Farm forestry options in a world of imponderables

In early April I spoke to the New Zealand Farm Forestry Conference in Napier about farm forestry options as I saw them.  Most of the farmers I was talking to have had many years of experience in farm forestry, so I was certainly not going to tell them how to grow trees. Rather, I explored how to find a pathway through some of the challenging and at times imponderable issues that farm foresters currently face.

Many of my forestry presentations have focused on flaws in the Emission Trading Scheme (ETS). This presentation was different. I simply took the rules as they are and looked at how farm foresters could best respond in their own interests, be they economic interests or broader issues coming from the heart.

My starting point was to briefly look at the journey New Zealand’s production forestry has taken in recent decades. I used three graphs published in November 2023 in a USDA GAIM Report, where GAIN stands for Global Agricultural Information Network. GAIN reports are a great source of current and historical facts with not political messaging.

The first graph below demonstrates two key points. The lower dark-coloured area shows how New Zealand production forests were sold off in the 1990s from public to private ownership. The upper light blue area demonstrates the big uptake in forest planting in the 1990s.

The second graph demonstrates that processed-wood volumes have bounced around but there has been no overall growth in recent years. In contrast, the log trade has grown from almost nothing thirty years ago, reaching a maximum in 2023. What the graph does not show is that export volumes are declining this year.  This is not because there is less timber to be harvested, but because decreasing returns and increasing costs mean that the economics of harvesting no longer stack up on land that is steep or distant from ports.

The third graph demonstrates the wall of wood aged 26 to 30 years waiting to be harvested from the big plantings in the 1990s. if it were not for economic issues that threaten harvest operations, the next five years would see more exports than ever before.

I then observed to my audience that timber is where we are more dependent on China than for any other export product, with almost 90 percent of log exports going there. I also observed that China now has less need for our timber than in the past. This is in part because China’s big infrastructure years are now behind us. Our logs are largely used for concrete formwork rather than products with higher value-add.

New Zealand is now the only country that exports significant volumes of softwood logs to China. Countries like Russia now only export lumber, not logs. Also, China is becoming increasingly self-sufficient in timber, with big eucalyptus plantings in the south of China. However, China’s timber markets are obscure and it is hard to confidently take an overall positive or negative stance about the future.

I then looked at the economics of sheep and beef farming relative to various farm-forestry options.

There is no doubt that most sheep and beef farmers are doing it tough right now. Profits in the last ten years have typically been in the range of one to two percent return on capital and slipping below that in the last three years. Right now, many farmers are cash-flow negative, with land values also dropping precipitously.

This also means that many farmers lack cash right now to convert some of the rougher country to trees.

When preparing the talk to farm foresters, I ran lots of spreadsheet models of net present values and internal rates of return for various production forestry scenarios.  The big message was that using prices and costs from two to five years ago told a story of nice returns for radiata pine. But that story now belongs to history.  Looking forward, the big message relating to production returns is lots of uncertainty and high economic risk.

This aligns with the current attitude of the big forestry companies.  Whereas until about 18 months ago there was a mad dash to buy land for its potential timber value, that interest has disappeared.  Almost no-one is interested in buying land for production timber by itself.

I then looked at what happens if land is developed out of pasture for new radiata pine production based on harvesting at 25-30 years and at the same time earning carbon credits through to 16 years under the Emission Trading Scheme (ETS)) averaging regime.

I used a conservative price of $60 per tonne of carbon (NZU) whereas the minimum prices for which the Government currently auctions carbon is $64 this year, with this price having been officially set to rise in each of the coming years.

In doing these calculations, I used the official look-up tables for radiata pine growth in different parts of New Zealand. These tables are used for assessing carbon credits for all forests of less than 100 ha and are generally considered to be conservative. Forests of more than 100 hectares are measured on actual growth.

The big message here was that carbon credits are the business to be in if converting pasture to trees. They can rapidly turn a likely unprofitable timber-production business into a profitable dual business.  It did not matter what scenario I looked at, as long I used a carbon price of $60 then the internal return was acceptable, and in many cases much more than acceptable. In a typical example, it raised the IRR from around 2% to about 9% even with these low carbon prices and an inbuilt land value. It also brought the payback period including land value as a cost back to around ten years or slightly less.

These projected returns raise questions as to why the big investment companies are not doing this right now. The most important reason is that confidence has been knocked around so much over the last two years, with Governments changing the regulatory rules of the game multiple times, that commercial investors lack confidence that the rules won’t be changed again. Forestry is a long game.

I then looked at growing so-called permanent forests, where new forests are registered in the permanent scheme and then not harvested for at least 50 years. I compared this to two cycles of production timber harvested at 25 and 50 years combined with carbon credits under the averaging scheme limited to the first 16 years.

The results showed that both systems were profitable but the economics of the permanent scheme were superior under almost all realistic scenarios that I could envisage.   Of course, pine forests can grow for much more than fifty years.  There are radiata pines in the Wellington Botanic Gardens that are more than 160 years old. They are believed to be the first radiata pines ever brought to New Zealand

Some farm foresters are not keen on the idea of non-harvested pine forests. The reasons are generally unrelated to economics. Also, some farm foresters, who have been committed to both production and environmental forests for much of their lives, are suspicious of the whole concept of carbon farming.

Subsequent discussions went on well into the night, as we not only talked about radiata pines but also discussed eucalypts, redwoods and poplars. Within the farm forestry association there are groups of farm foresters strongly supportive of each of these other introduced species and with sound reasons developed from experience.

My own perspective is that all of these other species are underutilised within the New Zealand forestry landscape. I plan to say more about them on the coming months, and what we need to do about this.

There is also the issue of indigenous species and the role they can play. I had long discussions about this with both nursery providers and farm foresters, including the monumental issue of establishment costs. Many of the farm foresters are absolutely committed to using indigenous species, particularly for riparian plantings, but the cost of establishing indigenous woodlots at scale is so much more than for introduced species.  Also, the introduced animal-pest species absolutely love indigenous trees.  Introduced species are much more pest resistant.

The biggest message from all of this is that carbon credits lie at the heart of forestry economics. But it is not a simple story.