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Rural Insight: Forest sector buoyed by carbon and timber

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Despite a downward slide in forest plantings, a recently released report anticipates a surge in re-forestation as carbon values lift and timber prices remain firm.

The market intelligence report written for the United States Foreign Agricultural Service by its man on the ground in New Zealand David Lee-Jones also identifies a shift on the anticipated “wall of wood” arriving from forests planted in the early nineties.

The rise in carbon prices over the past three months has been nothing short of dramatic, with this week’s values at $18.10 a tonne, double what they were in April.

Lee-Jones notes a gathering positive sentiment toward increasing forest plantings thanks to the optimism in carbon values, an upward trend in log prices, and poor dairy pay outs all but stopping deforestation and conversion projects.

The latest PF Olsen log report records log export values up on average 6% in the past year, with strong price value gains for sales to India and South Korea in particular.

But the report also casts some uncertainty over how long the golden export run will last for the sector. With almost half of log exports destined for China, it raises the possibility that ongoing and significant increases in wood product demand in China are uncertain. The significant reliance upon that market makes the risk even greater.

The risk of a lack of investors in green field forestry ventures is also identified. The largest forest owners are asset class holders with a portfolio of investments that include forestry, and are unlikely to invest in new forest planting ventures.

The net planted area in April this year was 1.718m hectares, after a mini expansion that happened from 2012-14 that peaked in 2014 at 1.733m ha.

Interestingly after years of forecasts on a “wall of wood” being felled in the Bay of Plenty region, the report maintains it is now unlikely the peak annual harvest of 36 million cubic metres anticipated will eventuate.

This is now forecast to be 6% lower at 34m cumecs in the 2020s.

The surge in carbon values accompanies greater industry confidence that this time around the government will be committed to maintaining value in NZ sourced carbon values after the undermining they experienced from cheap dubious Eastern European credits. This year’s budget put a stop to the use of such credits.

PF Olsen chief executive Peter Clark said carbon values were capped at $25 a tonne, and he anticipated values would float about the $20/t mark in coming months.

“What it means is that on some hill country that is a bit rougher and not running the stock units and is high maintenance for fertiliser and regrowth, forestry will start to look like an option.”

“At $3000 a hectare it is starting to make sense with carbon prices where they are heading.”

Lower carbon prices had meant at those land values foresters were only achieving a return under 5% a year, when they needed 7-9%.

“Transactions including carbon values that have taken place lately have achieved a 6.5%-7.5% net real rate of return, when dry stock and even dairy farms would be well under 5% now.”

Modern well managed pine plantations are capable of growing at 20 cumec a hectare a year, translating to a net cash-flow of $1000-$1500 a hectare a year.

The report notes this would be better than most sheep and beef farms could achieve, acknowledging the drawback is the upfront costs and the 27-plus year wait to receive the income.

The additional value of forest plantings to help intensive farm operations manage nutrient losses could also hold value in coming years. The report notes tighter sediment and nitrate loss controls wold be offset with plantings, avoiding the need to reduce milk or meat production.

Clark said the fresh water aspect was one that could bolster forestry’s value rapidly as the primary sector seeks a “NZ Inc” brand to market protein under, and that brand required a quality environmental image with it.

“I think forestry and farming are quite complimentary for that, and for forestry to offer another investment option to help with the commodity cycles we experience.”

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