Keith Woodford calls on the Government to rethink its forestry policies so as to favour all New Zealanders of present and future generations, and to constrain the narrow-based behaviours of international investors

Keith Woodford calls on the Government to rethink its forestry policies so as to favour all New Zealanders of present and future generations, and to constrain the narrow-based behaviours of international investors

New Zealand’s forestry policy is in a mess. We have drifted into a situation where the big decisions are made outside of New Zealand. Governmental forestry policy is like steering a dog by the tail. And this particular dog has a mind of its own.

Let there be no doubt that forestry has been and will be of great importance to New Zealand. The problem is that key decisions affecting forestry and hence New Zealand land-use are being made outside of New Zealand. The key decisions are being made by international investors who are figuring ways of making money in a new global environment where there is lots of capital looking for a home.

If we go back to the forestry boom times of late in the 20th Century, then forestry investments were only for those who were prepared to wait a long time for a cash return. Even then, investors had to be satisfied with returns on capital of something around six percent or less, net of inflation.  It was also a highly risky investment, requiring thirty-year foresight as to timber demand.

All of that has now changed, and here is why.

Risk-free rates of return in the broader economy, for example from Government bonds, are now less than two percent. That is before any allowance for inflation. To get more than this, an investor must take on considerable risk.

If an investor buys shares in Apple, they will cost more than 200 times current earnings. Shares in Amazon cost nearly 80 times earnings. Share in Microsoft, which the market believes has more modest growth from herein, can be bought for 30 times current earnings.

In this environment, it is not hard to see why large-scale investors would eye up an investment in New Zealand forestry. It’s not just the value of the timber that catches the eye. Indeed, that is no longer the main attraction. It is all about carbon trading.

In most cases, the investors are not actually thinking about offsetting their own emissions. Rather, it is all about making money. They plan to do this by selling the credits to others who do need to offset their emissions. In most cases the purchasers will be New Zealanders like me and you, or at least those of us who are still around.

The beauty with growing trees for carbon trading is that there is a cash flow throughout the growth cycle. At current prices of a little below $25 per tonne of CO2, it looks very much like a risk-free investment. However, there are also very good prospects for ‘windfall’ returns, not because the trees fall over, as hopefully that will not happen, but through escalating carbon prices.

As to what carbon prices will rise to in coming years, that is anyone’s guess. There are realistic scenarios of $40, $100, and even $200.

The reason that the future price of carbon is a guess is that it is a virtual market controlled by government policies, both here and overseas. Trying to outguess long-term government policy is always somewhat of a fools’ game. Nevertheless, there is no doubt which way the tide is flowing.

Given the simplicity of planting trees and the need for minimal tending thereafter, combined with a near-to-guaranteed cash flow from carbon trading, then it all looks very attractive as one component of a diversified international portfolio of investments. And that is the way the big international investors are now thinking.

Here in New Zealand, we have made it highly attractive for those international investors. Unlike other New Zealand investments, such as purchasing assets for farming, or even investing in post-farm-gate infrastructure, there is no need for investors to demonstrate a net benefit to New Zealand.  As long as investors can show they have some history of integrity, then in they can come.

This preferential-investment consideration for forestry arises from the embedded belief that here in New Zealand we must plant large areas of trees to offset the carbon emissions from our 21st Century lifestyles. That may well be a worthy objective.

However, some may also see it as a cop-out by the urban-dominant population. It is something that ‘others’ can do for the sake of ‘our’ current lifestyles.

Under current policies there is likely to be a stampede.  We have already seen the first stages of this up and down the East Coast of the North Island.

It is ironic that this is occurring at a time when returns from sheep and beef have never looked better. For better or worse, forestry based on carbon trading will have the power to elbow all of that aside.

It is also ironic that planting trees for carbon trading is a short-term activity tied to the length of the first rotation. The financial benefits are sucked up in the first rotation. The international investors can then walk away have mined the financial benefits of carbon sequestration.

The carbon benefits are meant to last for ever, but the economic value of that has been assigned to the first-rotation owners.

As to the future land-use, that will be locked into forestry unless the sequestered carbon is repaid. Second and subsequent rotations of trees can gain no further monetary credits because there is no longer a net gain in sequestered carbon.

Currently there is a political focus in New Zealand on the Zero Carbon Bill and how New Zealand will offset its carbon emissions. In contrast, real life and long-term thinking also needs to be about unintended consequences.

If New Zealand is to plant large areas of trees, beyond the ten to twenty-hectare woodlots that farmers might plant on lower quality land within their pastoral farming enterprises, then that planting needs to happen in a considered way using land where forestry is indeed the most appropriate long-term land-use.

Those areas of suitability need to be officially designated as such, using ecological and socio-economic criteria. The assignment process needs to be led by central government.

This then leads to the question as to who should be making the consequent forestry investments.

Forestry investments are too big for individual New Zealanders to take on. It has to be corporate-led.

Given the future needs for New Zealand superannuation, the investor could well be a forestry equivalent of Landcorp, including investment from the Superannuation Fund. Given the technical simplicity of forestry management, it would be much simpler than for corporate-style agriculture.

Regardless of the specifics, the bottom line should surely be that large scale forestry development in New Zealand should be for the benefit of all New Zealanders, both now and in the future. We do not need overseas capital to make that happen.


*Keith Woodford is a retired academic who now holds an honorary position of Professor of AgriFood Systems at Lincoln University, NZ. He now consults through his own company AgriFood Systems Ltd. Articles written since 2010 are archived at https://keithwoodford.wordpress.com. He can be contacted at kbwoodford@gmail.com

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Makes sense. If non residents can't buy residential homes why should foreigners own forestry assets or more importantly arable land ? Lease yes, own no.

Agreed, just as foreign buyers of housing helped push prices out of reach for Kiwi's, the same will happen here with farmland and for what benefit?

Great report Keith, Lets hope Jacinda and her blind clowns can read............

. . Jacinda ... as her predecessor Helen Clark also , has ideological blinkers on ..

They impinge upon reading or learning anything that doesn't accord 100 % with their preconceived views...

When it comes to selling off NZ's productive land and food supply chain both sides seem to be far too enamoured with the idea.

Agreed, they should be like National who has done great work stopping the sale of NZ assets to foreigners. Many former National MPs and PMs join the broads of foreign companies to "protect" NZ. True patriots.

... is " arable land " by definition land which is actually being cultivated by arabs ?

Yes, as opposed to land cultivated by Cockneys, which is 'orrible land.

GBH, of course and crypto currencies are mined from the graves of Catholic saints. A colossal hoard is alleged to reside inside the holy grail...

Good luck taking on the $1.5 trillion/annum rent seeking climate change industry. The globe is littered with CO2 boondoggles. "Germany's Federal Court of Auditors is even more forthright about the failures. The shift to renewables, the federal auditors say, has cost at least 160 billion euros in the last five years. Meanwhile, the expenditures "are in extreme disproportion to the results," Federal Court of Auditors President Kay Scheller said last fall, although his assessment went largely unheard in the political arena."
https://1-stromvergleich.com/medien/elctricity-prices-europe-2017.png
https://www.spiegel.de/international/germany/german-failure-on-the-road-...

The firs three comments were OK.

Then the mediocrity kicked in.

There isn't enough land to sink the carbon we dig out of the ground, this is just a temporary self-excuse. Secondly won't be 'money' in the future, as energy is required to underwrite it. Thirdly, it was the ideological blinkering known as neoliberalism - aka the free market - that got us into this mess. Bit disingenuous blaming the lefties, even if they are pro-growth and therefore playing a limited-over game.

Thirdly, not only forestry, but farming as practiced, needs to become less monocultural, more biodiverse, and less focused on 'making money'.

... media who ? ... may the arabs plough the furrowed fields of your mind ... tee heee heee.. .

Free markets are fine. It's our monetary system that requires exponential growth to sustain itself which is the issue. I don't understand why you perpetually conflate the two.

Withay - that's oxymoronic. Sorry, but that's how it is. Leave a lot of short-term self-interests to themselves, and you've got exponential growth.

You've always gotta blame the Lefties. See the new fad on silly-sausage propaganda sides is to try to rewrite Nazism as leftist.

What are the economics? Assume I plant a hectare of pine that consumes 20 tonnes co2 per annum (so 20x$25 = $500 p.a.). Am i paid annually or is there a single payment upfront for life? Also, is there a Govt. grant available to plant the trees under the Billion Tree's initiative? Lastly, the trees mature and I chop them down and sell them for x$, I then have to replant the land to retain the sequestered carbon. The land always has to be planted and only the first rotation is eligible for the carbon credit. Land that has to be planted in tree's (or the carbon credit repaid), has to trade at a big discount to land without the first rotation surely? Thanks in advance

It is the rent seekers deal of a lifetime - bought to you by fuel users and governement mandate - to the landed gentry of NZ to appease crackpots who think they can mitigate inter-glacial warming and take us back to the little ice age. You couldn't make it up if you tried. Cough up 150ha and you are in.

Talking with the Environmental officer of our regional council today. He said government grants are $1200ha for pine trees with the cost being $1600 to plant - so you'd only need to stump up $400ha.

In comparison he said the cheapest a contractor had quoted for planting, and managing to ensure they survive, a ha of natives was $10k with the grant being $4k.

So who's going to plant natives?

( can't verify the accuracy of these figures but you get the general idea ).

Your officer forgot to add the bit about negotiated rental. "Crown Forestry, a business unit of the Ministry for Primary Industries, would lease the land or enter into a forestry joint venture for a one rotation (30-year) term. The Crown would pay for all establishment and management costs over the lifetime of the crop and pay a negotiated rent to the landowner." The average South Auckland fuel user must stoked about this penance/indulgence for poor large land holders who can't afford a forest on their own.
https://www.mpi.govt.nz/about-us/crown-forestry/helping-achieve-one-bill...

Te Kooti,
Yes, the payments are annual.
Re Governemnt grants, it all depends on the situation.
Yes, land with carbon liabilities attched will sell at a big discouunt. It may be worthless except to gamblers who think that eventually the government may wipe the liabilities.
KeithW

Thanks. This whole exercise feels so theoretical and absent real world impacts. Are we really going to tie up swathes of our country in pine owned by off-shore investors and which is effectively rendered unusable (nothing grows under pine)?

Paris is a non-binding agreement - Kyoto is a binding one and even that didn't hold together;
https://en.wikipedia.org/wiki/Kyoto_Protocol

I doubt anyone will be buying carbon credits 10 years hence, given the likely costs of climate disasters in the real economy.

Westport/Buller DC's toxic landfill on the beachfront is a great example - neither the council nor central government want to pay $660,000 for the needed rock revetment. I reckon a Givealittle page would raise that inside a week given the average NZer would rather see that solved than the 'plan' for 100 years hence.

When I informed our kids we would leave them a forestry block in our wills they were keen. I shouldn't have shown them the budgets as they then reckoned we were shafting them. Go calculate the IRR. What you do with the block in 30 years does not matter so sorry Tim, Sarah & Angus but the medium term returns for the right block should fund plenty of overseas trips.

Keith, in a previous article you framed the once-through carbon credit annual cash flow as 'a forestry mine'.

I think you should pound this theme: mining is extractive, leaves behind local economies with their livelihoods in tatters (gumfields and kauri in Northland, native forestry and coal on SI West Coast) when the boom ends, and the long-term value of the softwood trees commonly planted is at best questionable.

It also falls foul of the Precautionary Principle in that the future is easily predicted: cash out to overseas crop owners for 25-30 years, then land is locked into what may very well be a sub-optimal use case for ever after. Not great for any notion of resource re-allocation or adaptation to whatever Gaia throws at us next.

Carbon Credit Mining has a simple, nicely pejorative ring to it. Spread the meme.....

Yes, I think the term 'carbon-credit mining' does have a catchy ring to it. And I think it captures the essence of what is starting to happen.
KeithW

Bit insulting to miners - at least miners produce something tangible. It is more akin to religious indulgences. Billy Graham must be gutted he didn't think it up.

No overseas control thanks. Only citizens should own New Zealand land, and the forests.

Good article Keith. From my perspective as an ever cynical generation X who has seen his country completely financialised from one end to the other this development comes as no suprise. Essentially this is the neoliberals setting up yet another extractive industry from which to siphon enormous profits. And as usual theres a convenient window of lax government policy which is the signalling to the market to get in before the residents of NZ realise whats happening and start to push back against it. This phase is where the damage is done, and we may already be too late. As we saw with the National governments point blank refusal to acknowledge let alone intervene as foreign buyers snapped up residential property enmasse post gfc, the market participants move with lightening speed and agression. Its not helped by the fact our own politicians virtually assist the process by deliberate inaction and failure to consult or coordinate at a national level. My longstanding question in all of this is why do we tolerate it? What will it take for this Country to stand up for itself against such bad economic leadership ?

Keith doesn't seem to be aware that the NZ Superannuation Fund is already a significant forest investor through its holdings in Kaingaroa Timberlands. NZSF is probably over-weighted in forestry and would be looking to diversify that risk.
A forestry equivalent of Landcorp, is a bad idea if it yields Landcorp's terrible return of investment.
Forest management is seldom technically simple, I'm not sure that Keith has too much familiarity with forestry.

To say nothing about NZSF's holdings in dairy....

NZSF, buyer of last resort for large land holdings that no kiwi can afford to buy, or are willing to pay the price that banks may require from the seller

The main companies/Individuals buying new land and planting are NZ based - Kiwis. Most of the OIO land sales for forestry are for existing forest blocks. If you buy land and take carbon and timber the return is split roughly 50:50 between both products. Existing forests of scale are being actively sort just for timber. These investors aren't stupid and they see the future there. Kaiangaroa has been one (or best) of the top performing assets for NZ super - compare it to Landcorp that has scale as well - its a joke especially if you strip out Land value gain. The facts are Timber land produces 300% more per ha in export earnings per annum for NZ and per hectare employs a lot more people in higher paid jobs than farming. Time to look at some real uncomfortable FACTS

The main companies/Individuals buying new land and planting are NZ based - Kiwis. Most of the OIO land sales for forestry are for existing forest blocks. If you buy land and take carbon and timber the return is split roughly 50:50 between both products. Existing forests of scale are being actively sort just for timber. These investors aren't stupid and they see the future there. Kaiangaroa has been one (or best) of the top performing assets for NZ super - compare it to Landcorp that has scale as well - its a joke especially if you strip out Land value gain. The facts are Timber land produces 300% more per ha in export earnings per annum for NZ and per hectare employs a lot more people in higher paid jobs than farming. Time to look at some real uncomfortable FACTS

Jack is correct, its mostly locals investing in carbon forestry. The political risks are too high for overseas investors with the Government changing the rules every couple of years. The logical placement is in farmers retiring non productive land. Not only for carbon credits as there are other ecosystem benefits as well; water regulation, erosion control, and biodiversity improvement.

" Not only for carbon credits as there are other ecosystem benefits as well; water regulation, erosion control, and biodiversity improvement"
Seriously? Planting pines would be about the worst land use to achieve those three things.

Seriously.
Forest reduces run-off during storm events and increases water flows during drought.
Forest stabilises soils resulting in less erosion.
Native bird and invertebrate populations are much higher than pasture, especially around forest / farmland boundaries.
This is true for exotic and native forest.