ethical forestry

I have just seen what sounds like something very similar on the back of the Amnesty magazine - something called the Cochabamba Project in Bolivia, promising up to 7.5% annual interest. (those sneaky 'up to' words could bite you in the backside I guess).

I'd be interested to know if these sort of things are on the level if you or anyone else finds anything out.

Saw an advert for Ethical Forestry and was interested in investing myself given the returns, but since I'm always cautious of scams I thought I'd do a bit of due diligence.

In summary, their business model on first discussion with the company appears sound (and great brochure), but their numbers don't.

The guy I spoke to claim that they have their foundations in pallet production (i.e. the wooden pallets you see everyday to transport goods). Their Forestry business was an add on to ensure that they could access plentiful supply of wood to grow their pallet business - seems fair, and good to see that they are involved all the way through the value chain and will actually use the wood produced, buying off you at market prices.

However, taking a look at the brochure and doing the maths raises some potential cause for concern. The returns they anticipate are not based on anything other than an over-inflated assumption around the price of wood (depending upon your viewpoint and level of optimism).

Forget everything else and simply focus on how many cubic meters of wood each cut returns, and how much they are paying per cut - you can easily calculate an average price per cubic metre of wood from the numbers they provide. If you calculate backwards you will be able to see that they are assuming an average inflation rate on the price of wood per m3 in excess of 15% per annum, compound (i.e. 15% increase every single year, year on year) – or 570% over 12 years (yes, five hundred and seventy percent).

This is where the stellar growth comes from. Assuming that wood is a worldwide commodity - i.e. it doesn’t matter where it grows, your view on this investment should really be based on the question - do you think the price of wood is going to increase by in excess of 15% per annum over the life of the investment. If you do, I will sell you some wood myself let me have your contact details.

If not, I think this is one to avoid - based on simple inflation of 3% it will hardly produce anything more than putting the money in the bank, and certainly not enough to cover the risk premium I would want to cover the fact that there might be forest fires, natural disasters, disease that could destroy your crop, etc…, or the fact that they own the land and you might have to go through all sorts of legal disputes in costa rica should anything happen to their company.

If you’re still not convinced that these returns are a tad too high, 2 more thoughts;
-The price of a m3 of coniferous wood used in the construction industry was around £15 at the end of 2011 (bbc.co.uk/news/business-15756074). If I back calculate using EF’s inflation assumptions, their starting price assumption for a m3 today is £74 (5 times quoted price), and they are going to pay you £133 per m3 in 4 years for your 1st harvest for the same basic kind of wood - REALLY?
– or alternatively,
- they are charging you £30 per tree upfront, and yet after 4 years of growing them when they cut down half of the trees (yes 300 out of 600), they are only paying you £20/ tree (before their management fees). Hmm? A net loss of £10/ tree on half your harvest four years on.

Your money - your investment at the end of the day. Good luck, won’t be one I’m investing in now I’ve been through some basic due diligence.