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Clarky's Comment - February 2013, Forestry's Profitability and Risk Management

Forestry's Profitability and Risk Management

Forest owners have a reasonable expectation that their managers will:

  1. Seek to protect the major asset, the forest itself, from catastrophic loss or value reduction.
  2. Seek to maximise returns from the harvesting and sale of logs.
  3. Seek to add value to the forest estate over time.

Overlaid on this is the imperative of corporate social responsibility to wider stakeholders, be that the safety of the public and workers, environmental impacts on fresh water systems and neighbours, or indeed adding positively to the exports and GDP of the nation in which the forest is located.

It is also evident that if we don't do anything differently in the future as we have done in the past we should not expect a different outcome. The two big opportunities to improve the profitability of plantation forestry and manage risks of value reduction, either catastrophic or gradually over time are:

  1. Well-targeted and executed research

    We are entering a new round of primary sector bidding for government funding to assist research initiatives. It is timely to reflect on the relatively low level of private sector investment into both forest growing and processing. In the forest growing space the big opportunities are in genetics, disease resistance, and supply chain logistics. There is also a massive opportunity for wider application of what is already evident in good genetics, silviculture, site preparation and weed control. The Commodity Levy proposal on harvested logs will be put to the vote in April and should be supported. If successful approximately half of the levy raised will be directed towards pan-industry R&D. While moving from voluntary research levies to a compulsory levy is not expected to raise any additional funding, it will at least provide stability of some core research funding that is so important to support building research capability.

  2. Reducing over-reliance on log exports

    Our current 50% reliance on log exports is a dangerous strategy. We sell logs mostly with bark-on, meaning a biosecurity threat to the log trade if a new organism is discovered that can survive on the log surface. Because returns to the forest owners are so dramatically influenced by exchange rates and bulk shipping rates, an over-reliance on log exports is also an exposure to quite short-term fluctuations in the annual harvest levels. This problem will be exacerbated as we move towards an increasing percentage of smaller owners harvesting single age-class forests. Such volatility works against harvesting contractor stability needed for investment in new plant and training. Without that investment we can expect lower productivity and rising costs over time, and even risk our social license to operate if we cannot adequately safeguard workers from injury or protect environmental values. Current efforts under way to explore ways to profitably process more logs within New Zealand are most welcome. There are some fast moving trends in China and high tariffs on Chinese manufactured wooden furniture sold into the US that are making the prospects for more New Zealand manufacturing look positive.