Clarky's Comment - October 2014

Since our September edition of Wood Matters we have had 2 big things take place in New Zealand. The first is a general election. The new National dominated cabinet includes some MPs promoted into more senior and influential roles. PM John Key has acted as any good CEO with an eye to succession and promotion of the leaders of the future would do.

The second matter is the continued downwards pressure on international prices for milk powder, New Zealand's largest export product. While other export sectors benefit from the lower NZ$ this drop in prices has helped to cause, the reality is that the reduced export earnings and a reduced tax take from the dairy sector are very material for the nation that is underperforming on its targets for business growth and exports.

The forestry sector has also suffered export log price reductions over the past 6 months, but these have now started to recover in response to the lower price reducing supply into key markets. The issue with milk powder is that, unlike logs, there has been high capital invested in herds and milking and processing facilities that are likely to make the excess world supply more sticky. A price recovery for milk powder could be a long way off.

Short-term export earnings growth is an important objective for any government to have but uninhibited intensification of the dairy sector to achieve it comes at an environmental cost that could have long term impacts. The drop in milk powder price is a reminder that national leadership must take a longer term view of where New Zealand's competitive advantage lies. If we lose our clean lakes and rivers and market perceptions of good environmental stewardship, we lose a lot. Exports of our main primary products, as well as tourism, rely on New Zealand retaining its clean green image.

To better align private sector investments in land use with what is in the public and national interest requires that a monetary value be applied to environmental costs and benefits. Taxpayer funded clean-up of lakes and rivers polluted mainly by agriculture and the grandfathering of Nitrogen Discharge Allowances (NDAs) based on historic land use at Lake Taupo and now proposed for Lake Rotorua serve to underpin pastoral land values at levels that do not reflect the true costs of environmentally sustainable farming. These inflated land values effectively exclude land use for either less intensive pastoral farming or more environmentally benign forestry.

The newly elected National government is in a good position at the start of a 3-year term and with a high level of political capital in the bank to take some bold policy moves that will set NZ's use of its natural capital in land and water on an environmentally sustainable course. A good place to start would be the equal allocation of tradable NDAs in sensitive catchments, regardless of existing land use. Those that have or choose to retain or create indigenous forest reserves or plantation forests would be in a position to sell excess NDAs to those that wish to intensively farm. The cost or benefits accruing to the landowner will drive land use decisions that are aligned with the public interest and in fact New Zealand's long-term economic interest.

Whether we see such strategic thinking and leadership emerge from the new cabinet will be revealed in the May 2015 budget.