Aggregation of Woodlots a Good Idea – and it's been going on for many years

United Forestry Group's launch of a vehicle to "maximise the value of output from small forests" has some laudable objectives, but is unnecessarily dismissive of the current make up of the industry and could also miss the mark in terms of its espoused solutions. More importantly it will not address the fundamental issue of market volatility being highly damaging to supply participants (e.g. harvesting, log transport and port services contractors).

Fonterra-style consolidation for better sales negotiating power

The last time NZ forestry attempted to join forces to form a large scale log selling entity was Silva (2003-2005) – a conglomeration of Carter Holt Harvey and several other large forest owners. This entity only lasted a few years and never achieved its primary objective of establishing consistently superior returns for its members. In fact, a Silva representative once lamented that it was difficult to negotiate from a position of strength as the Asian buyers knew you had a lot of volume you had to place.

There is no straight forward correlation between export log prices and scale of buyers or sellers. In the past five years many new small to medium-sized log exporters have popped up at most ports around New Zealand. These traders are commonly Indian or Chinese nationals with NZ residency; many are working to build log supply lines back to family businesses in their home country. Some are also purchasing forests in NZ to secure resource. Whilst some have not made it, many are still trading today. The price they pay for logs at the port is mixture of their sales channels in Asian markets, the efficiency of their supply chain, the competition from other buyers at the port and the margin they take. Often these newer buyers pay a higher price than incumbent traditional log exporters. Some of these newer buyers disappear in market downturns, which make them much less viable to forest owners with ongoing harvesting, but some have proven to be entirely reliable in all markets.

A flexible approach to log sales, and one which has some competitive tension, will likely result in the best overall return for forest owners.

No NZ log seller, unless perhaps a legislated single-desk seller for the whole of NZ's export log production, could command sufficient negotiating power to fundamentally lift log prices, or stabilize the market. In doing so it would run the risk of losing market share to Russia, North America and Australia. If it could decrease the highly damaging and wasteful volatility of the market that would be a worthwhile achievement for smaller forest growers, but the larger forest growers, who aren't much affected by the volatility wouldn't support such a venture.

Aggregation of woodlots in a geographic area for scale and efficiency of operations

There are definite benefits in aggregation, but many of them are already achieved by engaging a suitably qualified and experienced harvesting and marketing manager. These entities effectively manage their client's forests as if part of a larger estate, engaging contractors and organising log sales with this larger scale. In this highly competitive market there is considerable pressure on fees and costs and a lot of focus on getting the best log price, so forest owners have plenty of choice and if selective on who they work with, can get good service and achieve excellent returns.

At many ports, in fact, logs from smaller woodlots of variable quality are mixed in with higher quality logs from larger plantations and get the same price - in effect, the smaller woodlot logs are being subsidised as if supplied in isolation the price would be lower.

Excellent harvest crew
Excellent harvesting results can be achieved by selecting an experienced and trustworthy harvesting manager. Unfortunately, there are few solutions to the potentially damaging impact of market volatility on small forest holdings.