Irish land use change and the decision to afforest: An economic analysis.

Abstract

Considerable variability in the price of commodities, such as milk and cereals, occurred in the 2007-2009 period. This was compounded by a high degree of volatility in the price of inputs such as fertiliser, animal feed and energy. Previously, Irish farms have used the returns from off-farm employment as well as agricultural support payments, such as the Single Farm Payment (SFP) and the Rural Environmental Protection Scheme (REPS), to protect their living standards against low and uncertain agricultural market returns. However, the downturn in the Irish economy has led to a reduction in the availability of off-farm employment as well as the discontinuation of REPS. This in turn may lead to an increase in afforestation on Irish farms, as forestry offers greater certainty through the provision of an annual premium in addition to the SFP. The decision to afforest represents a significant long-term investment decision and therefore, should not be entered into without careful economic consideration. The aim of this paper is to use Discounted Cash Flow (DCF) analysis to calculate the returns from forestry enterprises, taking into account the opportunity costs associated with the conventional agricultural activities which would potentially be superseded by forestry. The returns from forestry were calculated using the Forestry Investment Value Estimator (FIVE), an economic decision support tool developed by Teagasc. These returns are then incorporated into a DCF model along with the agricultural returns foregone from five superseded agricultural enterprises. This approach allows for the calculation of the net present value (NPV) of three different forestry options and shows that the forest investment options examined all offer a positive NPV. The results also indicate that planting fast growing conifer species offers a substantially higher NPV than planting a broad-leaf species such as ash. Scenarios which assess the impact of the inclusion of the cost of reforestation after clearfelling and the impact of participation in the Forest Environment Protection Scheme (FEPS) are also examined as part of a sensitivity analysis.