Finca Leola and the current economy
It is said that when the United States catches a cold, Latin America catches the flu. This is because Latin America is connected so tightly to the fortunes of the USA. Though we are feeling the effects, for Finca Leola it isn’t as bad as it might be. Financially, the company is doing fine.
Costa Rica is affected the most in construction and tourism. Many construction projects have been stalled due to lack of credit, and tourists are arriving but not buying much in the way of souvenirs. The general concensus down here is that everyone is waiting – and in construction, there are signs that it will resume in a couple of months. Much of construction slows down to a crawl around this time of year anyway, since it is hard to build until things dry up a bit, and transporting materials into undeveloped worksites is hampered due to the knee-deep mud.
We currently have the right to cut about 1 million board feet of teak in a neighboring plantation. We did expect to be in full production from start to finish on cutting this wood, but with the downturn in construction here, we have stopped cutting for a while to wait for inventory to go down and for construction to pick up again.
A really nice thing about trees is that there is a fairly big window for harvesting them. If necessary, they can stay in the field for two more years with no damage after they are ready to harvest. This is one of the reasons that the price of wood normally doesn’t fluctuate wildly like some other things. If the market is glutted, you can just hold off on cutting.
For the last few years, wood has been losing a bit of demand due to its rising prices. But in the last year, the prices of concrete and structural steel have risen by 50% due to fuel costs, so that now it is cheaper again to build with wood – and it sure is nicer looking. Wood, though heavy, is lighter than concrete for building, and so fuel cost impacts concrete much more than wood. Manufacture of concrete and steel is fuel-intensive, while most of the processing of wood is done with electricity here in Costa Rica, for the most part hydroelectric. As long as the rains keep coming (and we are in a rainforest climate, after all) the price of electricity remains pretty stable. And, if necessary, Finca Leola can use the power from our own rivers and streams – I have been tempted to do it just because it would be cool!
The timing should be very good for our tree owners when the large amount of wood starts proceeding from our own plantations. Most estimates are that we will be back into high demand, since by then inventories will be depleted. This is a very common cycle here in Costa Rica and probably elsewhere as well. When the market is bad, people don’t plant, whereas in truth, the best time to plant is when the market is down, especially for trees. While we wait for the market to return, the trees keep growing. With a perishable crop, for example pineapple, it doesn’t work that way. When we first arrived here in Costa Rica, everyone told us to plant pineapple because “everyone is doing it.” Well, when “everyone’s” pineapple matured all at the same time, we saw pineapple being fed to cattle, it was so worthless.
All in all, investing in trees is looking very good right now. The future supply is still woefully low here as in many parts of the world. There isn’t nearly enough being planted to handle even current demand. We have significantly increased the size of the planting every year so far, and with both the stock market and real estate suffering, the coming year is looking to be the biggest increase yet. This is heartening when you consider that there is no end in sight to the shortage of tropical wood, particularly wood grown with environmental consciousness. If everyone had the recommended 14% of their portfolio in trees, imagine the difference it would make.
Fred Morgan
President, Finca Leola S.A.
866.737.5268
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