New Zealand’s forestry policy is in a mess. We have drifted into a situation where the big decisions are made outside of New Zealand. Governmental forestry policy is like steering a dog by the tail. And this particular dog has a mind of its own.
Let there be no doubt that forestry has been and will be of great importance to New Zealand. The problem is that key decisions affecting forestry and hence New Zealand land-use are being made outside of New Zealand. The key decisions are being made by international investors who are figuring ways of making money in a new global environment where there is lots of capital looking for a home.
If we go back to the forestry boom times of late in the 20th Century, then forestry investments were only for those who were prepared to wait a long time for a cash return. Even then, investors had to be satisfied with returns on capital of something around six percent or less, net of inflation. It was also a highly risky investment, requiring thirty-year foresight as to timber demand.
All of that has now changed, and here is why.
Risk-free rates of return in the broader economy, for example from Government bonds, are now less than two percent. That is before any allowance for inflation. To get more than this, an investor must take on considerable risk.
If an investor buys shares in Apple, they will cost more than 200 times current earnings. Shares in Amazon cost nearly 80 times earnings. Share in Microsoft, which the market believes has more modest growth from herein, can be bought for 30 times current earnings.
In this environment, it is not hard to see why large-scale investors would eye up an investment in New Zealand forestry. It’s not just the value of the timber that catches the eye. Indeed, that is no longer the main attraction. It is all about carbon trading.
In most cases, the investors are not actually thinking about offsetting their own emissions. Rather, it is all about making money. They plan to do this by selling the credits to others who do need to offset their emissions. In most cases the purchasers will be New Zealanders like me and you, or at least those of us who are still around.
The beauty with growing trees for carbon trading is that there is a cash flow throughout the growth cycle. At current prices of a little below $25 per tonne of CO2, it looks very much like a risk-free investment. However, there are also very good prospects for ‘windfall’ returns, not because the trees fall over, as hopefully that will not happen, but through escalating carbon prices.
As to what carbon prices will rise to in coming years, that is anyone’s guess. There are realistic scenarios of $40, $100, and even $200.
The reason that the future price of carbon is a guess is that it is a virtual market controlled by government policies, both here and overseas. Trying to outguess long-term government policy is always somewhat of a fools’ game. Nevertheless, there is no doubt which way the tide is flowing.
Given the simplicity of planting trees and the need for minimal tending thereafter, combined with a near-to-guaranteed cash flow from carbon trading, then it all looks very attractive as one component of a diversified international portfolio of investments. And that is the way the big international investors are now thinking.
Here in New Zealand, we have made it highly attractive for those international investors. Unlike other New Zealand investments, such as purchasing assets for farming, or even investing in post-farm-gate infrastructure, there is no need for investors to demonstrate a net benefit to New Zealand. As long as investors can show they have some history of integrity, then in they can come.
This preferential-investment consideration for forestry arises from the embedded belief that here in New Zealand we must plant large areas of trees to offset the carbon emissions from our 21st Century lifestyles. That may well be a worthy objective.
However, some may also see it as a cop-out by the urban-dominant population. It is something that ‘others’ can do for the sake of ‘our’ current lifestyles.
Under current policies there is likely to be a stampede. We have already seen the first stages of this up and down the East Coast of the North Island.
It is ironic that this is occurring at a time when returns from sheep and beef have never looked better. For better or worse, forestry based on carbon trading will have the power to elbow all of that aside.
It is also ironic that planting trees for carbon trading is a short-term activity tied to the length of the first rotation. The financial benefits are sucked up in the first rotation. The international investors can then walk away have mined the financial benefits of carbon sequestration.
The carbon benefits are meant to last for ever, but the economic value of that has been assigned to the first-rotation owners.
As to the future land-use, that will be locked into forestry unless the sequestered carbon is repaid. Second and subsequent rotations of trees can gain no further monetary credits because there is no longer a net gain in sequestered carbon.
Currently there is a political focus in New Zealand on the Zero Carbon Bill and how New Zealand will offset its carbon emissions. In contrast, real life and long-term thinking also needs to be about unintended consequences.
If New Zealand is to plant large areas of trees, beyond the ten to twenty-hectare woodlots that farmers might plant on lower quality land within their pastoral farming enterprises, then that planting needs to happen in a considered way using land where forestry is indeed the most appropriate long-term land-use.
Those areas of suitability need to be officially designated as such, using ecological and socio-economic criteria. The assignment process needs to be led by central government.
This then leads to the question as to who should be making the consequent forestry investments.
Forestry investments are too big for individual New Zealanders to take on. It has to be corporate-led.
Given the future needs for New Zealand superannuation, the investor could well be a forestry equivalent of Landcorp, including investment from the Superannuation Fund. Given the technical simplicity of forestry management, it would be much simpler than for corporate-style agriculture.
Regardless of the specifics, the bottom line should surely be that large scale forestry development in New Zealand should be for the benefit of all New Zealanders, both now and in the future. We do not need overseas capital to make that happen.
Here s an earlier article wrote on carbon trading and forestry.