given serious consideration as an economic farm enterprise. Real rates of return of between 5% and 6% per annum can be anticipated (i.e. rate of return after allowing for inflation). Over the past 10 years this would have given an average rate of return of 13-14% which is better than for most farming enterprises.

Guaranteeing a market and unfamiliar management procedures are a barrier to farmers entering agroforestry. Formal joint ventures with end users can overcome this. Joint ventures with ANM at Albury, for example, guarantee a market for pulpwood at a price determined by an 'independent valuer'. Management advice is also provided(2).

To give an example of how a radiata plantation could assist a farming enterprise, take the problem of handing a farm on to a son or daughter and struggling to keep two families on a farm that can currently only support one. If a young farmer plants, say, 40 ha of radiata pine by the time he is 27 (in his first 5-10 years of farming), by the time he is 57 and ready to hand over to his offspring his plantation would be worth $400,000 in current dollars, without professional management, and sold as 'framing logs', and up to double that amount if professionally managed. It provides a useful and flexible superannuation scheme and can be harvested progressively to keep the tax payable under control. There are certainly risks from fire and so on but there are risks in most superannuation schemes, even those tied up in bricks and mortar, for example unlisted property trusts.

What are the current costs for establishing a radiata plantation? We will begin with a bare (cleared) paddock of 20 ha or more that is already fenced(3).

Ripping - $100 - $120/ha

Seedlings - (1000/ha) $100 for

seedlings or $320 for cuttings

Grass Control - $60/ha including tractor costs

and chemicals

Boron (and no other fertiliser) $60/ha

Planting costs - $100/ha

Total establishment costs/ha - $420 to $660

The returns per ha from this plantation can be expected to be:

first thinning (about 12 years)

second thinning (about 19 years) - $1300/ha nett to grower

third thinning (about 25 years) - $2000/ha nett to grower

clear felling (about 30 years) - $9500-$10,000/ha nett to grower

Another option is to use lower density plantings to produce higher quality sawlogs. These are easier to market.

The costs per ha for establishing a 200 stem/ha plantation using cuttings are:

Ripping - $60/ha

Cuttings - $70/ha

Boron - $20/ha

Weed Control - $30/ha

Planting - $50/ha

Total Establishment Costs/ha - $230.00

There are three prunings or 'lifts' involved which reduce the number of stems to 150/ha and provide a small income. The main return is from clear felling at about the 30 year mark where a return of $10,000/ha is likely. In addition to the timber growth, wide placed trees allow for continued grazing after year 3 (hay can be cut in the first 3 years). The grazing reduces as the trees grow from about 75% sheep carrying capacity at year 8 down to 36% sheep carrying capacity at year 24(4).

Radiata plantations reduce runoff and erosion and provide shelter for stock. They reduce water entry into the soil profile and help to lower watertables. They cause slight soil acidification in the order of 0.1 of a unit over a 30 year rotation. This is considerably less than the acidifying effect of a subterranean clover pasture over the same period.

Radiata pine has been growing in Australia since 1918. It has a proven economic track record providing suitable conditions, including marketing, are met.

Non-Radiata Agroforestry

Most of the Riverina region is unsuitable for radiata pines because it is too dry. It has been stated that there is no known economic forest product in the non-radiata areas of our region.

There are many higher risk agroforestry ventures for our drier areas that are being investigated and tried. Some will probably make a lot of money, but by the time we find this out for certain we will have missed the advantages of getting in early.

Anne Boutland(5) from the Forestry Department of the Australian National University has completed a summary of the farm forestry enterprises and their economic outcomes throughout Australia. She has (in conjunction with Dr J. Field) also summarised the minor forest products (essential oils, seeds, cut flowers, etc) which may also be profitable enterprises. This paper will be presented at the National Conference on The Role of Trees in Sustainable Agriculture being held in Albury from 30 September to 3 October 1991. Some non-radiata agroforestry enterprises that appear as possible higher economic risk options for our region are:

Dryland Eucalyptus Farm Treelots

A simulation study has been carried out for a low rainfall area (<550 mm) growing small areas (about 2 ha) of yellow box and grey box at a density of 833/ha, with thinning at year 15 to 400/ha and harvesting the best trees for posts and poles at year 36, and from year 25 harvesting lower quality trees for firewood and poles. This study was developed for the Goulburn-Broken River Catchment in Northern Victoria, but could also be applicable to lower rainfall areas of our region. The study is interesting because it is typical of small scale dryland eucalypt farm plantations that are being considered for recharge control and native habitat. The economic result predicted by this study showed a loss of more than $2000/ha excluding salinity and environmental benefits over the rotation(6). These salinity benefits are quite high - about $100/ha/year.

Another farm woodlot study, this time in Western Australia, looks at integrating eucalyptus pulpwood production into agricultural systems, with the side benefits of groundwater control, shade and shelter. The trees (E. globulus) were planted in shelterbelts and harvested between years 7-12 and further pulpwood from coppice growth each 10 years. This was a share farming venture between the farmer and the investor (WA Chip and Pulp) on 600 mm+ rainfall land. Shares were based on their contribution to total costs and included a 7% real rate of interest compounded until harvest. This enterprise breaks even at pulpwood rates ($25 m3), double those currently offered in NSW (Eden $12 - $14 m3).

On this basis, as a purely economic agroforestry venture, eucalyptus pulpwood looks doubtful in this region. The analysis does not include the environmental benefits(7), nor does it consider the long term effect on sawlog prices of native forests being increasingly tied up for conservation purposes.

Minor Forest Products

Some minor forest products that are currently making money for some investors include:

Cut Flowers and Foliage

Producing cut flowers and foliage has primarily been tried in Tasmania, Victoria and Western Australia. It has been a small opportunistic market, but is growing. Western Australian exports have grown from $1.3m in 1980/81 to $7.7m in 1988/89. Some 45% of Western Australian exports are now cultivated wildflowers and there are 50 species of native plant cultivated over 800 ha of plantation. Main species include Kangaroo Paws, Geralton Wax and Banksias.

Eucalyptus Oil

Eucalyptus oil is already grown/gathered commercially in this region at West Wyalong, and there is research into eucalyptus oil production being carried out by the Department of Agriculture at Condobolin, the Australian National University, the University of NSW, and the CSIRO. Imports from China, South Africa and Chile keep prices down, but opportunities may exist for higher quality oil. Recent trials have examined the prospects for combining oil production with land conservation. The eucalyptus species suitable for soil production will grow in low rainfall areas on poor soils (e.g. 'ironbark ridges'). This country currently provides marginal returns from traditional cropping and livestock enterprises, and is subject to severe erosion.

Walnuts

Walnuts grow well without irrigation over 600 mm rainfall and grow well with irrigation below this rainfall.

There is a large market for walnuts worldwide and existing Australian growers (mostly in North-East Victoria) are confident that their nuts will sell well in Australia, displacing annual imports of around 2650 tonnes. The trees, however, would also provide income from the seeds, the shells and the high quality timber which currently sells for approximately $3000 m3. Establishment costs are high, in the vicinity of $3500 - $4500 in the first year (Boutland, 1991).

Pistachios

Pistachio trees tolerate low rainfall and saline conditions. The trees continue to produce nuts even under drought conditions. Australian pistachio plantations in Victoria, NSW and South Australia currently produce 75% of Australian demand. At about 7 years the nuts produce between 5-10 kg of dried nuts which sell for $15 - $20 kg. A recent survey by the Pistachio Growers' Association showed that the income from pistachios could be similar to that of walnuts or chestnuts. They estimate, with an interest rate of 17%, it would take 7 years until the first return, and 13 years to break even (Boutland, 1991).

Carobs

Carob has been grown in Australia for over 140 years. It is very drought resistant (down to 250 mm rainfall) and salt tolerant. It is a useful species for general shade and shelter and has the added benefit of producing palatable pods for stock. Economic data are sketchy. Under irrigation, carobs can produce 4 tonnes/ha/year by year 15. The pulp is valued at $2000 - $3000 per tonne (Boutland, 1991). This is a tree worth investigating.

Quandongs

Quandongs provide edible fruit and are native to this region. They grow in the semi-arid areas. The fruit can be used to make jams, pies and jellies. The CSIRO is conducting research into domesticating quandongs and some successful farm orchards have been established. Quandongs sell for $30-$40 per kilogram. Quandongs are members of the sandalwood family and, being parasitic, are hard to propagate. Very recent indications are that this problem may have been solved. This is a prospect worth investigating.

Olives

Olives grow freely around the Charles Sturt University campus. They are very hardy and will produce some fruit without any care. One olive tree without attention can produce enough olives (about 25 litres) for a family for a year. Commercial olive growing is well established.

Speciality Timbers

High value speciality timbers can be grown in this region and examples include trees such as silky oak, Queensland kauri, red cedar and crows ash, all of which can be found growing successfully in the Albury Botanic Gardens. Chris Borough, writing in a recent article in the Australian Forest Grower(8), points out that these timbers should face a declining supply and a growing demand and that, if marketed well, can command very high prices (in the order of thousands of dollars/m3). These timbers can offer high long term returns.

Marketing may offer returns for timbers already found on many farms and currently used for low value uses such as fence posts. An example is ironbark (E. sideroxylon) which was successfully used in the new Parliament House to line the lifts.

Non-Agroforestry Trees on Farms - Economic Aspects

Farm trees grown for environmental purposes, such as erosion control, windbreaks, groundwater control and wildlife conservation, have economic costs and benefits of which farmers should be aware.

Windbreaks

A number of case studies have looked at the economic benefits of farm trees and calculate these by comparing carrying capacity, handfeeding, lamb condition and survival in sheltered and non-sheltered situations. The assumptions are that lambs are valued at $20 each, hay is valued at $2 per bale, and the cost of establishing a 3 row shelterbelt is $420 per 100 m, less tax deductions(9).

Results

Property 1. In an unsheltered situation 60 out of 195 lambs are lost and cows are handfed for 12 weeks of the year. This compares to 30 out of 203 lambs lost, and no hay feeding in a sheltered situation. Based on these figures, property 1 has an annual benefit of $66/ha from its shelterbelts.

Property 2. In an unsheltered situation 2000 bales of hay are required to feed cattle for 20 weeks, lambs are ready for market at 16 weeks and sell for an average price of $20 each. In the sheltered situation, 1500 bales are required for handfeeding cattle for 20 weeks, lambs are ready for market at 14 weeks and sell for an average price of $22 each. Based on these figures, property 2 has an annual financial benefit of $60/ha from its shelterbelts(10).

Property 3. Has a 15% increase in sheep carrying capacity in sheltered paddocks which represents an annual financial benefit of $32.50/ha from its shelterbelts.

Property 4. Sheltered portions of this property have been valued at $900/ha, compared to $790/ha for unsheltered sites. This represents a 10% increase in land value directly attributable to shelterbelts.

These results are questioned by R.G. Dumsday and others(11) who say the economic evaluation is incomplete and tends to over-estimate the value of the shelter. Evidence from the USSR, USA and France, as well as common sense, indicates that shelterbelts do raise agricultural productivity by more than the cost of the shelterbelts themselves. They also look good.

Salinity Control

Trees are an important salinity control because they use water throughout the year, including summer when crops and annual pastures do not. Tree removal is considered an important cause of salinity in dryland areas. However, this does not mean that tree replacement is necessarily the most economically efficient method for controlling recharge(11).

A number of studies, particularly in Victoria, have looked at the most economical way to lower the amount of recharge water entering the watertable. The findings generally show that either trees or deep rooted perennial pastures can reduce recharge, but that trees do so at considerable overall cost, while perennial pastures achieve a similar result while making a profit. A recent study in the Kyeamba Valley near Wagga showed that phalaris establishment (without lime) generated a positive nett cash flow in year 2 with a wool market indicator at 500 cents or above, at the same time as reducing recharge(12). As a general economic observation, apart from radiata plantations, removing recharge water by tree planting costs money, while removing recharge water by perennial pastures makes money.

Amenity Plantings

Economists who are criticised as 'knowing the cost of everything and the value of nothing' are not renowned for valuing non-monetary benefits.

Trees do add beauty to a farm, provide shade and shelter and provide habitats for wildlife. The value placed on these aspects was probably quite low 10 years ago, but is now increasing steadily and many farmers spend valuable time and money establishing trees around the farm. It probably follows that if farmers value trees, they will also value more highly a farm with trees on it, hence improving the capital value of the property. Rural valuers who have been canvassed give limited support to this view, that a well presented farm sells better, and that trees and shelterbelts improve farm appearance.

Taxation Aspects

If the tree expenses are related to forestry or agroforestry then the deductibility should be considered under Section 51 of the Income Tax Assessment Act. If, however, the expenses in a tree program are incurred for the purpose of preventing or combating land degradation, then Section 75D provides for this capital expense deduction. I will consider forestry taxation and land degradation taxation separately.

Forestry

The taxation aspects of forestry are quite complex and a good overview is given in a short publication, "Trees and Taxation"(13). An investor or landholder considering agroforestry investments should get professional taxation advice. On a general level, the current taxation aspects of forestry are criticised for 'distorting individual investment in forestry, resulting in a suboptimal and inefficient level of private forestry investment in Australia'(14). As this criticism comes from the Federal Government agency, ABARE, it is hoped that it may lead to change.

In discussing the taxation effects on forestry, ABARE states that 'it would be expected that investment by individuals in forestry would be small (approximately 50 ha) and that those who do invest are most likely to have high non-forest incomes, such as investors with professional occupations. In addition, other potential forestry investors with low non-forest incomes, such as farmers and other individuals seeking investment opportunities, would be expected to form a minor percentage of individual forestry investment.' This is, in fact, the case.

Trees to Counter Land Degradation

This is a rapidly changing area of taxation law and one of the few areas that have become more generous for a landholder. The most recent changes were announced by media release on 10 July 1991 and have practical implication for landholders, so I will cover them in detail.

Land Degradation - Section 75D

Until the 1990 Budget, Section 75D of the Tax Act allowed full deductibility to expenditure of a capital nature incurred by a taxpayer who carried on a business of primary production in Australia, being expenditure incurred in:

• an operation primarily and principally for the purpose of preventing or combating land degradation otherwise than by the erection of fences;

• an operation consisting of the erection of fences (including any extension, alteration or addition to fences) on the land primarily and principally for the purpose of excluding livestock or vermin from areas affected by land degradation in order to prevent or limit any extension or aggravation of land degradation in those areas and to assist in the reclamation of those areas.

Although trees are not specifically mentioned in the section, there is ample scientific evidence to support the contention that tree planting is a necessary part of land degradation prevention and control.

Section 75D was extended in the 1990-91 Budget to allow for deductibility under Section 75D to include:

• all rural businesses earning income from the land (i.e. not just primary producers); and

• the erection of fences (including any extension, alteration or addition to fences) primarily and principally for the purpose of preventing land degradation (other than sub-divisional fencing within areas of the same land capability), in accordance with a whole farm plan.

The taxation treatment of other environment related capital expenditures is subject to further review by the Treasury. The results will be announced in the next Budget (1991/92).

The key issue in this extension of Section 75D was the need for a 'whole farm plan' before deductibility for fencing was allowed. Fencing is a major cost component of many tree plantings to control degradation on farms, and so the 'whole farm plan' was a problem. The Soil Conservation Service of NSW, now Conservation and Land Management, does provide very high quality farm plans, but at a cost of $1500 each and after a 6 month wait.

Incidentally, hobby farmers cannot make claims under Section 75D of the Act.

On 10 July 1991 the requirements to allow primary producers a tax deduction for fences erected primarily and principally to prevent land degradation were relaxed. Whereas since 21 August 1990, rural producers and farmers may claim the costs of fences erected in accordance with an approved farm or land management plan, now a farmer can draw up his own land management plan and have it approved by an officer of a land conservation agency or an approved farm consultant within his State.

Furthermore a whole farm plan is no longer necessary and the rural producer can qualify with an approved land management plan of only part of a farm. The plan should be on a map or air photo and show the fences and different classes of land.

In summary, tree planting associated costs to counter or control land degradation should be 100% tax deductible under Section 75D.

Some Economic Observations on Trees

The costs of non-agroforestry tree establishment vary greatly from up to $5 per tree (seedling, enclosure, weed control, etc) to $150/ha using direct seeding for over 1000 trees (or 15 cents per tree). Natural regeneration can be even less expensive if care is taken to keep fencing costs down. A couple of years' stock exclusion can have quite dramatic regeneration effects in this region at minimal cost. Since the benefits are similar regardless of how the trees are established, the best return on investment should come from the lower cost tree establishments.

Joint Ventures and Forestry Consultants

Farming has been characterised by low cash flows and relatively minor taxation difficulties, with capital gain being the main source of wealth generation. City-based professionals frequently have high cash flows and are seeking taxation relief with long term capital benefit. It should be to the benefit of both parties to form joint ventures in agroforestry. The farmer gets cash flow and the investor gets tax relief and long term capital gain. The potential for such ventures currently exists. Before proceeding, it is advisable to use a forestry consultant from within this region to set out the joint venture agreement and advise and supervise the forest development.

Some Conclusions

• Radiata plantations as a joint venture under suitable conditions are a viable economic prospect.

• Non-radiata agroforestry ventures are currently unproven and therefore in the high risk category. Some opportunities appear to be worth investigating as they show the potential for high returns.

• Trees do help to control land degradation. For widespread recharge water control however, perennial pastures are a more cost effective solution in this region. Plant trees for pleasure, plant pasture for profit.

• Trees have marked shelter and shade benefits as well as improving a farm's appearance. These all have economic benefits.

• Taxation is not an important incentive for farmers to plant trees other than to counter land degradation.

References

1. Peter Rutherford, Australian Newsprint Mills (ANM), Albury,19 June 1991.

2. Peter Rutherford, ANM, 19 June 1991

3. Forestry establishment costs and returns are based on the actual costs and results achieved by ANM in the Riverina Region.

4. Borough, C. Agroforestry - A Broad Perspective. In Australian Forest Grower. Winter 1989, Vol.12, No.2.

5. Boutland, A. (1991). Economics of Agroforestry and Farm Forestry in Australia. (In press).

6. Loan, W. (1990). The Economics of Tree Planting and the Farm Tree Model. Paper to Workshop on Dryland Salinity Control, Dookie, 28 February 1990.

7. Bartle, J. (1991). Tree Crops for Profit and Land Improvement. WA Journal of Agriculture, Vol. 32, pp.11-77.

8. Australian Forest Grower, Vol.13, No.1, Autumn 1990. Special Liftout Section 12.

9. Victorian Garden State Committee, Victorian Farmers and Graziers Association (1984). Financial Benefits of Farm Trees. A brief economic study of trees on four Victorian farms, Melbourne.

10. Boutland, A. (1991). (Press).

11. Dumsday, R.G., Pelger, R. and Oram, D.A. (1989). Is broadscale revegetation economic and practical as a groundwater and salinity management tool in the Murray-Darling Basin?

12. Thorne, P. and Walker, S. (1991). Landcare News No.8, July 1991.

13. Trees and Taxation (1989). Joint Trees on Farms Program. Roberts, D. University of New England.

14. Taxation and Individual Forestry Investment. Some issues and policy implications (1991). Australian Bureau of Agricultural and Resource Economics (ABARE), Canberra.