Pivoting from production to permanent forests

A fundamental change is occurring in the economics of production versus permanent forests. The policy environment is getting left behind

During 2019, I wrote five articles discussing land-use transformation that would be driven by forthcoming forestry investments.  One of the key themes of those articles was that New Zealand’s forestry policies are a mess. The rules are complex and confusing. Also, the alignment of those rules with the overall public good is at best debatable.

I wrote about how policy communication by Government has been driven by public relations spin about the so-called billion trees programme. It has been virtue signalling but little else.

I also wrote that the investor focus to date has largely been driven by production forestry with that focus shaped by proximity to ports rather than the most appropriate land-use.  In that context, selling carbon units has been seen as a bonus.

In contrast, I suggested that the future would be dominated more by the price of carbon than the value of production forests.  I also stated that I would much prefer New Zealand’s carbon-forestry investments to be funded by New Zealanders, with there being no need for overseas funds for any permanent forests.

It is now 13 months since I wrote the last article, so what has changed in the meantime?

The biggest change is that the price of carbon units (NZUs) has risen from around $25 to $37.50 per tonne of carbon dioxide. That in itself is not a total surprise. But there is always a difference in the decision-making weight to be placed on what might happen and what is happening. So, this price rise is a big reinforcement of the upward trend.

Conversely, in this last year the focus on climate change and the Paris Agreement has been dulled. This is because COVID19 has crowded out other issues. However, the Paris Agreement has not gone away. The focus will come back, and New Zealand has committed.

In this last year, I have also become increasingly cautious as to the long-term value of production pine forests. Right now, most of the trees go to China where they are used for formwork on big infrastructure projects. Then they get burned for energy.

By my reckoning, the Chinese infrastructure programme may well have another ten years to run with more roads and skyscrapers still to be built. By then, the Chinese population will be declining.  There will still be more apartments to be built as old buildings are torn down, but the overall pace of infrastructure growth will by then be much slower. Hence, the demand for New Zealand timber will also be lower.

Not everyone will agree with that perspective on future log prices. Perhaps we will find new uses for logs at a scale that replaces formwork and paper. However, I see increasing caution from investors until those new uses become embedded in the economy.

More immediate, there is a flood of international capital looking for a home. This is a key reason why interest rates are so low. Look forward another year or two as COVID19 recedes, and international investors will be clamouring for business-class seats to come, ‘look see’, and invest in carbon-trading activities.

Pulling those factors together, the consequence is that the focus will soon shift fundamentally from production forests to permanent forests that will be planned on the basis of never being harvested. That means that investors can afford to look at the hinterland, without worrying too much about road access and proximity to ports.

The shift in thinking from production to permanent forests creates an associated shift in the financial assessment framework.  In a physical sense, a permanent forest is there for ever. In a financial sense, the investment is like a mine with a limited life.

The value of land for permanent forests is the assessed present value of a carbon annuity that extends for around 50 years, perhaps a little more, and then stops. That is because the forest is no longer producing new carbon.

The notion that a permanent forest is a short-term investment seems incongruous, but in a financial context it is true. It is a direct consequence of carbon trading being a market for carbon sequestration, not maintenance of existing carbon.

As to where these permanent forests might be located, as a starting point I went to Beef and Lamb’s ‘Sheep and Beef Survey’, focusing initially on Class 3 North Island hard hill country. There are about 920 of these farms averaging 670 hectares (6.7 square kilometres) per farm and totalling about 600,000 hectares. These farms have land and buildings valued at about $8300 per hectare.  This gives a gross value of about $5 billion across 600,000 hectares, something that international investors could snaffle up in a few bites.

Some quick calculations suggest this hard hill-country land, at current carbon prices of $37.50 per one-tonne unit, could earn at least $750 per hectare per annum over a 50-year time horizon after allowing $25 per hectare for rates but with minimal other expenditure needed. As a comparison, these sheep and beef farms net around $330 per hectare on a similar basis.

Of course, this comparison is not quite the full story. If planted in permanent trees, then the land has minimal further market value after 50 years. But this is not a big deal for international investors who have long recouped their investment and made nice profits along the way.  That is the nature of any mining investment.

This comparison also does not allow for sheep and beef farms providing ongoing employment, whereas carbon farming provides minimal employment once the trees are planted. Nor does it account for the fact that each hectare of these sheep and beef farms earns more than $1000 per annum of export income once the products have been processed. In contrast, the carbon farm is providing carbon units to balance New Zealand’s internal carbon emitting economy, with the proceeds becoming a foreign exchange outflow if owned by international investors.

These numbers illustrate that the issues go much deeper than simple cash flows. Also, when it comes to fixed assets like land, international investors may beat to a drum that does not necessarily align with the greater public good back here in New Zealand.  Although my focus here has been on the hard-hill country, that is really only a start.

Another part of the needed debate relates to natives versus exotics. The problem with natives is that they are much slower growing than exotics, be that pine or eucalypts. Natives are also expensive to plant. No investor is going to favour natives.

I often walk through a small exotic forest near my home that has an understorey of natives. It has convinced me that exotics can indeed be a transition phase. However, in my local forest the transition has been helped by man doing some plantings. Also, birds have been assisting with transfer of seed. That will not happen in a big forest.

The big message of this article is not that there is a clear path ahead. Rather, exactly the opposite. That is why there is a need for an informed and wide-ranging debate as we search for the path that will lead to the right trees in the right place, planted and owned by the right people.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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14 Responses to Pivoting from production to permanent forests

  1. jefftombleson says:

    Keith thank you for this article that scores 15 over 10. A copy of this article should be sitting on the desk of every policy analyst in MPI, MfE and the CCC.

  2. David Butcher says:

    Dear Keith,

    As a former Parliamentary Under-Secretary for Forests I appreciate your, as always, thoughtful article about Forestry Policy. If you are passing though Wellington some time maybe we could have a chat about it?

    Hon David Butcher

  3. Jan Woodhouse says:

    Great article thanks Keith
    But I would like to add some more elements to the discussion.
    A recent traverse through the central North Island was revealing for the following reasons;
    There is a lot of hill country through the centre of the country poised to move at the first drop of rain and I agree, it should be covered in trees.
    Exotic weed species were invading all of the visible exotic forests along my route and the climbing weeds were clearly overpowering the natives – particularly along the margins of the forests.
    Wilding coniferous species were increasingly visible throughout the country – slowly spreading across grasslands – much of which is crown estate.
    Coniferous forests are great habitat for animal pests.
    And some observations
    The East Coast experience indicates that Coniferous forests sequester water but do not release it readily which is reflected in lower downstream water flow
    Fires over the last two years have shown the inherent danger created by mass coniferous planting
    and finally
    and probably most importantly to me, the natural features of our landscape generated a significant part of GDP pre Covid. We spoil that with massed coniferous plantings at our peril.
    so what to do
    Go softly and include Landscape Architects and Ecologists well versed in broad scale rural planning in any team planning solutions.

    Jan Woodhouse

    • Keith Woodford says:

      Thanks Jan
      If the coniferous forests are absorbing more water such that stream flows are reduced, then my question is where is the water going? I have never thought of coniferous forests as having high evapotranspiration rates, and I had assumed that modest evapotranspiration is one of the reasons why they flourish as wildings in the tussock country.
      Keith W

  4. Have you correctly factored in the return to farming those areas designated as suitable for forestry? Surely, over time the quality of those areas will deteriorate, while under forestry they will maintain a reasonably stable state I assume. This comes to mind when I think of the trip I made up “the forgotten highway” a few years back and you could see mile after mile of landscape that had been cleared some time ago and looked very much as though that should never happened since it was clearly not suitable for pastoral farming. Apart from anything else you could see the erosion and land slips around the higher ground. Surely that is almost certainly going to get worse, so the returns on pastoral farming are going to deteriorate and, on that course, it is hard to argue against some different kind of cover, whether that be exotic or native, commercial or otherwise?

    • Keith Woodford says:

      Thanks Peter
      It is a long time since I travelled the ‘Forgotten Highway’. [For those who might wonder what Peter is referring to, it is the amazingly steep and erodible country that runs from Stratford to Whangamomona and then on to Taumaranui.] I agree that it was an error to develop much of that country, with much of that development occurring in the years immediately after the First World War, and some perhaps before that. A lot of it, almost certainly the majority, has now reverted to bush and some to planted forestry. Looking down on it from the air on occasions, I think neither sheep nor production forests are ideal for much of that country, and fortunately at least some of it now has protected status. The ‘hard hill country that I was referring to from the Beef and Lamb Economic Survey averages around 8 stock units per ha and most of it is not quite as fierce as the land of the Forgotten Highway. Nevertheless, I am personally comfortable that a considerable amount of that land could go into permanent forests, although it does seem to me that it would be better if those lands could remain in NZ ownership, and hence with the carbon-trading benefits thereby accruing to NZ rather than remitted to overseas owners. I think we are finding that pine production forests are somewhat of a gamble with nature in high rainfall steep country. Also, although I used the hard hill country as my main example, the 600,000 ha in that category is not going to be enough to meet the Paris commitments. I think there is lots to think about.
      Keith W

      • Well, I am glad you are on the job. There is just not enough informed debate on primary industry matters that is not dominated either by vested interests or standard political/bureaucratic tropes.

  5. DANIEL VIOTTI says:

    KEITH.
    AQUÍ EN URUGUAY VEMOS GRANDES INVENCIONES EN FORESTACIÓN SIN MUCHO PIENSO,
    CON GRAN ÉXODO DE MANO DE OBRA RURAL HACIA LOS CENTROS POBLADOS .
    LOS RIÓ Y ARROYOS ESTÁN CON CADA VEZ MENOS AGUA.
    Y LA GRAN MAYORÍA SON INVENCIONES EXTRANJERAS , QUE FAVORECEN LA DESOCUPACIÓN DE NUESTROS HABITANTE FAVORECIENDO LA VIOLENCIA Y DROGADICTO DE NUESTROS JÓVENES.
    COMO SIEMPRE MUY BUENO SUS ARTÍCULOS.
    MUCHAS GRACIAS.

    • Keith Woodford says:

      Daniel
      I think that there are some parallels between New Zealand and Uruguay, although some of the social problems in Uruguay are even more acute.
      On my visits to Uruguay I saw eucalyptus forestry investments that focused on the needs of the foreign investors without necessarily aligning with the internal priorities. But solving these issues is not easy. Like New Zealand, Uruguay has been built on its pastoral industries. In both cases we have more recently been building forestry based on exotic species – pine trees in New Zealand and eucalypts in Uruguay.
      Regards
      Keith W

  6. Pingback: Rural round-up | Homepaddock

  7. David Porter says:

    Thanks for another thought provoking article Keith.

    The fact that the government considers this as a good way to mitigate climate change shows either their lack of knowledge about climate change (I don’t believe that they would be as badly briefed as that) or that they want a quick political win, popular with those who wish to keep their current lifestyle. Afforestation is only a short-term token gesture in mitigating, not reducing total C emissions and has all of the downfalls that you have mentioned in your articles.

    From an agricultural point of view, it is so very important that it is limited to suitable areas such as The Forgotten Highway and others of its ilk. Even then, as you mention, it will do nothing for the economy of New Zealand.

  8. Frank Strie says:

    The real alternative in operation at scale for say about 70+ years:
    https://prosilvaireland.com/prosilva-quality-management-in-our-forests

    https://www.prosilva.org
    My co- production from ~27 years ago in Tassie AUS : https://prosilvaireland.com/prosilva-quality-management-in-our-forests (yes was published in Ireland)
    Any questions, feedback, ideas?
    http://www.terrapretadevelopments.com.au

  9. Pingback: Forestry issues still need much debate | Posts from Keith Woodford

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