Clarkys Comment - September

The adverse operating environment for the forest growing sector over the past two decades is now becoming obvious with gaps appearing in regional wood supplies in the near term. We can do nothing about that. Trees take time to grow. What we can do is fix the ETS and land use policies that will encourage replanting of harvested forests and encourage new planting, including by pastoral farmers.

More trees are needed not only to help meet our Paris Accord commitments, but also to provide the confidence for investment in internationally competitive wood processing plants.

The Wood Council of New Zealand submission into the ETS review called for policy changes that would result in both more trees being planted and greater uptake of engineered wood for low-rise residential and commercial buildings. The June submission can be seen here.

The Wood Council submitted in April on a key policy that could materially de-risk harvest liabilities for post-1989 forest owners, and in doing so encourage planting, regardless of whether agriculture is brought into the ETS or not. The policy relates to the now international recognition that when trees are felled all of the carbon does not immediately enter the atmosphere as CO2. Rather that release is deferred; for decades in some wood products. The Wood Council submission on Harvested Wood Products (HWP) can be seen here.

Devolution of harvested wood products (HWP) benefits to post-1989 forest owners would significantly reduce the number of NZUs that foresters need to retain or buy to meet harvest liabilities. Such liabilities could instead be met by the carbon accumulated in the new crop planted post-harvest. The impact on afforestation of non-forest land would be a much improved profitability. Separately, devolving the HWP rule into the domestic ETS would remove the perverse incentive for post-1989 forest owners to defer their harvest, or not harvest at all, and thus improve the log supply for domestic saw millers.

Only about half of post-1989 forest owners are registered in the ETS. A conservative portion of the value of the HWP credits that the government is retaining in respect of post-1989 forests not in the ETS should be used for the establishment of a fund. Such a fund would be annually allocated to, and administered by, the Wood Council of NZ to advance its Strategic Plan that looks to increase the contribution of the forestry and wood products sectors to $12 billion export value by 2022.

Advancement on this Plan has been constrained by lack of action by both government and by industry. In summary we cannot expect to achieve $12 billion in exports simply by exporting more logs. We must have modern efficient wood processing in NZ. The review of the plan will focus on just a few constraints to achieving that and how these can be rectified jointly between government and industry.

Most readers will be aware that the NZ forest industry has for some years been feeling that it has been disadvantaged relative to pastoral farming in respect of ETS and land use policies and its treatment under the RMA. Forestry acknowledges the economic and social importance of a strong and resilient pastoral farming sector, but differential treatment flows through to the relative land values under grass versus trees. This really matters to forestry because foresters do not treat land as an investment for capital gain but rather as a cost to generating income from growing trees.

Current low productivity grassland is valued between $3,500 and $5,000 per hectare and in some regions that is rising further on the back of exuberance over the Manuka honey opportunity. At these values the cost of land whether leased, purchased or owned, represents in excess of 50% of the cost of generating income from trees.

The profitability of afforestation or reforestation is constrained by high land values, even though the return from forestry on an annualised basis is superior to that from most dryland farming.

The forestry sector understands that sudden changes to policies that impact negatively on pastoral land values are politically unacceptable and we do not advocate for this. However, we also detect a growing acceptance in the farming leadership circles at least that the focus of farming must move from land value capital gain to cash returns. This change in attitude combined with signals that agriculture must make an increasing contribution to our greenhouse gas emissions reduction, and the equal treatment of forestry and pastoral land when it comes to allocating freshwater Nitrogen Discharge Allowances (NDA), would go a long way to levelling the playing field.

The outcome of these changes would likely result in most farmers planting a portion of their land in trees rather than face the prospect for writing a cheque to purchase NZUs. For the most intensive irrigated dairy farms in Canterbury it is acknowledged that they would need to plant a lot of trees, most likely on hill country off the dairy farm. These policy changes would serve to constrain the expectation of ever increasing rural land values. That is very important as under current policies land under trees has not inflated in value whereas land under grass has; serving as a further disincentive to plant trees.

The end game here is to have forestry and pastoral farming interests aligned as those land uses are complementary. Commodity price swings for dairy, meat, wool and forestry on our hill country occur at different times. A mix of two or more of these products at the farm enterprise level will provide resilience if one product is down. Trees within part of the catchment will permit more intensive farming on the better land without undue impact on freshwater quality.