How financially viable is smallholder forestry? A case study with a high-value tropical forestry species

This paper evaluates the financial performance and risk of high-value tropical forestry under the challenges faced by smallholders, using Vanuatu sandalwood as a case study. We developed a financial model to predict returns from smallholder-based sandalwood plantations. The model was used to investigate the following issues typically faced by smallholders: (i) what is the financial impact of smallholders harvesting trees at young ages because of fear of theft or cyclone damage? (ii) how does the opportunity cost of labour impact on the financial returns of sandalwood? and (iii) what are the current opportunities for smallholders to finance the establishment of sandalwood plantations and how might these be improved? Data were collected from expert interviews and relevant literature. We found that smallholder sandalwood can be a profitable investment, but tree security issues and environmental risks are leading to early harvest and an associated 64% reduction in potential returns. To improve the profitability and attractiveness of sandalwood plantations to smallholders, the following key issues must be addressed: (i) risks associated with tree theft need to be dramatically reduced; (ii) earlier returns from planting systems must be planned for smallholders with more immediate needs; and (iii) greater access to financial services is needed, including loans with competitive borrowing rates, particularly to increase the scale of planting for individual smallholders that might be constrained by labour. Theft mitigation can include fencing, patrolling, microchip tagging, all of which add significant maintenance cost. Formalised social and governance structures within and between villages, may be more cost-effective in improving tree security. Incorporating agricultural crops into systems helps produce earlier financial returns, and more rapid payback. Accessible loans can allow for upscaling of smallholder systems that are limited to household labour for plantation management, harvesting, and processing the logs.