Latvia still has a great deal of untapped potential in forestry, because the state has placed unjustifiably tight constraints on forest management; easing or lifting them would become a significant cornerstone of growth for the whole sector, say Zane Driņķe, Chair of the Supervisory Board, and Pēters Putniņš, Chair of the Management Board, of the state forest management company AS “Latvijas valsts meži” (LVM) in an interview with “Dienas Bizness”. They acknowledge that one of the most important tasks at present is raising competitiveness.
What were LVM's operating results for 2024?
P.P.: Last year was the third financially good year in a row, and the reason for that lies in the situation on the wood products market. Net turnover for the reporting year (unaudited) reached 598.8 million euros, and profit for the reporting year was 150 million euros, of which 111 million euros will be paid out in dividends to the Latvian state. Of course, in 2023 these figures were higher – net turnover of 637.8 million euros and net profit of 220.8 million euros respectively. The reason? Demand for timber fell, and its price dropped as well. By way of comparison – if in 2023 the average price of the roundwood sold was 83.98 euros/m³, last year it was only 72.38 euros/m³. It should be borne in mind that last year the volume of roundwood assortments sold by LVM reached 7.44 million m³, which is 0.5 million m³ more than was sold in 2023 – 6.94 million m³. In 2024 lower revenue was also earned from the sale of wood chips, as the average price of this product fell by 34%. Over its 25-year history LVM has experienced both rises and falls in prices and demand.
What operating results are to be achieved in 2025?
P.P.: The planned harvesting volume – much as in 2024 – is about 7 million m³, but there is no telling what the weather will be like and how it will affect the population of the European spruce bark beetle. The company has drawn up a wood products sales programme for 2025-2007, and it is already being actively implemented. This year the PEFC RED II certification audit was successfully completed, and LVM obtained the first PEFC RED II certificate in Latvia, which is aimed at enabling the successful export of biomass, or fuel wood chips, for which demand in Latvia is lower than our production capacity. In 2022 biomass prices and demand were very high, but as energy resource prices fell, demand for it on the Latvian market fell too. Storing biomass for long periods is neither possible nor economically viable, which is why contracts have been concluded with foreign buyers, and these do not allow for suspension or termination. The plan is to reach just under 560 million euros in revenue overall in 2025. This year LVM introduced an e-invoicing system with all service providers and timber buyers, so that paper documents have been replaced by electronic ones, which take less time to fill in because many of the parameters in them are generated automatically.
Does LVM plan to buy forest land from other owners this year?
P.P.: LVM is the first port of call for Latvian citizens who wish to sell their forest land, because it will remain in the hands of the Latvian state. LVM's approved budget for 2025 sets aside funds for land purchases, but only time will tell how much we will buy. At present we can see that there are plenty of applications, but it is still too early to forecast the result for the year. Over its 25 years, LVM has to date purchased and registered in its own name in the land register more than 15,000 ha of forest land.
What has been achieved during the 25 years of “Latvijas valsts meži”?
Z.D.: We can be proud that a state forest management company was once set up in Latvia and entrusted with the management of a very valuable asset. Not only have these land assets not been lost, they have been increased, and new business niches have been created. What is more, over these years the value of this asset has grown substantially as a result of LVM's considered economic, socially fair and environmentally friendly operations. LVM is a kind of cornerstone for the entire forestry sector. At regional and even European level, meanwhile, LVM is today held up as a good example to others. Of course, the scientific and technical revolution creates new opportunities, allows us to work more efficiently and to pay larger dividends to the owner – Latvian society – which are then used to fund the health care, education and security services that the people of Latvia need. That does not mean that everything has been done.
One of the most important tasks at present is raising competitiveness, which rests on technology, but that also means a reduction in the number of jobs. Of course, in Latvia there is a desire to live as they do in Scandinavia, where prosperity was built up over many decades. Yet at the same time there is strong resistance in Latvia to the same freedom of economic activity that exists in Scandinavia, and that holds back the competitiveness of the company, of the forestry sector and of our country alike.
P.P.: LVM is the only large company owned by the Latvian state that is a genuine market player, because it does not operate in a regulated market and receives no state subsidies. We have to adapt constantly to what is happening on the wood products market. LVM is an important part of the forestry sector's supply chain, mirroring all the business cycles and processes taking place in the sector. Yes, there have been problems and there have been solutions at various levels, but this system has proved its viability. Politicians must not give in to tempting will-o'-the-wisps and turn LVM into an administratively regulated company. The wood industry needs a predictable flow of timber, and LVM provides it; LVM earns money and enables both service providers and wood processors to earn money too, and they are the biggest creators of added value and generators of income – provided political decisions do not disrupt this interlocking mechanism. When the company was set up, LVM's business model was largely modelled on those same Scandinavians and adapted to Latvian conditions. Over time the system of economic activity built up here surpassed the one in Sweden, and now foresters from Scandinavia come to Latvia to learn from our experience. Yes, the Scandinavians have been comparatively very conservative, whereas Latvians, endowed with an Eastern European mentality, have been inventive and very quick on their feet.
If the Baltics (Latvia) were able to put in place freer operating conditions, LVM's future prospects would be considerably better even than in Scandinavia.
Z.D.: For all 25 years LVM has been educating the public about what natural resources are, what forestry is, what the forestry sector is, what its added value is, what it contributes to the country, what riches belong to the Latvian state and how to use them rationally – especially because the future prospects of Latvian forestry depend on the education of Latvian society.
P.P.: The battle for people's minds goes on continuously, and every sector is trying to find something with which to draw people in.
What has the state gained (directly and indirectly) from 25 years of LVM's work?
P.P.: LVM is one of the most significant commissioners of research from the scientists of the Latvian State Forest Research Institute “Silava”. This research has a commercial focus, which means that the insights gained allow us to work more efficiently and more productively.
Z.D.: One often hears it said that science is somehow remote from production, yet the cooperation between LVM and “Silava” is a very good example that refutes that view, because in the end it produces a result that is measurable in labour productivity, faster tree growth in the forest, higher-quality timber and better business results.
P.P.: “Silava” is the number one forest science research institution in the whole of the Baltics. The view that everything in the forest sphere has already been researched and there is nothing left to study is mistaken, because the climate is changing and the growing season is changing too – it is getting longer.
Z.D.: Decisions must be based on scientific research, and to achieve that money has to be allocated to it – money that first has to be earned.
What will LVM's place be in the development and growth of Latvia's forestry sector over the next 5-10 years?
Z.D.: I would be pleased if we could reach the next levels in both efficiency and productivity, as well as in the export revenue of the whole sector. I see “Latvijas valsts meži” as the green flagship of the entire Baltics. I hope that foresters from other European countries will continue to come to us to learn and gain experience. LVM is a leader that achieves the highest-value results with the smallest possible resources.
P.P.: The business plan for the next five-year period is already known, because this time, very much in good time – at the end of 2024 – the Cabinet of Ministers approved the maximum permissible felling estimate for final felling in state forests for the next five years (2026-2030). This makes it possible to plan and carry out all kinds of procurement in good time, while at the same time timber buyers have clarity about how much and which assortments LVM will offer on the market. Wood processors and rural entrepreneurs were not too happy about the 4% reduction in the maximum permissible felling estimate, which over five years will add up to several tens of thousands of m³. There is no denying that this will also affect – reduce – LVM's financial performance and, most likely, the amount of dividends paid to the state as owner. Of course, there will be questions related to the various conditions and restrictions that the state keeps in force. Staying close to the maximum permissible felling volume will be a challenge, because almost half of all the areas managed by LVM have problematic soil bearing capacity, which means that operations can only be carried out there in frozen or dry summer conditions. That is precisely why additional attention will be paid to restoring forest drainage systems and building new ones, something that has not happened in Latvia over the past 35 years. Several experimental projects are currently in preparation, the aim of which is to test how ready the public administration is to implement such plans – for instance, by issuing the relevant permits within a reasonable time. I have hopes for the working group on reducing bureaucracy and an appropriate action plan. By putting the water system in order, LVM not only substantially improves growing conditions for trees and the growth capacity of the forest, but also gains access to timber resources in places where they currently exist in theory but are not available in practice. At the same time, the availability of such timber resources is a significant factor not only for wood processors and for the state budget as the recipient of tax payments, but also for the state as owner – in the form of dividends.
Over the previous 25 years LVM has followed a classic development scenario, but in the years ahead that will no longer be possible. Not only because changes in the external environment have already taken place and will most likely continue, but also because of what regulatory requirements will be. That means the path of development will not be an asphalt motorway, but a track whose continuation may not always be immediately visible.
Z.D.: Everyone will have to be more flexible, acquire new knowledge and skills, and keep up with the latest trends in the region, in Europe and around the world. Although the prevailing view is that forestry is a very conservative field, in fact only the fundamentals stay the same; everything else undergoes transformation brought about by new knowledge, the emergence of new technologies and their entry into everyday operations.
Could LVM have a role to play in siting chemical wood processing capacity in Latvia?
P.P.: At one time, on the instructions of its owner – the Latvian state – LVM was involved in the planned but never realised Ozolsala pulp mill project. Even now the siting of chemical wood processing capacity is a matter of national interest in which LVM can act as a supplier of raw material – timber resources. A minuted decision of the Cabinet of Ministers states that if an investor in chemical wood processing meets certain conditions, the state guarantees the supply of a specific volume of timber. This concerns pulpwood-grade assortments, the volume of which obtainable in Latvia currently exceeds the volume that can be processed, and which is therefore exported. Of course, LVM has no such obligation at present, because nothing has yet been invested or built.
Overall the direction – towards deeper wood processing – is the right one; the only question is what the chemical wood processing product will be – fuel, wood fibre or pulp. One plant is indeed at the construction stage, but the relevant government programme on resource supplies does not apply to it.
Z.D.: Investors, including in chemical wood processing, are needed, because investment creates jobs and tax revenue for the state budget as well.
P.P.: Latvia still has a great deal of untapped potential, because the state has placed unjustifiably tight constraints on forest management. In Scandinavia, commercially usable forests are managed very intensively, but in Latvia that is not possible (it can only be done in registered plantation forests). Latvia still has forests with unproductive or low-productivity stands, where from the owner's point of view it would be more advantageous to fell them and plant high-quality tree seedlings, which would form the basis for growing sought-after timber resources and at the same time give the owner a decent return.
Yes, there are discussions about the felling age for spruce and birch, because Latvia lags substantially behind neighbouring countries; moreover, as practice shows, high-quality seedlings combined with appropriate tending allow a given stand in good conditions to reach sawlog and veneer log diameter as early as 40 years of age, yet we can only fell it (by age) several decades later. Both research and the conclusions of practitioners show that a well-growing, well-tended spruce stand is practically resistant to insects up to about 40 years of age, but later, when the trees' growth rate slows, their vitality declines too and the bark beetle can destroy such a stand. The financial gains are also far greater if you sell roundwood untouched by the European spruce bark beetle rather than infested by it. The fact that in Latvia the law does not allow a forest owner to take a sensible decision about felling age, as they can in Scandinavia, is neither good for the country, nor economically advantageous, nor responsible, because instead of sawlogs and veneer logs, which cost several times more, one ends up selling firewood. In commercial forests, intensive management is the efficient use of land resources, not something bad and harmful, whereas in protected forests management is planned with a different aim – biodiversity.
Is LVM taking part in talks with Södra about the possible purchase of the forest land it owns?
P.P.: The company gets involved in projects we are financially able to take on, but this is not one of them, and so LVM is not conducting any talks with Södra about buying the land it owns.
Is LVM not planning to move into the new business of CO₂ banking, or carbon credit systems?
P.P.: No, because this line of business is not yet mature, although research work on carbon credit systems is being carried out.
https://www.db.lv/zinas/meza-nozarei-vel-ir-neizmantoto-iespeju-rezerves-521274
Photograph by Kristaps Kalns used for the original article