Forestry development in Paraguay: a tall opportunity
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Forestry development in Paraguay: a tall opportunity
In a context of decreasing global availability of natural forests and growing demand of sustainable wood products, Paraguay offers opportunities in forestry that go beyond its excellent climate and soil conditions and general advantages for agribusiness investment.
Mild temperature year round and high precipitation regime contribute to a faster growth rate and good yields of some commercial species and consequently, to a shorter payback period: 12 years versus up to 40 years in other countries.
The Paraguay native forest has unique wood material (tajy – Tabebuia Hepthapylla, yvyraro – Pterogynenitens, ybyrapyta – Peltophorumdubium, kurupay – Piptadenia macrocarda, etc.) suitable for added value products as timber, profiled and floorboard wood and carpentry and building components.
The country has extensive know-how of the forest industry, especially in wood flooring and biomass production and the mainly young population is open for training. Finally, land ownership is structured in great surface plots suitable for commercial plantations.
THE PARAGUAY FOREST
In the 20th Century, the once dense native forest was severely decimated by uncontrolled cropping and transformation into cultivated land. In 1973 forestry law 422/73 declared in the public interest the rational handling of forests to control erosion and protect water basins. Yet illegal exploitation continued as agriculture soared. In 2004 Paraguay had the highest deforestation rate in America when the Government passed the “zero deforestation” law that prohibits transformation of forest soils into agriculture in the eastern region, now until 2018.
The National Forestry Institute (INFONA) started projects with the Food and Agriculture Organization (FAO) to encourage sustainable forestry development and UN-REDD+ aimed to reduce emissions. Now, Paraguay has national plans for forestry competitiveness, agro forestry policies, inventory, updated thematic maps for investment orientation and a National Forest Monitoring System. Management of indigenous forests, boosting of planting programs and modernization of the institutional framework were identified as crucial issues for sustainable development and employment increase.
The National Forestry Inventory (2015) identified 16:700.000 hectares of native forests; 2:400.000 ha palm trees and 53.000 ha of commercial plantations. The total amounts to 47% of country area.
|INFONA Maps Project TCP PAR 3304||INFONA Maps Project TCP PAR 3304|
|Caazapá, San Pedro and Alto Paraná departments concentrate almost 60% of plantations (31.000 hectares)||High potential areas (less than 100 km from ports or industries) add up to 9:000.000 hectares, mainly in central Paraguay.|
CHARACTERIZATION OF THE SECTOR
The Paraguay forest industry ranges from seed and seedlings production to final shipment of finished products. It includes at least two industrial chains: mechanical processing (sawn wood, boards, joinery, floorboards, laminates, moldings and furniture) and energy production (firewood, charcoal and biomass). Activities are agricultural, including nursery production of reproductive material and seedlings, tree planting, forest grooming and harvesting and industrial. The sector is well served by transport, logistics and associated professional services including commercialization.
However, both the mechanical processing and the energy production chains have deficits in the continuous supply of raw material, which ensures steady need. Timber demand for industrial use keeps growing while the offer decreases with a bigger gap since 2013. FAO calculated that to fulfill demand of installed industries by 2020, planting should average 10.000 hectares/ year.
Industrial use timber supply versus demand evolution 2003-2020 source: FAO
Biomass accounts for 46% of energy consumption of the country, 78% of it produced from wood chips and charcoal. This tendency will continue since fuel oil and electricity are pricey and most small and medium industries have biomass boilers difficult to convert. Planting to meet demand in 2020 should average 25.000 Ha/year.
FORESTRY INVESTING OPTIONS
Considering the raw material deficit, a good initial strategy is to concentrate in agricultural activities, where there is business engineering that allow to profit from know-how and investments already in place. Firms such as Paraguay Investments work with land owners supplying clone seedlings, land preparation, planting, cropping and harvesting services and transport to industrial facilities. One possible legal figure is the warranty trust, where one party (settlor) gives access to another (trustee) to some assets –with or without transferring ownership- to operate towards a certain goal in benefit of the first party or another beneficiary.
The most common plantation types of new commercial forests are:
- Solid timber from cloned Eucalyptus grandis or urophylla, with commercial cutting at 24 and 60 months and full cut at 14 years. Median annual increment (MAI) 30 m3/hectare/year.
- Solid timber from Eucalyptus grandis from seeds, with commercial cutting at 24 and 60 months and full cut at 14years. MAI: 26 m3/hectare/year
- Biomass from cloned Eucalyptus grandis or camaldulensis, with no commercial cutting and full cut at 7 years. MAI: 60 m3/hectare/year
At full cut, all types have better internal return rate (IRT) than cattle (bovine raising and wintering) and agriculture (soy and its chain) though the profit is reaped only at full cut. In a 2014 study of returns over investment in cloned eucalyptus for solid timber published by INFONA, IRT in 10 years was 17.04% factoring in land cost and 18.87% when expected price increment in the period is considered.
Cash flow of commercial forestry plantations. Source INFONA return on investment in timber forestry
Another option is working with native species, either from managed natural regeneration, rational use of mature trees and planting of good size and high commercial value species as lapacho (Tabebuia spp,), cedar (Cedrela sp.), petereby (Cordia trichotoma), or incense (Myrocarpus frondosus). There are about 20 such species identified in western Paraguay (Chaco) of which about 14 are also present in the eastern region. Mature trees have typically great dimensions, and relatively fast growth rate. Productivity of native forest in sustainable production is lower than in commercial plantations (MAI 1.6 m3/ha/year) but is compensated by higher prices and may be improved with genetic manipulation and forest husbandry techniques.
The most valuable production is solid timber for industrial processing, with a wide range of technological characteristics among species that makes them useful for many products. Installed industries export railway sleepers, profiled or floorboard pieces, construction carpentry components, serrated timber, laminated wood sheets and composite wood panels.
Eucalyptus combined with yerba mate
Both exotic and native plantations can be managed in combination with other types of land exploitation to improve and diversify farm production, prevent soil degradation, conserve water and capture carbon. Agro foresting and sylvopastoral systems associate ligneous species with annual crops, fruit trees or grazing and refuge for cattle. To the investor, the combination offers better returns and earlier positive cash flow.
REGULATIONS AND TAX BENEFITS
Paraguay offers ample benefits for foreign and domestic investments, including some specific for the sector. The most important general benefits are 60/90 Law (fiscal investment incentives regime); 1.064/97 Law (Maquila, a regime of subcontracting for the productive process and re-export of goods and services); Free Zone system (temporary suspension of customs and internal taxes on machinery, capital, and raw materials) and MERCOSUR rules of origin that require 40% of components to be national, less than in any other member country.
Some specific incentives are 422/73 law (fiscal exemptions for forestry elements imports) 125/91 law (income tax reductions for re planting); 536/95 law (incentives for planting and re planting and low interest- long term loans) and dedicated credit lines for forestry offered by the Financial Development Agency (AFD) through the PROFORESTAL program with loans up to 12 years payable at terms end.
Research: Alice Bonet
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