Wrestling with forestry decisions

Carbon and forestry, increasingly linked to overseas investors, continue to outmuscle sheep and beef but nothing about carbon is simple

I had intended this week to move away from forestry to other topics. But once again, I have been drawn back to forestry because it is the biggest issue right now facing rural land-use.

For those who are farming sheep and beef there is the disconcerting reality, but also in some cases exciting reality, that carbon farming is now the most profitable land use.

Somewhat ironically, this changing land-use is also relevant to the dairy industry, which in combination with the other pastoral land uses is supposed by 2030 to reduce methane by 10 percent. It is looking as if much of this might now come from the decline in sheep and beef.

When I started writing this series on carbon farming back in July of this year, I used a carbon price of $48 per tonne, but right now it is stting at $65. I have been rerunning some spreadsheets in recent days and inevitably the economics of carbon farming now look even stronger.

Given that the ETS is controlled by Government, there is no certainty as to where prices will head long term. But as I have said previously, the ETS lies at the core of New Zealand’s climate policy, and the ETS cannot achieve its goals unless the carbon price climbs considerably higher. The Climate Change Commission made that point very clearly.  The only alternative is for the Government to ditch the ETS in its present form and shift to tax and command systems.

The message I am getting from the field is that almost all sheep and beef farms currently coming on to the market are being snapped up by current and prospective foresters.  This week I have been informed of very steep North Island country, distant from a port, selling for $15,000 per plantable hectare, with the investors coming from overseas.  This must be close to double last year’s market value, perhaps more.

These overseas investors are required to commit to eventually harvesting the timber so as to obtain OIO investment approval. However, it is not hard to predict that at some time the Government will agree to these overseas-owned forests being reclassified as permanent forests. Logic says that should happen and investors will already be factoring that in.

However, the whole notion that New Zealand needs overseas investors to facilitate the current headlong forestry investment is very strange. It really does sell the next generation’s birth-right. These overseas investors, typically from Europe, have low capitalisation rates and hence can easily outbid the locals. Of course, it is great for the existing pastoral landholders.

One of the reasons that pastoral land is so attractive for forestry is that it comes with no existing forestry encumbrances such as ‘residual carbon’. Accordingly, foresters can afford to pay around $10,000 more per hectare for pastoral land compared to post-1989 forest land that has just completed its first rotation and is ready for replanting.

Why this is so will be a puzzle to those who do not understand the way that ‘residual carbon’ works. Every step of the carbon journey reinforces that overall message of complexity. 

In the last ten days there has been new information added to the MPI website in relation to the rules for the new carbon averaging system to be introduced on 1 January 2023. One issue that is now explicit is that under this scheme no credits can come from second rotation forests, even if the first rotation was outside of the ETS. This means that as from 2023, a second rotation forest on newly ETS-registered land can only earn credits if it registers as a permanent forest.

More important is that the amount of carbon that can be credited under the averaging scheme is no longer, as the MPI website previously stated, simply the carbon sequestered “from when it is registered up to its long-term average carbon stock”.  Rather, it has become explicit that it has to be earned during the first 16 years of the forest’s growth. 

I admit to being surprised by this third statement. I had previously read the website many times and had taken it at apparent face value. To repeat, it said that a “first rotation forest using averaging accounting will earn units from when it is registered up to its long-term average carbon stock”.  That would have meant, for example, that a forest first registered at 16 years of age could still have earned units in subsequent years up to its long-term multi-rotation ‘average age stock’. The key phrase was ‘average age stock’ and there was no mention that for an existing forest it actually had to be earned within the first 16 years.

I regard the new limitation, or perhaps it is a clarification, as being anomalous and somewhat unfair. But of course, ‘fairness’ is always subjective and there will be diverse views on that. I apologise if my previous interpretation gave false hopes to some of these owners.

However, nothing in the ETS is as simple as it might seem. For example, there is a webinar from March 2021 on the MPI website, where MPI Te Uru Rākau Director Oliver Hendrickson, who is in charge of forestry within the ETS, said that the Cabinet work programme for later this year would consider extending the averaging system more broadly across the post-1989 forestry estate. It is unclear as to whether this is still ‘on the table’, despite still being on the website, but at least some experienced foresters think it has gone.

This all goes to the nub of the situation that foresters face. Foresters have to make decisions in the very near future but with regulations still to be fully developed. I regard early drafting and gazetting of the regulations, which are central to current decisions, as being of particular importance. As MPI says on its website, MPI “cannot accept any liability for the accuracy or content of material on this website”, yet that is all that decision-makers have.

In regard to the averaging scheme, I have asked MPI whether I can see the draft regulations. A key reason they can’t send them to me is that the regulations have not actually been drafted. It seems they will not be published for another year. However, MPI has indicated to me that Cabinet policy decisions on which the regulations will be based are likely to be released very soon.

My current assessment is that for most owners of post-1989 forests it is still worth giving close consideration to joining the ETS and putting in claims for the current five-year ETS period of 2018-2022, initially under the stock accounting scheme. This is the best way to retain optionality. However, until all fog has dissipated from around the new regulations, it is much safer to then retain those units rather than sell them.

For many of these forests, an important option will be to convert the forests to permanent forests, where credits will be claimable for 75 years and beyond as long as the trees are still growing.  Also, for those who planted in 2003 or later, there are some credits that will be retainable under the averaging scheme, but once again they must be claimed prior to 2023. My spreadsheet analyses indicate that claiming these credits for 2018-2022 could be of considerable importance to the overall economics, and hence retaining optionality is important.

One issue that I have been giving considerable thought to is the need for independent consultants, independent of those who are actively involved in buying and selling forestry land, or seeking to manage that land, who can give specialist consultancy advice on the ETS to rural land owners. I am getting lots of requests as to where to obtain such advice.

I am becoming aware of some consultants who offer these services, but they are few and far between. Although there is existing legislation enacted in 2020 requiring log traders and forestry advisers to be registered, there appears to be no requirements for independence. In any case, the system appears to not be operative despite legislation having been enacted and there are no professional development requirements before advising professionally on the ETS.  This is a big issue.

 

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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5 Responses to Wrestling with forestry decisions

  1. antipodes22 says:

    Keith, good you have the energy and time to keep on at this carbon farming issue.
    I feel that in the circumstances, it would be reasonable (and practical) for the OIO not to approve new overseas applications for land purchase if any of it was for forest planting for carbon farming. Domestic investors, and farmers themselves, have to be interested in this opportunity at the IRRs you are demonstrating. I assume none of our international trade obligations would block this – we have retained the sovereign right to control ownership of our land I believe.
    What is your view on a ‘carve out’ for domestic ownership only of land for carbon farming? It could have a domestic definition from majority upwards after all, not blocking additional funds coming in if needed to get some investments off the ground. I have not heard of an institutional ‘aggregator’ offering NZ funds a way to invest in this IRR, but surely it has to come quickly?
    cheers

    • Keith Woodford says:

      Antipodes 22,
      Currently overseas investors only get special approval for forestry purchases if their stated plan is to harvest the logs. Accordingly that is what their plans state. However, these investors also will have figured that the Government will probably release them from that commitment if the forest has more value if left for carbon.
      In the meantime, most of these foresters will register in the ETS and claim credits under the averaging scheme which is designed for situations where the timber will be harvested at around 28 years.
      KeithW

  2. Raymond Ward-Smith says:

    Interesting. If Keith is at times perplexed by the vagaries of the ETS and carbon sequestering issues then it becomes an elephant in the room for the rest of us. While I am now locked in a hotel room doing penance for travelling to Scotland for six weeks for my wife and I to visit Grandchildren, it is giving me a chance to catch up with issues Keith writes about. The carbon trading schemes becomes more like the children’s story of the King’s new clothes. Money can appear or disappear but really never existed. A lot of NZ landholders are doing a lot of planting, usually of natives, within livestock grazing systems where the options remain for both economic animal production and for soil and water conservation, plus the opportunity for possible ETS payments on the side. This spreads the risks for the genuine NZ farmer or syndicate investor. It was rather odd to find that a rich foreigner could purchase a large estate in the UK just because he liked the area but it appeared with no obligation to benefit the UK economy. In NZ I am also perplexed that large sums of money are being put into clearing wilding trees, that have spread from shelter and conservation planting in sparsely or non grazed areas, and rightly so, while at the same time new planting on somewhat similar land with financial incentives, both directed or encouraged by Government. I am confused as I sure are many others, at at what appears a short term vision of what should be a long term vision of how humanity should manage our beautiful and productive land.

  3. Tony says:

    Hi Keith,

    Thank you for sharing all these insights on your blog posts, they are extremely valuable. Do you have thoughts on what an increasing ETS price would be expected to do to the price of pulp logs and wood for use as fuel?

    The more I read your blog posts the more I get the impression that the alternative option for the foresters of simply carbon farming is likely to mean that the price of pulp logs and biomass fuel will increase greatly if the ETS price continues to increase.

    Is it going to mean that the ETS will, in a round about way, affect the cost of wood fuels to a similar extent to how it would affect it if wood was a fossil fuel?

    I’m just trying to get my head around what the implications are here for manufacturers who are hoping to fuel switch away from coal or natural gas to biomass as part of their decarbonisation strategies.

    • Keith Woodford says:

      Tony,
      I too am trying to get my head around these things. I tend to see carbon farming and biofuel as crowding out a lot of traditional demands for timber. I am concerned with the move to building big boiler facilities to run on biofuel, and where this fuel is going to come from.
      Keith

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