Clarky's Comment - July 2013, Is the New Zealand Forestry Industry "Different"

Is the New Zealand Forest Industry "Different"

Every sector has some claim to its importance and uniqueness in its actual or potential contribution to our economy and lifestyle. Those that have the most compelling cases, and/or those that sing their case longest and loudest tend to get public and political support. In the forestry sector we have some unique characteristics that may be reasonably well understood by the public and the politicians, but so far at least have not been valued sufficiently to warrant positive policy attention. Perhaps we have not been singing loud enough!

Some Unique Features

  1. Time horizons between planting a forest and harvest are 25 – 30 years; up to 10 election cycles. The key issue for investors is protection of property rights and relative certainty of the rules associated with forest harvesting and marketing of logs many years into the future.
  2. Industry organization. Most primary sectors have pan-industry associations charged with organizing research, training, market development and the like that are supported by Commodity Levy funding. But both forest growers and processors are characterized by a diverse mix of large and small, institutional investor and direct owner/operator, foreign and resident players. Such an ownership structure is closer in its nature to the tourism sector than to other primary land-based industries that comprise multiple, largely homogenous producers providing raw materials to a few large-scale processors/marketers. It is instructive that due to the nature of the tourism sector that it has no Commodity Levy and receives around $150 million/annum taxpayer support mainly for marketing.

    Forest growers are now organizing themselves with a Commodity Levy, albeit that the funding raised will be just $6 million, little different from the voluntary levy model that exists now.

  3. Provision of public benefits from the roughly $20 billion private sector investment into commercial plantation forests are very material. Consider soil protection on steep erodible country, water quality in our streams and lakes, greenhouse gas sequestration, flood peak mitigation and recreation. To date these benefits have largely been viewed by the public and politicians as being provided for free.

    In recent years however we have witnessed differential treatment of forestry that seeks to nationalize those benefits while accepting that costs associated with pollution remediation in other land uses comes at taxpayer cost. The most obvious examples are taxing of land-use change for pre-1990 forests (partially compensated) and the grandfathering of Nitrogen discharge rights into Lake Taupo at much lower levels for forest owners than for pastoral farmers. Also contributing are the exclusion of agricultural emissions from the ETS, and the regional councils coming down hard on short-term sediment discharges from steep-land roading during the harvesting cycle, while largely ignoring much more debilitating nitrate and phosphate leaching from farms into waterways.

    The problem with this sort of approach is that it discourages future investment in forests, and along with that the loss of public benefits over time.

Is There a Problem?

If the industry is to achieve WoodCo's Strategic Action Plan goal of adding $7 billion to New Zealand's exports over the next 10 years, then we must have new investment into wood processing. Investors in wood processing will want to have confidence that plantation forests are at least replanted, if not added to. At present we have virtually no investment in wood processing and the national forest estate is set to decline again in 2013 as conversions to pastoral farming following harvest gather pace. Extrapolated out a few years this does not translate to bright future for our 3rd largest export industry.

Is there a Way Forward?

An effective mechanism to provide investor certainty would be a New Zealand Forest Policy with cross-party support. This idea was raised with the Minister of Forests at the recent NZIF Conference in New Plymouth.

It should emphasise those issues of common interest to the sector and the public of New Zealand. It should be a policy covering all NZ forests in appropriate detail, but the value of native forests in the conservation estate are obvious and therefore don't need to be discussed in exhaustive detail.

The NZ Forest Policy should serve as a guiding document against which specific policies that impact on land use, wood processing, domestic wood use, trade, the ETS and Research and Development support can be tested and modified.