Optimisation of Land Use is a Big Deal for New Zealand's Economy

Back in June of 2013 (Issue 54 of Wood Matters), Peter Clark pondered why, despite very compelling economic and environmental attributes, there is a trend of divestment in forestry – both in forest growing and the processing of forest products in New Zealand.

The impressive contribution forestry makes to regional economies was also outlined in Nick Bunting's piece in Wood Matters piece in November 2013 - Economic Impact Assessment of the Forest Industry in the Gisborne Tairawhiti Region, Issue 59. A key finding of this study was that forestry had a direct economic value per hectare 2.5 greater than drystock farming ($1,461/ha vs $588/ha) – and harvesting volumes are forecast to rise substantially, making this gap even wider.

More recently, inspired by an article by Denis Hocking in a recent NZ Institute of Forestry newsletter, the editor compiled statistics on the per hectare contribution of various large scale land uses. These are derived from figures published by Statistics NZ. Based on averages for the years 2011, 2012 and 2013 (and an including 25% of the tussock/danthonia areas in the land figures for drystock farming) export earnings per hectare for forestry are over twice as high as for drystock farming. Unsurprisingly, export earnings from dairy are over 2.7 times that of forestry. (Dairy, however, also has much higher inputs and much higher adverse environmental impact).

Table showing Export Earnings of large scale land use
(average per year for years 2011,12,13)

Product category/land useArea farmed/ forested (million hectares)Export earnings ($ billions per annum)Export earnings per hectare
Meat, offal, wool/dry stock farming *1 6.6 5.6 $848
Logs and wood products/forestry 1.7 3.3 *2 $1,941
Dairy 2.1 11.4 $5,400
*1 Includes 25% of 2.6 million hectares of extensively grazed undeveloped tussock and danthonia land - typified by South Island high country – this percentage was arbitrarily chosen.
*2 Based on an annual harvest of about 27 million m³. MPI is forecasting this to increase to up to 35 million m³ (a 30% increase) in the next 10 years. Hence, forestry has further to go in reaching its full export earning potential.

Looking at these various metrics (GDP, export earnings and direct economic value), different studies, and different territories, there is a consistent theme of forestry as being 2-3 times higher (more favourable) than drystock farming.

So let's now look at return on capital. On an average site, forestry is estimated to have an internal rate of return of 6% -7% excluding land appreciation contribution. In contrast, drystock farming's long-run average rate of return is 2-3% and dairy only slightly higher despite not having to meet the full cost of its environmental impact.

Now let's look at environmental credentials: greenhouse gas emissions (mitigation), soil and water (protection) and species diversity (see Beetles Living is Up in the Forest, Wood Matters Issue 36 for an example of species diversity in forests). All score higher (some considerably higher) for forestry as a land use compared to drystock farming. The difference with dairy is much larger again.

The erosion protection provided by forestry has been scientifically proven and is widely recognised (see Forestry Holds up Well in Series of Intense Storm Event, Wood Matters Issue 31). In a presentation by Scion last year, a net present value of $1,000 per hectare from erosion-avoided was reported from a Hawke's Bay study. Horizons Regional Council point out that across New Zealand up to 1 million hectares of highly erodible hill country would benefit from afforestation (that could be a value of $1 billion for erosion-avoided if all established in forest!)

So despite all these positive attributes, why is New Zealand's production forest estate shrinking? The reason is that the investment decisions are being left solely to the market, and the market is imperfect and doesn't have all the values monetised. Even the carbon value of forestry, which for brief period had economic value when NZU's were above $15, has languished, and current prices for NZU's provide no incentive to plant.

Getting into drystock farming in New Zealand is driven by investing in providing a family-based working lifestyle, or investing in an asset which has traditionally shown strong long-term capital gain. Forestry, on the other hand, does not have the working lifestyle attraction, and over the years, some forest-land has suffered capital loss via locking in forest land use under various environmental schemes such as lakes water quality and the emissions trading scheme.

With many of the values of forestry being off-market it is not sufficient to leave these critically important land use decisions solely to the market; just as the market is poor at providing parks to walk in, schools to learn in and public transport to ride in.

This is where the government has to step in and show some leadership. The NZ Institute of Forestry has been calling for a national forestry policy for some time now. Many in the industry can see that a Wood-First policy for public buildings might help with confidence in both forestry and wood processing investment. Unfortunately, the National Party, appears disinterested. From these national policies needs to flow well-founded initiatives that capture the entirety of values offered by alternative land uses, and result in more optimal utilisation of this precious land we call New Zealand. Even just a modest price on carbon (>$15/tonne) would be stimulatory to new planting, cost the government nothing and have minimal impact on inflation (remember our electricity prices already increased for $25 carbon in July of 2008, and haven't gone down since).