'Smouldering discontent' in rural sector as farmland converted to forestry

Rural News

Rural property market weak as farmers grapple with pastoral land being converted to forestry and tougher lending conditions from banks

21st Jun 19, 10:32am by Greg Ninness

Farm sales remain sluggish with the Real Estate Institute of NZ recording 380 farm sales in the three months ended May, down 14.2% compared to the same period of last year.

In the 12 months to May, 1409 farms were sold, down 3.1% compared to the previous 12 months, with the biggest fall occurring in dairy farm sales which were down 34.2% on the previous year, followed by finishing farms down 13.8% and arable farms down 6.7%. In contrast sales of grazing properties were up 26.3% on the previous year.

Prices also appeared weaker with the median price per hectare coming in at $22,244 in the three months to May, down 15.2% compared to the same period of last year. However the REINZ All Farm Price Index, which adjusts for differences in the mix of farms by size, type and location, was up 0.2% compared to a year ago.

Dairy farm prices were particularly weak, with the average price per hectare of dairy farms sold in the three months to May ($31,248) down 13% compared to a year earlier, while the REINZ Dairy Farm Price Index, which adjusts for differences in the mix of farms by location and size was down 3.7% on a year earlier.

REINZ's rural spokesman Brian Peacocke described an air of smouldering discontent hanging over the rural property market.

"On the rural front, discontent smoulders strongly in a number of regions, fanned particularly by the ongoing emergence of evidence of sales of good pastoral land to forestry interests, this activity being aided and abetted by the Overseas Investment Office providing an environment conducive to investment from offshore interests," he said.

"This factor, coupled with the inexorable grind of the full range of compliance issues and an evident hardening of lending criteria from within the banking sector, is adding to a mood of widespread concern and caution within the rural sector.

"Product prices continue on a solid note, albeit volatility in prices being paid under the Global Dairy Trade auction system, plus the diminishing value of Fonterra shares, is causing farmers and financiers alike to gauge and reassess budgets and equity situations within the dairy industry," he said.

Sales of lifestyle blocks were also down, with 1934 lifestyle properties selling in the three months to May, down 9.2% compared to the same period of last year.

In the 12 months to May, 6870 lifestyle properties were sold, down 5.8% on the previous 12 months.

However lifestyle prices remained firm, with a median price of $690,000 in the three months to May being up 2.2% compared to a year earlier and equal to the previous all time high.

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36 Comments

by Andrewj | 21st Jun 19, 10:44am 1561070645

I hear that Carbon credits are worth $2400 a hectare pa, $1800 if you average payments. With that size subsidy there is no way traditional agriculture will compete on hill country, my guess is it will turn in to a dogs breakfast down the line.
https://www.stuff.co.nz/business/farming/112416878/carbon-farming-can-p…

by dictator | 21st Jun 19, 11:28am 1561073302

I've started looking at this as I've noticed blocks of land turning up for sale. I'd say the pressure is on with NZ not meeting carbon targets, but as you say it could turn into a dogs breakfast. The trading scheme is still a market, and plenty of farmers need money as soon as they can get it.

by Wilco | 21st Jun 19, 2:19pm 1561083560

Andrew - have you read your own link?
Where the hell did you get $2,400 a hectare per year from earnings from carbon credits?

by Andrewj | 21st Jun 19, 2:26pm 1561083996

mate in industry, but theres a difference between a straight sink and a plantation forest. They average out at $1800, from the horses mouth.

by Andrewj | 21st Jun 19, 5:16pm 1561094164

Wilco Keith Woodford hd an excellent article on the site.

"Under current legislation, there is a carbon price cap of NZ$25 per tonne, but there is a very good likelihood of this being removed within the next three years – that is the current Government plan. The price of carbon would then be likely to rise in line with rising international prices

The key reason is that the value of carbon within the NZ Emission Trading Scheme has been increasing rapidly. In 2014 the price was well under NZ$5 per tonne. Right now, it is between $24 and $25 per tonne.
The carbon price could in time go to $100 or even higher. Even if it only goes to $40 per tonne, or even less, then the forests may never be harvested. The EU price is already over $40."
An overseas entity can buy the land, plant it in trees, receive some Government subsidies, and then sit back and take the stream of income from carbon credits over the next 28 years. And then write off the original investment in the same way that a spent mine is written off.

If I were advising any such foreign entities, then that is exactly what I would be saying to them. Governments have set the rules, and now here is the opportunity to play the game.

Of course, it does not require me to tell them that. Their own advisers are telling them, and the game is now on.

https://www.interest.co.nz/rural-news/100134/keith-woodford-says-crippl…

by ngakonui gold | 21st Jun 19, 10:45am 1561070757

So who pays what to who and when the trees are mature and chopped down what happens then.

by Andrewj | 21st Jun 19, 11:59am 1561075185

companies like Air NZ, some credits go to commercial forestry but some forests are grown just to maximise carbon credits.
https://www.airnewzealand.co.nz/sustainability-customer-carbon-offset#p…

by Conrad | 21st Jun 19, 10:53am 1561071207

I wonder if all those Royal Navy-named farms between Taupo and Rotorua will be replanted?

by SimonP | 21st Jun 19, 1:18pm 1561079909

Unlikely. Pāmu (Landcorp) spent maybe $20,000/ha converting this land from forestry to dairy. The irony is this was done by a SOE despite the Government having substantial future obligations under the Paris Agreement.

by powerdownkiwi | 21st Jun 19, 11:31am 1561073470

There is not enough area to sink what we've already burnt, nor enough to keep up with what we intend to burn. The fossil fuels were the result of many millions of years of sunlit acreage, we overshot both ourselves and our energy use.

So our present arrangement is finding out that it cannot support it's present rate of energy-consumption.

Number of NZ journalists joining the dots? Nil.

by Andrewj | 21st Jun 19, 12:35pm 1561077351

The problem is it's all one way, paying into a scheme with no future income consumers are getting done. It's obviously better to just plant the cheapest land you can get, credits are the same.
So lets plant Redwoods and get payments for 40- 50 years, then selectively mill so not to lose any credits. Credits paid every 5 years, so now you get regular income from forestry, just solved the biggest problem the 25 year wait for a pay day.
Predictions are for credits to go to over $50, at that rate we will all be running carbon sinks, there will be no hill country left as stock farms in fact a lot of better country will be farmed as a carbon sink. This is madness that will spiral out of control, govt is distorting the market.

by Kate | 21st Jun 19, 1:09pm 1561079398

Yep, madness;
https://www.interest.co.nz/opinion/99722/katharine-moody-mad-doctrine-p…

by Andrewj | 21st Jun 19, 12:41pm 1561077697

just talked to a mate, tells me a good farm close him is going into a carbon sink. He talked to the farmer and said it was sacrilege for his good country to go into a sink, think of all the lost income. The farmer told him that it was worth more as a sink than a sheep farm even with good lamb prices. So you go from a farm generating income to a never ending cost.

by Kate | 21st Jun 19, 1:14pm 1561079653

I wonder how it would work out regenerating the land into native bush and then goat farming it. A bit of both worlds? :-).

by Chris-M | 21st Jun 19, 1:28pm 1561080506

The Chinese will be playing a long game and end up owning most of our productive land under the auspices of planting forests, aided and abetted by this very foolish government.

by PocketAces | 21st Jun 19, 4:47pm 1561092460

There is more than one government involved in that foolishness (although I agree with you, by the way), have you already forgotten the outcry from the last one.

by christlucas | 21st Jun 19, 5:26pm 1561094818

This will not end well. Thanks Winston

by Andrewj | 22nd Jun 19, 11:07am 1561158427

Local realestate agent told me this farm got sold to carbon credit operation, was on the market for a while. Lots of improvements, couple of shepherds, shearers, trucking companies, sale yard fees ,fertiliser sales, vets, fencing , tractor sales and on and on, all down the drain.
https://www.bayleys.co.nz/3060584

by Wilco | 22nd Jun 19, 1:35pm 1561167322

Andrew - I don't know who your forestry "source" is - however the dollar values being quoted are not accurate.
A 30 year rotation averages, at best, less than 30t of CO2 credits per year per ha. At current pricing of $25t that is $750 per ha not $2,400.
This is still a superior return than most sheep and beef farmers make.
According to ANZ's latest research the TOP 25% of sheep and beef farmers average $451 EBITR per ha.
The bottom 25% averaged $12 EBITR per ha.

by Andrewj | 22nd Jun 19, 3:10pm 1561173009

He was quoting a straight carbon sink, not a pruned thinned forest. I was looking at farms, considering buying one and then planting the steeper country as a sink and using the income to offset the price of the rest of the land.

by Jack Lumber | 22nd Jun 19, 2:39pm 1561171171

Andrew you answered why this sold to forestry, it was on the market for a long time and NO farmer wanted to buy it. Why? Because over 50% of farmers make a zero return each year. This is the problem for farming. The returns from pastoral farming are so poor they can’t afford to buy anything. This isn’t a forestry problem it’s the Agri industries problem. If Agri was profitable they could buy it. Dennis Hocking has a very good article on farmers weekly on timber returns. Based on area in forest it earns 300% per ha more than meat and wool of hill country for New Zealand. This isn’t for 1 year but a 5 year average. Farmers need to wake up or else they will slowly slide away. We don’t feed the world only around 40 million out of 7 billion plus. We we would be lost in the margin of effor on population figures. Farmers can’t get staff now, forestry struggles to get staff at far higher pay rates. The issue is people don’t want to live in these areas that’s not forestry’s fault. Look at facts, the truth is hard but change has been happening and will continue. Take the opportunity to improve profitability and stop blaming everyone else.

by Andrewj | 22nd Jun 19, 3:30pm 1561174214

But this is a straight subsidy that is distorting the market. That farm had a value but they didn't have to find out what it was due to subsidised carbon credits, who do you think ultimately is paying for this?
I think income from forestry is around 30k a stump hectare? I have heard of better returns in Nelson but their trees are better and the block was fantastic. 2000 $ to plant1700 to prune another 1700 thinning. About the same as the return in 1992. Looking at planting gangs on East coast they were all Fijians last time I looked.
I think that if you get carbon credits they should all be mixed forests, no single species, they should not be able to compete for better farms. What happens if we get the pine beetle or Pitch Pine canker to your carbon credits? We already have the ambrosia beetle.
Forestry needs to pay for all it's roading damage, Jones just gave 27 million to fix a road stuffed by logs from forests owned off-shore in Southern HB.
At present lamb prices I doubt forestry is competing, many of these farms got over 120$ for store lambs and 800$ for weaners. Many farmers have poor systems, and they need to change, high farm prices are shutting young entrepreneurial farmers out, subsidies to farmers are creating get rich schemes for the all ready entitled, on the back of the taxpayer.
China has a rapidly ageing population they wont be needing timber for ever, a world with slowing growth will see tree prices plummet. Our pine is still going to low value uses, we are the only country that uses technology to harden it. Last time in Gisborne I noticed lots of gums being planted, about time.

http://www.china-profile.com/data/ani_pop_1.htm

https://www.interest.co.nz/rural-news/100134/keith-woodford-says-crippl…

by Jack Lumber | 22nd Jun 19, 4:19pm 1561177165

We are harvesting in Hawkes bay making $50,000 per ha net at age 24 even more in bop read Dennis Hockings article. Read the ag reports the top 20% of farmers make 2 to 4.5% return. Most don’t make anything. What if foot and mouth turns up, myco plasma. Forestry returns on timber as the numbers show are 300% on meat and wool who’s contributing more to NZ - these aren’t made up they are real facts. Doesn’t matter what you get for selling something it’s whats left after costs. If you own rural land plant some trees, get some carbon and timber value. If you keep doing the same thing you will get the same result. Why defend something that isn’t working. Unless farming opens it eyes and changes it doesn’t look good. Many farmers, the top 20%, are and are doing very very well and into forestry and carbon big time. In a market economy the most productive and successful will take over the inefficient. Carbon is there for all rural landowners - this government will even fund it for you. You can take a horse to water but you can’t make it drink.

by Andrewj | 22nd Jun 19, 4:39pm 1561178379

Farmers are important to the local communities, forestry is not. Carbon credits are hardly a free market, farmer returns are very dependent on debt, family situations etc, often more important than skill.
If we allow carbon credits to distort the ,market for farms then I suspect the outcome will be very ugly further down the road.

by Jack Lumber | 22nd Jun 19, 4:48pm 1561178916

Based on facts and actual returns for different land use it will be ugly for those who do not change. To say forestry is not important to communities shows a complete dislike for forests and blind adherence to one way. It’s everyones choice at the end of the day but you need profit to sustain a community and we live, thankfully, in a democracy where people have choices as to how they derive that profit.

by Andrewj | 22nd Jun 19, 5:06pm 1561180013

I look at that farm and wonder why the hell there isn't more trees. Im sick of looking at farms where the only trees are around the farmers house, they like shelter but think livestock don't? or perhaps production has been so drummed into us that we cannot see past it.
I plant lots of trees my farm has shelter belts 3 to four deep running through them all stock have access to shade and shelter, im spending a couple of days next week planting hardwoods.
Pongaroa is the home of wind, they should have been planting trees for shelter and as sustainable managed forests for the last thirty years, we know that if we plant well we can have 30% of our farm in trees with no loss of production.
i was in Sweden last and always interested in the mix of farm incomes, livestock crops and trees, my favourite places is a forest on a friends farm in France, run in conjunction with a monastery on a 200 year rotation, mostly beech. Polish forests are my next goal.

NZ has always been a boom bust economy it appears to be part of what we are, these subsidies create market distortions and every one of our booms has ended in tears.

In fact livestock is in the same bucket as logs when it comes to dependence on Asia.

by Andrewj | 22nd Jun 19, 5:18pm 1561180681

I am fencing some streams off and cutting some paddocks in half. Im cutting a thousand posts out of a hardwood woodlot I planted for ground durable posts. It's very rewarding and the trees should coppice well.

by Jack Lumber | 22nd Jun 19, 5:37pm 1561181864

Sounds great Andrew I agree on the last 2 posts of yours. I don’t want to see all of nz in pine trees and it won’t be no matter what happens. We all rely on China now but the key is we need different income options. This gives resilience and diversity which hopefully helps people through hard times which always come. If you planted 30% of a farm for timber, carbon and shelter everyone wins. Some farms will go 100% trees but if farmers start the change to 30% there will be less of this so it’s really in the hands of the existing landowners what will happen. This will increase their profitability and make life, succession etc better, easier and more enjoyable for families which at the end of the day is what life is all about.

by Andrewj | 22nd Jun 19, 5:54pm 1561182863

cockies won't do it. It's expensive and long term we are all thinking short term. Timber should be a part of every farmers business and part of a diversified income, risk adverse.

Any of my friends planting trees are going 100% Radiata, no long term planning outside traditional NZ forestry, half of these trees will need to be hauled and thats going to knock returns.
Fencing for trees is expensive but we have to start somewhere, perhaps thats a subsidy/incentive we do need. I believe low interest rates have distorted investment decisions, god knows what things will look like in the future.

by Andrewj | 22nd Jun 19, 6:03pm 1561183405

Interesting video on China one belt etc
https://www.youtube.com/watch?v=np4OwQaJItY&feature=youtu.be

by Jack Lumber | 22nd Jun 19, 6:23pm 1561184628

Low interest rates are the scariest thing. People see no risk and buy assets on virtually zero yield - this is for any assets not just land. Combined with low inflation(incomes don’t go up) and no capital gain it’s a dangerous combination which could bite a lot of people. You have to be very disciplined and make sure you buy on long term averages.

by Andrewj | 22nd Jun 19, 9:01pm 1561194063

Which brings me to Hussman

" Our view is that no form of investment risk is always worth taking without regard to valuations, fundamentals, economic conditions, or market action. The strategy of buying and holding index funds for the long run is essentially a strategy that says that market risk is always worth taking. Yet the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..

The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal."

https://www.hussmanfunds.com/wmc/upd02d.htm

by Davo36 | 23rd Jun 19, 1:35pm 1561253711

Andrewj, I look at that farm and it screams for trees to be planted. Not everwhere of course, but on the areas where it's slipping.

And you mention this in some of your comments below.

There are large areas on the farm in the ad, that could be planted with no loss of production.

by Andrewj | 23rd Jun 19, 1:56pm 1561254982

Im not a fan of that country and I don't know what the trees are like off it, i've heard varying reports, some faces slipping due to the weight of trees, some stressed by wind.
It's still important as breeding country suppling lambs and beef to store markets.
I always think that all country can perform with the right stocking rates.
The problem is this whole farm is being planted for carbon credits, it's no longer productive, just a sink according to the realestate agent. A sink that taxpayers get to pay for, for ever and ever. If it's going to be a sink it should always be mixed species, at least make it beautiful. It also needs to have a productive value even if it's 60 years out, at least sometime it will return value back to the community.

Part of the problem with this country is NZ's very high cost structure.

by Davo36 | 23rd Jun 19, 1:36pm 1561253808

Frankly I don't understand any of this.

Is there a "Carbon Farming for Dummies" type set of articles somewhere?

by Andrewj | 23rd Jun 19, 1:57pm 1561255046

https://www.interest.co.nz/rural-news/100134/keith-woodford-says-crippl…