One of the primary functions of the Australian Farm Forestry Financial Model (AFFFM) is to allow landholders and their advisors to explore the potential impacts of forestry development on overall farm profitability, financial position and cashflows. In this chapter, two case studies of real-life landholdings are presented. The first examines the development of native forestry operations on a landholding in the New England Tablelands region, and the second examines the development of a hardwood plantation on a landholding in the Darling Downs region. These case studies illustrate the data input requirements and the nature and interpretation of the output from the model

Cockfield, Geoff

Emtage, Nick F.

Thompson, David

University of Queensland eSpace

12.  Case Studies Using the AFFFM  
 
David Thompson, Nick Emtage and Geoff Cockfield 
 
One of the primary functions of the Australian Farm Forestry Financial Model (AFFFM) is to allow 
landholders and their advisors to explore the potential impacts of forestry development on overall 
farm profitability, financial position and cashflows. In this chapter, two case studies of real-life 
landholdings are presented. The first examines the development of native forestry operations on a 
landholding in the New England Tablelands region, and the second examines the development of a 
hardwood plantation on a landholding in the Darling Downs region. These case studies illustrate the 
data input requirements and the nature and interpretation of the output from the model. 
 
12.1  New England Tableland Native Forestry Case Study 
 
This case study illustrates the AFFFM can be used to investigate the financial implications of 
managing a private native forest for timber production. The data for this case study farm were 
collected in 1999 during the course of a previous RIRDC-funded project (Thompson 1999). 
 
The case study farm is located in northern NSW and falls within the boundaries of the Uralla Local 
Government Area (LGA). This is a family-owned business which operates with a high level of off-
farm income. The operational features of this business are set out in Table 12.1. The dominant 
commercial native timber species on the farm are native hardwoods (see Figure 12.1). While there is a 
range of eucalypt species on the farm, those of most commercial interest are: 
 
• Silvertop stringybark (Eucalyptus laevopinea);  
• Red stringybark (E. macrorhyncha); 
• Youmans stringybark (E. youmannii); and 
• New England blackbutt (E. andrewsii). 
 
These species are commonly taken by sawmills in the region which pay stumpage of about $25/m3, 
the price varying according to stand size, timber quality, site access and distance from the mill. The 
farm has a small fixed sawmill on site and the species mix currently put through the mill is 
approximately 80% stringybark species and 20% blackbutt. The owners are interested in processing 
their own timber on-farm for sale to local building supply firms. This would attract a sawn timber 
price of at least $320/ m3. Expansion of the current sawmilling operation for this purpose would 
require hiring additional labour, of two men for three days per week, to assist with timber sawing and 
one man for four days per week to assist with cutting and mill maintenance (i.e. 10 man days per 
week). The cost of this labour is estimated at $120 per day plus loadings for workers compensation 
and compulsory superannuation of 24%. On the basis of a 60% recovery (which assumes that only 
selected logs are milled), this corresponds to a labour cost of $89.65/m3 of roundlog put through the 
mill. There were also fuel and maintenance costs of $34/m3. 
 
The farm manager would be largely responsible for cutting, de-barking and log snigging operations 
using existing farm machinery. Based on State Forests NSW estimates of harvesting costs of $15/m3 
and the farm manager’s estimates of fuel and maintenance costs of $6/ha, the total cost of the log 
harvesting operation is estimated as $156/ha. 
 165 
Table 12.1. Case study farm structure 
 
Item Amount 
Total farm area 978 ha 
Approximate area available for existing native timber 
management 
400-500 ha 
Average carrying capacity (whole farm) 2.87 DSEa/ha 
Additional carrying capacity generated following non-commercial 
thinning 
1 DSE/ha for a period of 10 
years after thinning 
Dominant soil type Granite based soils 
Average annual rainfall 850 mm 
Initial livestock numbers: Merino ewes 800 
                                          Merino hoggets 560 
                                          Adult cattle 50 
                                          Young cattle 35 
Weaning rates: Ewes 70% 
                         Cattle 70% 
Wool production: Ewes 3.5 kg/head 
                             Hoggets 1.5 kg/head 
Farm labour situation A full-time manager operator; 
casual assistance as required 
Farm family expenses $8,000 per annum 
Opening equity level 69% 
 
a. DSE = dry sheep equivalent, the amount of energy required to maintain one dry sheep for a 12 
month period. 
 
It is estimated that about 10 m3/ha of harvestable timber might be extracted across the entire farm, 
although this varies considerably between different sites. Timber growth rates are estimated at about 
1-2 m3/ha (State Forests of NSW 1998). For the purpose of this case study, the simplifying 
assumption was made that the 400 ha available for logging is divided into 10 coups with a regular 
annual harvest (i.e. 40 ha was logged every year, so each coup had a 10-year recovery period).  
 
The management cycle thus becomes: 
 
Each year, log and thin 40 ha removing 400 m3 of logs and thinning the logged area at a cost of $112/ha 
(based on estimates by the farm owner and State Forests NSW). Thinning would be performed by chainsaw 
and brush cutter. Current stand density is estimated at between 200-300 stems/ha and this would be reduced 
to around 150 stems/ha. 
 
Due to the lack of market opportunities for thinnings in the region at present, thinned timber would be 
pushed into piles using a tractor and left to break down naturally. As a result, no commercial thinnings 
revenue is realised. 
 
Two scenarios are compared using the AFFFM, one selling timber at a stumpage price of $25/m3 and 
the other sawing the timber on-farm and selling green sawn product for $320/m3.  
 
 166 
Modelling results - selling timber at stumpage prices 
 
Samples of the model results are presented in Figures 12.1 to 12.3. For this analysis, the model was 
run over a 60-year planning horizon using a real discount rate of 6%. In Figure 12.1, the ‘Financial 
analysis’ section of the screen reports various financial performance measures for the with-forestry 
and without-forestry scenarios. In this case, there is a clear improvement in farm business 
performance for the first four performance indicators (NPV, LEV, NPV/ha and EAV/ha) when native 
forestry is included as a farm enterprise. The model could not calculate an IRR because all business 
cash flows were positive from the start of the analysis. 
 
 
 
Figure 12.1. Financial analysis of the development of a native forestry enterprise on a New England 
Tablelands region 
 
Figure 12.2 displays the business cash position (BCP) with and without forestry. BCP essentially 
tracks the businesses bank balance and is useful for identifying any periods of negative balances 
which may cause cash flow problems, especially if overdraft limits are breached. In this case, starting 
from an assumed zero bank balance, annual cash flows are always positive, so the BCP increases. 
Initially, this increase is slower because a loan is being repaid and principal and interest costs have to 
be met. After Year 5, this loan has been fully repaid, hence finance costs fall to zero and BCP 
increases more rapidly. The bank balance is higher at all time periods where native forestry is added 
to the existing farm business enterprise mix. This is to be expected in the current example because the 
net cash proceeds from native forestry activities are positive for every year. This may not always be 
the case, especially where expenditure on silvilcutural treatment is required in order to restore or 
improve the productivity of native forests that do not currently have harvestable timber. 
 
Because of its cumulative nature, the BCP calculation simulates the bank balance reaching very high 
levels after 60 years (in excess of $2M with forestry). In reality, additional investments may be made 
on or off-farm which would offset this rapid rise in BCP.  
 167 
 
 
 
 
Figure 12.2. Projected business cash position of the farm enterprise with and without the 
development of a native forestry enterprise on a New England Tablelands region 
 
The annual cash flows are illustrated in Figure 12.3. Unlike BCP, these are a non-cumulative measure 
and exclude finance costs. It can be seen from this figure that the native forestry enterprise is 
projected to increase the yearly revenue to the farm business by approximately $6,000 per year. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 12.3. Annual cash flows of the farm with and without forestry investment 
 168 
 
Modelling results - selling sawn timber 
 
The results of the financial analysis where timber is sawn on-farm are presented in Figures 12.4 and 
12.5. These results clearly demonstrate the superior financial performance that can be achieved where 
the forester is able to move along the value-adding chain and sell a processed product. The NPV with 
forestry has increased from $328,000 to $508,000 (Figure 12.4) and BCP climbs at a more rapid rate 
(Figure 12.5). 
 
Figure 12.4. Financial analysis of the development of a native forestry enterprise on a 
New England Tablelands region when the landholder processes their own timber 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12.2  Darling Downs Plantation Enterprise Case Study Figure 12.5. Business cash position of the farm business with and without the development of a nativeforestry enterprise on a New England Tablelands region, with on-farm timber processing  169 
 
This case study examines the establishment of a plantation enterprise on a mixed cropping farm on the 
Queensland Darling Downs. The property size is approximately 500ha, most of which is used for 
crops, although about 50 ha is used for grazing. Data used to populate the grazing scenario were 
derived in part from Clarke (1997). Under this scenario it is proposed that the grazing activities would 
be replaced by the establishment of a 50 ha plantation of Eucalyptus argophloia (White Gum). The 
initial planting would be at 400 stems per ha (sph), thinned at the end of years three and seven to 
achieve a final stand density of 150 sph. The suitability rating of E. argophloia on clay loam soil (100 
cm deep) and using the climate file for Dalby returned an average MAI for the 30-year rotation of 12 
m3/ha. In the scenario it is proposed that the timber from the plantation would be sold ‘on the stump’ 
for $50/m3. There are no obvious markets for the thinnings from the plantation. The agricultural 
enterprises have been simplified for the sake of the analysis: a mixture of 5 crops is grown over a 
four-year rotation period. The gross margins for the four crop types have been averaged across the 
entire cropping area to give an average gross margin of $260 per ha per year.  
 
Table 12.2. Characteristics of the cropping and livestock enterprises, Darling Downs landholding 
 
Item Amount 
Total farm area 500 ha 
Approximate area available for cropping activities 450 ha 
Total gross margin for cropping activities $117,000 
Approx. area available for grazing or plantation 
establishment  
50 ha 
Average carrying capacity (whole farm) 5 DSEa/ha 
Initial livestock numbers, young cattle 25 
DSE rating per head, young cattle 10 
Gross margin per DSE, young cattle 22 
Total livestock gross margin $5,500 
Overhead costs $47,000 
On-farm capital and maintenance expenditure $30,000 
Farm family expenses (per annum) $30,000  
Species used for plantation E. argophloia (White Gum) 
Plantation area 50 ha 
Plantation MAI 5 m3/ha/yr 
Timber price (stumpage) $50/ha 
Harvest age (years) 30 
Harvest volume 150 m3 
 
Analysis of the scenario outlined in Table 12.2 reveals that the inclusion of the 50 ha plantation 
reduces the NPV of the farming enterprise from approximately $610,000 to $532,000 at a discount 
rate of 7% (Figure 12.6). This indicates that the farm would be in a worse financial position if 50 ha 
of plantations were established. The plantation enterprise in the form that is defined in Table 12.2 is 
thus not financially viable if the landholders expect a return of greater than 7%, the required rate of 
return on this investment.  
 170 
 
Figure 12.6. Analysis of a whole farm scenario in the Darling Downs based on cropping and 
plantation enterprises 
 
The negative NPV for the plantation enterprise in this scenario is a result of a number of factors. The 
projected MAI of the plantation is optimistic at 12 m3/ha. The suitability ratings assume that fertilisers 
are applied to correct any soil nutrient deficiencies and that optimal management practices are 
followed. Use of the sensitivity function of the AFFFM model shows that an increase of 
approximately 4.5% in the MAI or timber price would be required to generate a positive NPV for the 
plantation enterprise. If the growth rate (MAI) is increased to 12.54 m3/ha/yr or above the NPV for the 
plantation enterprise is positive. Another factor affecting the projected viability of the plantation 
enterprise is the lack of financial returns for the plantation before the 30th year. The time required to 
produce timber acceptable to the present market means that the costs of the plantation establishment 
and maintenance must be carried by the landholders for too long a period. This is confirmed by Figure 
12.7 which reveals that the business cash position of the farming enterprise with plantation 
development would eventually exceed that for the farm without plantations. This measure however 
takes no account of the time value of money (i.e. the values used to calculate the business cash 
position are not discounted like those for the NPV).  
 
Further exploration of the scenario using the AFFFM presented in Table 12.2 and Figures 12.6, and 
12.7 is possible. Some scenarios that could be explored using the model include: 
 
• examining the financial effects of grazing under the plantations so that the farm does not lose 
all their cattle once plantation establishment occurs;  
• exploration of markets for thinnings from the plantation to provide earlier revenue for the 
enterprise; and 
• exploration of the potential to increase the growth rate of the trees in the plantation. 
 
 171 
 
Figure 12.7. Graphical representation of the business cash position of the whole farm scenario in the 
Darling Downs 
 
 
12.3  Discussion 
 
The two case studies presented in this chapter illustrate some of the functions that are available in the 
AFFFM and some of the issues facing the development of farm forestry in the two regions. They are 
based on real-life farming situations. These case studies are not, however, meant to be representative 
of all the farming enterprises in these regions. The viability of the native forestry enterprise for the 
New England region contrasts with the plantation development scenario presented for the Darling 
Downs region. The difference is a reflection of the higher costs involved in establishing a plantation 
relative to establishing a native forestry enterprise, and the displacement of grazing activities and lack 
of early revenues for the Darling Downs plantation scenario.  
 
References 
 
Clarke, M.R. (1997), Beef cattle production on the Darling Downs, Queensland Department of 
Primary Industries, Brisbane. 
State Forests NSW (1998), advisory forester, Armidale, personal communication. 
Thompson, D. (1999), Agroforestry from existing timber resources on the Northern Tablelands, report 
to the RIRDC/LWRRDC/FWPRDC Joint Venture Program, Armidale. 
 172 


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