Earlier this year I wrote two articles, archived here and here, about the likely impact and consequences of policies that encourage conversion of pastoral land to forestry. I was particularly concerned about the actions and power of foreign investors, and the associated transformation of better-quality land.
My concern was not because of any fundamental objection to foreign investment to deal with shortages of investment capital in our economy. My concern was because of the sheer scale and power of overseas investors under current policies to change irrevocably the New Zealand landscape.
The responses I received indicated that I had indeed struck on a chord of concern and unease as to what we were doing to ourselves.
I also had both oral and email conversations with one person who has influence in the Wellington corridors of power. This person is listened to very carefully by Government when it comes to issues of forestry, the environment, climate and natural resources. This person told me I was wrong.
This counter view, as I interpret it, has two elements.
The first element is that we must plant lots more trees to show the world we are doing our part in relation to the Paris Climate Agreement. The Billion Trees Program is just the start. There is, so the argument goes, no other way to meet these commitments with present technology. Supposedly, it has to happen, no ifs and buts.
The second element to the argument is that the amount of pastoral land being converted to forestry by overseas entities is not large. Associated with this perspective, the loss of pastoral export opportunities from converting pastoral land to forestry is simply the way things have to be.
In this article, I focus only on the second element. The reason for doing this is to lay out more of the current evolution and consequences of going down the forestry-conversion path.
If those consequences are sufficiently great, then perhaps we need to look again at other alternatives that might meet our self-imposed Paris commitments. Alternatively, the target of absolutely zero net emissions might indeed be a step too far.
However, those issues are consequential and are issues for another article. First, we need to identify the impacts of pastoral land conversion.
We have no real-time estimate of the total amount of pastoral land being converted to forestry. This is because New Zealand investors do not need to advise anyone of what they are doing.
In contrast, overseas forestry investors need approval from the Overseas Investment Office (OIO) but it is a truncated process designed specifically for forestry. The key requirement is the ability to demonstrate good character and capability. It is not necessary to demonstrate benefit to New Zealand.
In the short term, it is the overseas investors who have the potential to change the pastoral landscape with a forestry tsunami. They are the ones with the capital. Hence, for the immediate future, the focus needs to be on overseas investors as the sharp end of what threatens to be a broader landscape transformation. That broader transformation is planned to encompass some millions of hectares over the next thirty years.
Back in August 2019, the influencer that I referred to in earlier paragraphs pointed out to me that, since the new investment rules of October 2018, the OIO approvals for converting pastoral land to forestry were for only 3200 ha. I cannot argue with that. I am sure his figures would be correct.
However, relying on such figures is like driving by looking in the rear-vision mirror. I am much more interested in the current position and the path ahead.
If we had been able to look ahead at that time, just three months ago, we would have seen a rapidly changing situation. As a consequence, we can now see considerably more approvals showing up in the rear-vision mirror.
As of 31 October 2019, the 12-month approvals for conversion of farmland to forestry have increased to 14,300 hectares.
In addition, the Government announced on 24 October 2019 that overseas-owned Pan Pac had received pre-approval to make forestry-related purchases of up to 20,000 ha over the coming three years, including conversion of land from farming to forestry. Specific purchases only need to be notified after the event. A Pan Pac spokesman indicated that most of the purchases were likely to be in proximity to existing timber processing operations in Hawkes Bay and South Otago.
I have good reason to expect that other operators will now receive similar generic pre-approvals to purchase land and then notify the OIO of specifics after the event.
These operators have access to the necessary funds and will have no difficulty in meeting the good character test. Under current rules, they will thereby have a right to follow the path already forged by Pan Pac.
The fundamental issue is that in the emerging world of carbon trading, the underlying investment rules have changed. Carbon trading takes most of the risk out of forestry investments.
Investors are now rewarded during the first radiata-pine rotation of approximately 28 years for the perpetual carbon benefits of keeping that land in forestry, with subsequent rotations required to be either radiata pine or an alternative species of similar rotation length, but with no further carbon trading payments.
The expected cash flows from first-rotation carbon trading are currently focusing investor interest on land that would never previously have been considered for forestry. And there lies the nub.
The opportunity is extended by the potential bonus of a timber harvest and replanting, with harvesting returns now being the higher-uncertainty bonus to low-risk carbon trading. This leads investors to favour land within 70 km and preferably lesser distances from ports.
Once carbon trading is removed from the equation, there is little financial incentive to plant radiata pine. That is the reason why so little radiata pine has been planted in New Zealand over the last fifteen years.
If future New Zealand generations could have a voice right now, they might say ‘how dare you’ constrain our future land-use in perpetuity in this way. We, the future generations will need the right to make future land-use decisions in that future, and not be locked in by your greedy decisions to gobble up all the financial benefits right now from locking-in future land uses.
As to what the best future land uses of the current pastoral land might be, we do not know. What we can be confident about is that New Zealand’s productive land is a scarce resource.
It might well be that pastoral beef and sheep meats are the luxury goods of the future. Current returns are the best for a generation and the outlook is outstanding, despite the gloom merchants of the popular press.
Within thirty years and shorter, there may also be other important land uses, including biofuels from short-rotation crops. Radiata pine has too long a rotation and other limitations to be ideal for biofuels.
From a national economic perspective, when overseas entities buy pastoral land for forestry conversion linked to carbon trading, there is an immediate beneficial flow of overseas funds to New Zealand. This only occurs once.
The subsequent carbon credits will in all likelihood be sold to other New Zealanders, thereby allowing these other New Zealanders to minimise changes in their lifestyles. The cash will then be remitted overseas as an outflow.
Alternatively, the carbon credits may be transferred overseas and sold directly in those countries, with the returns then staying with the overseas investors. Either way, there is no flow of funds back to New Zealand from carbon trading of overseas-owned forests.
The big message from all of this is that we need to tread carefully. We need to do a lot of thinking before allowing a tsunami of overseas funds to lead a landscape transformation.
It is all about getting the right trees and the right land-use activities in the right place. It seems doubtful whether current policies are aligned with that goal.