Peter Clark says investors are turning away from planting trees because public policy has nationalised the environmental benefits while imposing costs other land users have been protected from

By Peter Clark*

The 2014 NZ forest planting estimates were released by MPI on 4th February. These are based on a comprehensive survey of nursery treestock sales and a survey of large-scale forest owners.

The estimate is 3,000 ha of new planting and 43,000 ha of replanting.

We do not have an exact measure of the area of forest harvested in 2013 but based on the MPI reported national production of 29.7 million m³, and an average yield of 550 m³/ha we can estimate around 54,000 ha was cleared of trees, suggesting around 10,000 - 12,000 ha has not been replanted in 2014.

PF Olsen is aware of a large number of forest blocks that are not being replanted so this figure is not a surprise.

But this may not show up in national level Kyoto reporting for a number of years as there is a 4-year window between clearing a forest and declaring that land deforested if not replanted.

These estimates confirm the recent trend of reduced new planting and net deforestation.

This trend is at odds with the net new afforestation New Zealand needs to help offset growth in emissions from other sectors and also from forest harvesting that is expected to accelerate from around 2020.

We also need new planting now to avoid a drop in wood supply after 2030 that is no doubt of concern to those considering wood processing investments.

Historically investment in new planting, and to a lesser extent replanting, has been linked to forecasts of forestry profitability that rightly or wrongly is calibrated by investors on current harvesting profitability.

In recent years however we have seen a series of central and local government decisions that effectively nationalise environmental benefits of forestry while concurrently protecting other land use sectors from bearing the costs of their environmental pollution.

The end result of such policies is firstly a raising of land values for protected sectors.

This affects forest investment as the cost of land or land rentals is the single biggest cost of growing a forest crop and the price forestry investors pay for land is set by the value pastoral farmers ascribe to it.

Secondly, in the case of some policies the differential treatment of forestry has actually devalued forest land relative to other land uses.

This sort of treatment is a big turn-off for potential forestry investors.

Examples of what is turning forestry investors off are:

1. The Labour-led government's attempt to nationalise the carbon sequestered in post-1989 forests - a policy only overturned by a long and expensive public awareness campaign by the Kyoto Forest Owner's Association and New Zealand Forest Owners Association.
    
2. The Waikato Regional Council and Bay of Plenty Regional Council intentions to allocate lower Nitrogen Discharge Allowances or nutrient allocations for forest land than to pastoral land for the Rotorua lakes and Lake Taupo. This is effectively a "polluter benefits" principle rather than "polluter pays" principle" being applied. It reflects a lack of backbone by these local authorities to resist intense pastoral farming sector and lifestyle landowner lobbying.
    
3. The continued exclusion of the agricultural sector from the NZ ETS, when forestry has been in since 2008.
    
4. The decision to allow NZ emitters to use low-cost ERUs to meet their statutory emission obligations, effectively devaluing NZUs.
    
5. The legislation enabling the NZ Government to effectively print and auction NZUs in the future should it perceive the supply from forest owners being held too tightly. NZU availability is really a pricing rather than supply issue for the foreseeable future, yet the Government has not provided any certainty for forestry investors by refusing to indicate at what price level it might exercise its NZU auctioning powers. We thought that the whole purpose of the ETS was to get the market to determine the least-cost means of greenhouse gas reduction rather than have the government of the day intervene in the market.
    
6. The budget night 2014 legislation stripping post-1989 forest owners' rights to use low-cost ERUs to exit the ETS, while other emitters retain that right to satisfy statutory emissions obligations until May 2015. This was despite prior assurance that such forest owners would be entitled to use ERUs up until May 2015, and now leaves some forest owners with virtually unsaleable ERUs that were purchased to exit the ETS.
    
7. A focus by some Regional Councils on sediment discharges during the forestry harvesting cycle, while ignoring the benefits that forests provide during the growing phase and tolerating pastoral farming N and P discharges that occur virtually continuously and that are the primary contributor to the decline in fresh water quality in NZ lakes and rivers.

Forestry is a major export earner and employer in New Zealand. Its contribution to GDP per hectare occupied is roughly double that of dry stock pastoral farming and its ROI is also typically well in excess of the long-term average for dry stock farming if land value appreciation is excluded.

We see plenty of investor cash available and interest in purchase of near-mature or large forest estates but virtually no interest in new planting.

Increased forest planting is a win for the economy and a win for the environment.

It is ironic that we are witnessing net deforestation and the return of some forest land to dry stock farming.

There is clearly work to be done to improve the operating environment for new planting.

---------------------------------------

Peter Clark is the chief executive of PF Olsen. This piece was first published in Wood Matters and is here with permission.