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Hard-hill country farmers need to look seriously at carbon farming opportunities as carbon prices keep rising

Hard-hill country farmers need to look seriously at carbon farming opportunities as carbon prices keep rising

In recent months I have been analysing New Zealand sheep and beef farming to try and understand the changing scene. Here, I shift the focus to carbon farming on the North Island hard-hill country where sheep and beef currently predominate.

In this article I am not looking at lumber because much of the hard-hill country has lumber problems arising from logging costs and associated infrastructure. Rather, I am focusing on permanent pine forests and asking whether the economics now stack up.

In telling this story I am going to be challenged by some people who hate pine trees and also by others who love them but have a focus on lumber. Here, I am not taking sides on either of those issues. My approach is simply to report what the carbon numbers are saying. 

According to Beef+Lamb there are approximately 920 of these farms, averaging around 830 hectares, and therefore totalling about 750,000 ha. The total area might be somewhat more, somewhere around 1,000,000 hectares, in part because Beef+Lamb work on effective hectares rather than total hectares. 

On average, these farms have been making a profit after depreciation but before owners’ drawings’ of between $200 and $250 per effective hectare.  The owner-return on assets, before drawings, is of the order of 2%, recognising that this is the average.  Some farms will be more and some will be less.

The way I approached the analysis was to go first to the MPI forestry website. From there I was led to the website of the Parliamentary Counsel Office and the updated 2020 ‘Climate Change (Forestry) Regulations 2008’. Here I found the carbon ‘Look Up’ tables for post-1989 forests.

I chose the numbers for Hawkes Bay / Southern North Island but the numbers are close to identical for all of the North Island except Bay of Plenty where they are about ten percent lower.

Working on a 50-year time frame, the sequestered carbon for a permanent forest is 1345 tonnes of carbon-dioxide-equivalent (CO2e). At that point the trees are still sequestering around 26 tonnes per annum but that is as far as the tables currently go. Accordingly, the current assumption is that the forest remains as a permanent forest thereafter but earning no more carbon credits.

To compare this with production forests, regulations now coming into play mean that production forests can only claim the first 17 years of credits under the new averaging system.  

To put that further into perspective, the amount of carbon credits claimable for a production forest will be 436 tonnes over a 17-year period, with that forest, typically harvested at about 28 years, to then be replaced by another forest but with no further credits. This compares to the 1345 tonnes over 50 years for a permanent forest.

The current price of carbon credits is around $48 per tonne. Ten years ago, it was about $2 as the scheme was destroyed by fraudulent Ukrainian credits purchased by the NZ Government. Two years ago, the credits were worth around $25. One year ago, they were worth around $37.

As to what those credits will be in another five or ten years, that is a big unknown. But this is a market controlled by Government policies and associated regulations. All of the main political parties are on board and so it seems unlikely that the carbon price will drop significantly. Indeed, it could go a lot higher!

So, what do the numbers say?

At present prices, the carbon forest will return around $65,000 over 50 years. I have assumed that local-body rates will continue at the present level of around $23 a hectare, but some will say they should be increased.

I have played around with those numbers and even if rates doubled it has minimal impact on the forestry economics relative to other land-uses.

I have also assumed that it costs $3000 to plant each hectare. Some might say that is too high, but I have allowed for considerable land preparation, such as spraying for weeds at the start.  

I have not made a specific allowance for subsequent weed and pest control, but once again I don’t think that alters the big picture a great deal.

I then looked at the current land and buildings value which Beef+Lamb lists as about $8100 per ha. I asked, what is the carbon return on this investment?

I answered this by calculating the ‘internal rate of return’ (IRR). This is a measure widely used in finance. I have used and taught IRR and associated financial techniques throughout my career.

I am always somewhat cautious when people ask me for an internal rate of return as to whether they understand what it means.


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However, in broad terms, and applied to this specific situation, the IRR calculates the return you would make on a purchase price of $8,100 per hectare, recognising that after 50 years the land then has no sale value. In other words, the economic returns are exhausted over that 50-year period, and the loss of capital value has to be accounted for.

The answer is that the expected return is 9.7% per annum. It would be higher if credits beyond 50 years become available.

Note that this is what we call a ‘real return’ assuming constant-value dollars. If, for example, the carbon price increases with inflation, then the nominal return will be higher. If the carbon price increases faster than general inflation, then the real return will also be higher.

The next question is how does this return compare to sheep and farming on that land?

That question is reasonably easy to answer. Assuming current profitability of sheep and beef, with returns increasing at the rate of inflation but no more, then the internal rate of return, assuming in this case that the returns go on forever, or alternatively that the land can be sold at any time, is around 2%.

Now, let me make it clear that I am not advocating that any farmer should rush out and convert the farm to forestry just on what I say here. Any such decisions need to be specific to the specific farm. What I am doing is drawing a general picture.

The type of calculation that I have done here is something that big and small corporates are currently doing with their financial teams. They can work out for themselves how the numbers align.

However, this sort of calculation is not within the skillset of most farmers. Nor is it necessarily in the skill set of their local accountant.

I also asked another question within the spreadsheet. How high could the price of land go and still return at least 6% IRR? The answer was $15,500 per hectare, based on the current carbon price.

I emphasise that in this article I am not arguing that New Zealand should necessarily put all of the hard-hill country into pines forests. That is another issue, and it is a big issue. I am simply suggesting to rural folk how the numbers lead towards serious discussions.

Also, I emphasise that in this article I have focused specifically on the North Island hard-hill country. The issues do extend well beyond that land-class, but that needs its own analyses.

Finally, a little less than two years ago I gave a guest lecture to the Diploma of Farm Management students at Lincoln at the end of their course.

My key message to those thinking ‘sheep and beef’ was that they needed to keep abreast of carbon-farming issues. Two years later that message needs to be screamed out again, this time from the tree tops.  


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His previous articles on high-country issues are archived at https://keithwoodford.wordpress.com/category/the-high-country/. You can contact him directly here.

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39 Comments

I may have missed it , but do all figures pertain to the average 830 Ha size farm?

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The figures are all per hectare.
The carbon credits are assessed per registered forestry hectare.
For forestry blocks of less than 100 hectares it is normal to use the Look Up figures approved by Govt and hence the figures I have used. For bigger blocks it is necessary to have periodic surveys undertaken by a registered forestry surveyor.
The farming figures come from the Beef+Lamb farm survey. So yes, they are averages with all the caveats that apply to averages.
And that is why I say each farm owner has to assess his or her specific situation, and why my figures here relate to the general 'big picture'.
KeithW

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Thanks, and wow ! The returns are way better than I presumed. These are figures you could take to the bank , and have a chance of getting finance, given a decent deposit.Unlike for straight non dairy farming , there is no way you could afford to buy a first farm .

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Good summary of the numbers.
Just to be clear permanent is only for 50 years. At 50 years one option is to convert back to averaging and as it is 50 years old you get to keep around the first 26 years of carbon and repay the last 24 years(rough estimates) you can then log the trees after repaying back the last 24 years of carbon, take the timber and replant the forest - but there is no more carbon only timber. The other option is to continue as a permanent forest in 25 year segments.
The real opportunity here is to plant the hard to farm/log/access parts of the farm and get carbon. On better areas plant under averaging and get carbon and timber. On the best parts farm animals. The permanent carbon option has the most benefit to good land use planning to avoid erosion, water quality, weed control etc etc. Its dosnt need to be pines it can be other exotics (redwoods etc) or native.
This is the saviour of hill country farming - if people can get there heads around it.

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If you pay back those last 24 years at harvest you also have to commit to a second rotation of 50 years with no further credits.
If your second rotation is registered for say 28 years then you will have to repay back to the 17 year figure.
KeithW

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That hasn’t been decided yet. One option being considered is that you don’t have to repeat the rotation length but just keep it in forest of any type for a minimum period - say 20 years. The works around international carbon accounting rules and is 70 years away - if we are still worried then about storing carbon we will have bigger problems if the science is right.

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I got that requirement from an MPI webinar presentation, so unless it has gone back into the undecided box...
KeithW

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It will be in the regulations that will be out end of year or early next. No firm decisions but it’s around trying to build in landuse flexibility long term and simplicity in understanding and compliance. Can’t say much else sorry.

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Was talking to a forestry friend in the w/e who was saying someone he's working with are planting a bunch of pines and planning on converting it to native over time.

I was curious as to how that would even be possible but the thinking was to get the initial sugar hit of funds from pines and convert later.

Sounds like a win/win if possible.

But in reality it seems unlikely given you'd be planting slow growing natives amongst already established pines. Thinning out those pines once they're more than 10 or so years old would become problematic and no doubt very expensive.

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From what i've read , Pines can make quite a good nurse crop for natives. They let through enough light for Natives , and the acidic soil doesnt bother them too much. the pines can eventually be ring barked or poisoned , if relatively quick sucession is required, a dead tree doesnt do too much damage when it falls. longterm , the natives will eventually take over from the pines , but I think you would be looking at a 70 -100 year time period for that .

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Wildlings are an issue; friends with a QE2 back-to-native block have spent a lifetime on the morph.

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As are blackberry, gorse, wandering jew, jasmine , old mans beard , privet, japenses honey suckle , the list goes on , to the number of plants that will out do Natives in the wild. 130 types in the Waikato. Its an uphill battle to grow natives, and any nurse crop will help .

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It does work BUT you need to have
1. Enough rainfall
2. Some warmth
3. Native seed source
4. Pest control - this is the tough one
You can thin the pines out over time and natives will come away. Look behind the hills in Wellington and the Western springs debate where the pines were removed. They could have been left and in 20 to 40 years they would have all fallen over and native is there.

There are issues around areas that are to dry or cold as native is generally low shrub species and succession will be very slow.
Radiata is not an invasive pine it won’t beat native and in time will be taken over. Other pines are problems.

It takes 120 to 200 years and this is what people can’t visualise. We want it now. It took 200 years to destroy our native forests so it’s not that bad really.
If you want to drop to absorb a lot of carbon fast but end up with native it’s an option. It does need management though to really work well.

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"4. Pest control - this is the tough one"
Could be quite an ongoing expense unless we get to predator free by 2050. And thats just the possums. Then there are goats and deer which aren't going away in a hurry despite however many decades of effort.

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Why virtue signal for $48/tonne when you could virtue signal for $1-2/tonne and be carbon zero tomorrow. Good enough for Switzerland - why is it not good enough for us? As an added bonus we get to keep the farming and forestry jobs plus the export revenue - and feel the glow of saving the Amazon rainforest.

'Previously, we found projects in the Brazilian Amazon rainforest achieving a carbon offset for $US2 a tonne. But even at a conservatively-high $10 a tonne, New Zealand could offset all its net emissions for an annual cost of under $600 million.
Imagine that: If New Zealand entered a partnership with countries like Brazil we would become net carbon neutral tomorrow – not in 2050.
Such a deal has a precedent. Switzerland and Peru recently announced a carbon offsets deal.'
https://www.nzinitiative.org.nz/reports-and-media/reports/policy-essay-…

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You need to remember they need to be new forests. There are no credits for the existing Amazon or any other old forest
Keith

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I know of tropical projects that are taking the carbon credits rather than knocking it over for oil palm or cropping. It is overly simplistic to assume it is only about planting trees. Planting trees in NZ is a very expensive way to sequester CO2 - and that is before taking into account lost export income, jobs and communities.

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Keith, Thank you for your analysis.
We have been in discussions with a corporate who have over the past year and half lifted their offer per plantable ha by over 30%.but as you state they have the computer models to support their decisions while I just have the back of an envelope.
I assume the ROI over such a long time frame will be heavily impacted by future interest rates on any debt.
The $15,500 (on average) per ha suggests there is still upside for medium to hard hill country.

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Yes, debt can be used to create leverage and a higher return on equity. This is what the corporates will be doing. Carbon farming should work very well for a leveraged investment because there is cash flow from very early on to service the debt and leaving considerable cash in the pocket.
KeithW

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The main risk is if you lose the forest and the cashflow stops. Need insurance for that and is a stumbling block for banks.

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How would this compare to planting indigenous trees, does ETS pay a better rate? if not why not a diverse forest of insidious plants would provide more benefit.

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Indigenous trees have the same rate per tonne but they grow much slower.
KeithW

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There is no difference in native credits but they will be tagged as permenant from 2023. In the market you can get a @20% premium for native credits on exotic. That’s good but it doesn’t make up for the volume difference in production of exotic vs native. You need a 100% premium really but the market won’t pay it - we have tried!!. People who buy native credits will only pay so much, sound familiar, and the volume they want is quite small. If we pumped out huge volumes of native credits we would swamp the market and premiums that are ther would be gone.

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Those premiums must be occurring outside the ETS.
KeithW

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Yes and no. Some emitters are paying more as a point of difference - small volumes. Others are buying NZUs and using them outside the ETS as well. The voluntary markets is small but growing fast. Some such as Mackinseys are forecasting huge growth in voluntary and some see a risk that these voluntary markets will cannabilise the regulatory markets and stress emitters who have reg obligations. Interesting times and a lot of changes to come both expected and unexpected but in general demand going up.

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I still think we have to stick to credible science 1 Sq meter of wood mass = x amount of carbon. Start playing around with the type of vegetation because it appease a certain demographic of the population you lose credibility.

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Yes, if one is fixated with trees why shag around with NZ trees when you could be planting planting tropical hardwoods with vastly superior growth rates. Why plant 3 ha here when you could plant 1 ha in the tropics - the same amount of virtue signal at the fraction of the cost and land wasted. It is almost like it is not an emergency and just a NZ 'carbon' industry/spruiker benefit fund.

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Finding the land in the tropics to plant new forests - which cannot be the land currently in an old forest - is not easy.
You would need to buy the land, grow the trees, and remit the credits back to NZ.
And even then, they don't really help NZ meet its Paris commitments.
There are no easy solutions.
Note that in this article I did not say what NZ should do. Rather, what I have done is analyse some opportunities for landowners given the current regulatory system we are moving into.
KeithW

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1. There are vast areas of land in the tropics that could be planted in trees - 70 million ha in Brazil alone. 'Brazil has about 180 million hectares of pasture land, and parts of it could be converted into arable land, which would add to the land area given over to grain production without either harming the environment or using conservation areas, he said.“Brazil could free up to 70 million hectares of pasture land for agriculture in the space of between 30 or 40 years,” Pavinato said.

2. It can meet Paris commitments - the international regulatory system is already in place - 'Switzerland has struck a carbon offsetting agreement with Peru, in what the two nations say is the first deal of its kind under Article 6 of the Paris agreement.'

Why squander export earnings, jobs, communities and taxpayer funds, when the job could be done much more efficiently, and on a vastly great scale, elsewhere for a fraction of the cost.

https://www.climatechangenews.com/2020/10/21/peru-switzerland-sign-worl…
https://www.reuters.com/article/brazil-grains-idUSL1N1YA0MT

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The area of Brazil that you refer to is natural savanna (grassland). I have spent time there. It is not going to grow big trees. And it is not available. it is predominantly pastoral and cropping land, but with significant land set aside for conservation. The biome thereof is totally different to the Amazon.
KeithW

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I've spent time there too Keith, and other parts of the tropics. The tree growth rates are fantastic - and the genetics are getting better and better. There are plenty of other degraded grazing land in the tropics that could be put to use if Brazil is not to your liking. We seem to be myopically focused on rent seeking from relatively slow growing pines while more innovative countries, like Switzerland, leap ahead of us in the grand scheme to change the climate back to the little ice age.

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These projects are based up the REDD scheme and the main reason for the low price is they are very suspect most of the time and have low integrity. They are being paid to not remove the forest in most cases so not storing any more carbon just stopping further deforestation. Some plantations in the tropics do grow very well - the problem is the soils of many of these are on are equivalent to our class 1 and 2 soils and are the basis for massive pulp and paper industries - when I say massive I mean Massive - the scale is beyond anything NZ could ever do now simply based on our land size.
Many plantations in the tropics are also very poor due to poor soils and the high cost of establishment - you have to weed these plantings virtually every month for 2 years. Many of the soils we have in NZ are not good for cultivation or grass growing, we need to add fertiliser to keep them growing and spray/cut woody vegetation regrowth.- we need to remember NZ was once 80% in forest of some type, large and small. From an ecological point of view NZ is a natural forest country - if you walk away it will revert to woody vegetation and not stay in grass. Im not saying we do this but the point is if left nature will revert to what it wants to do - be a forest of some type - hence why trees grow so well on comparable soil types internationally.

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Well aware of the scale - they got that way via their superior growth rates. They can do pulp plantations at scale but not carbon? The problems you envisage are resolved through good management. Trees are only weeded on a monthly basis if the manager is a crook - by the nature of the high rainfall the soils are poor but if you look after compaction and organic mattter you never look back. Anyways, I think we have had quite different experiences. Cheers.

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The thought of Jair Bolsonaro or similar taking to it with fire bombs might put some off.

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Finding the land in the tropics to plant new forests - which cannot be the land currently in an old forest - is not easy.
You would need to buy the land, grow the trees, and remit the credits back to NZ.
And even then, they don't really help NZ meet its Paris commitments.
There are no easy solutions.
Note that in this article I did not say what NZ should do. Rather, what I have done is analyse some opportunities for landowners given the current regulatory system we are moving into.
KeithW

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Local body rates seem to have a " baked in " rate of increase of at least 5%pa, which means a doubling every fifteen years. Allowing for an inflation induced increase in land value of 2% pa generates another doubling effect over fifty years, so if rates are $23 /ha now, by the end of fifty years they could be $90- $100 /ha. That is to say that the accumulated cost of local body rates over fifty years is likely to be much greater than $23 x 50.

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I agree that rate are likely to increase. But this is also likely to occur with competing land uses. So it does not really affect the relativity of pastoral versus forestry.
KeithW

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Depends how regional councils treat permanent forests. Land put under qe2 convenants gets a rate rebate for e.g, but now, if that land was planted after 1999 has a potential revenue stream. Local councils lack of action so far is not promising, but the positive effect on waterways should be taken into account.

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Deleted question - it was already covered in the chat.

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