Nothing matches carbon-farming economics on sheep and beef land
This last week I spent two days in Rotorua at the New Zealand carbon-forestry conference where I was also one of the speakers. Both I and others presented perspectives on the path ahead for this new industry. There were close to 300 attendees plus an international online audience.
Although there was diversity of perspective as to how the industry might develop, I sensed no doubt that we all saw ourselves as being involved in something big that, one way or another, is transformational for New Zealand
Most of the attendees were either forestry people already in the business, or alternatively service-industry people who either are already or in future want to be part of this new industry. There were also some Government and Climate Change Commission people there to help explain the current regulatory framework.
However, there were not many farmers at the conference, apart from those who were already in the business of carbon farming, and doing rather well, I might add.
For me, the value of a conference like this is not only to hear the formal presentations, but to talk informally to a diverse range of industry people. That is how I can learn from those on the ground whether there is some key factor that I might have missed.
There was nothing there that made me change my views in any significant way, but there was information that helped further enrich what I have been learning in recent times about this fascinating industry.
One of the foundation points of my own address was that, if simple economics from a land-owner perspective is the criterion, then the answer is also very simple. On the sheep and beef lands of New Zealand there is nothing that can touch the economics of carbon framing.
Of course, simple economics is only one part of the story. Also, that story does change somewhat according to land type. However, the differences in the story are mainly in relation to the other land-use opportunities that are foregone as a result of carbon farming, rather than the carbon farming itself.
One of the remarkable things about carbon farming is that the returns are similar for both soft country and hard country, and largely independent of either on-farm infrastructure or distance to towns and ports. However, there are differences between the North and South Island related to climate, and also some variation between the north and south of each island.
A consequence of this is that for each area of New Zealand there is a difference in land price that carbon foresters are prepared to pay, but at least within the North Island those differences are modest. Southern Hawkes Bay farms have been selling for about $15,000 per hectare in recent months. Gisborne has been about $17,000 and King Country about $14,000. This is for pastoral land that fits the carbon farming regulatory environment.
The publication last week in the New York Times of an article on New Zealand carbon farming provides further evidence that this is now an industry of international interest. I was aware some weeks back that this article was in the offing as I was myself interviewed for it.
I am always cautious of media interviews where, following an interview of an hour or so, the journalist picks out a few sentences to weave into and support a perspective that may or may not be accurate. However, I reckon this journalist did a good job within the word limit.
An example in the New York Times article – which did not come from me – was a Gisborne farmer who purchased a sheep and beef farm in 2013 for $NZ1.8 million, and recently sold it for $NZ13 million. It was described as a windfall outcome, and it is hard to argue with that.
The likelihood is that, at the $1.3 million paid for it in 2013, it would have been marginal for sheep and beef, but now highly suitable in 2022 for exotic forestry. It might be a windfall, but it is also likely to be an appropriate change of land-use.
The New York Times journalist sought my perspective on whether New Zealand sheep and beef farmers deserved sympathy for being pushed off their land. My response was that farmers who sell need no sympathy, as they are doing very well from it. If there is sympathy to be shown, it is for the prospective generation of sheep and beef farmers who cannot compete with the forestry interests.
My real concern is whether, from a broader societal perspective, a lot of the forestry is going in the wrong places. I am positive about long-rotation and permanent carbon farming being developed on marginal pastoral land, but far from happy when I see farms sold for short-rotation forestry on what is good pastoral land.
Fundamental to that perspective is that pastoral farming provides export income, whereas carbon farming is an internal industry providing climate credits for fossil-fuel use, with this generating no export funds.
I was intrigued to learn at the carbon-forestry conference that some of the big companies are now promoting leasehold rather than purchase arrangements. One such arrangement is where the forestry company plants the trees on a portion of the land at their cost, and then, for an annual land rental paid to the farmer, earns the carbon credits for the next 16 years before handing the land back to the farmer.
I am cautious of such arrangements. Farmers need to understand that carbon credits that have been earned through forestry leases rest as liabilities on the land that the farmers own. Unless the credits are repaid, the land must stay in successive cycles of forestry but with no further carbon credits. Farmers leasing out land for forestry need to be very sure they understand all of the fine print.
I am also concerned that foreign investors are still very much involved as the pine trees march across Aotearoa New Zealand. The carbon credits will be sold in New Zealand but the cash returns from these sales will then be repatriated overseas.
Currently, there is a bill working its way through Parliament to make it harder for foreigners to invest in New Zealand forestry, be that for carbon farming, or timber production, or a combination thereof. However, I am also hearing that lawyers believe they will still be able to find a pathway to approval for these overseas investors. That sends a chill down my spine.
Another of the key take-home points from my own presentation was that the new averaging scheme for carbon credits, within newly planted production-forestry systems, is providing great incentives for planting exotics on the better class of pastoral land. It is the carbon credits earned in the first 16 years rather than the prospective value of the timber that is driving this process.
What we are seeing is the prospect of 16 years of carbon credits for new production forests, with this 16-year period being a very short time, yet driving investment into ongoing cycles of production forests, with no further credits. This has huge land-use implications for future generations of New Zealanders.
In recent months I have been saying that the pathway forward needs to have two key components. The first is to allow long-term and permanent exotics on the marginal country, recognising that afforestation with natives on much of this country is impractical, despite being emotionally appealing to those who do not understand the constraints.
The second component would be to recognise that on many sheep and beef farms there is about 20 percent of land that is steep and that this would also be best in exotic trees. Farmers know which land fits this category and it is reasonable to allow them to plant this land with minimal consenting. The specific allowable limit could be set regionally, or even on a farm-by-farm basis taking into account the specific land classes. Afforestation beyond that level on any property would require detailed consenting.
A lot of people have been saying to me that this sounds sensible. My response is that current policy is a long way from this. Of course, the devil is always in the detail. However, we have good maps of every square metre of New Zealand and specific property-based zoning is totally practical, with this being managed by regional councils.