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 identified 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 had been nothing short of dramatic with this week’s values at $18.10 a tonne, double what they were in April.
Lee-Jones noted a gathering positive sentiment toward increasing forest plantings thanks to the optimism in carbon values, an upward trend in log prices and poor dairy payouts all but stopping deforestation and conversion projects.
The latest P F Olsen log report recorded 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 cast some uncertainty over how long the golden export run would last for the sector.
With almost half of log exports destined for China it raised the possibility ongoing and significant increases in wood product demand in China were uncertain. The significant reliance on that market made the risk even greater.
The risk of a lack of investors in greenfield forestry ventures was also identified. The largest forest owners were asset class holders with a portfolio of investments that included forestry and were unlikely to invest in new forest ventures.
The net planted area in April was 1.718 million hectares, after a mini expansion from 2012-14 that peaked in 2014 at 1.733m hectares.
Interestingly, after years of forecasts of a “wall of wood” being felled in Bay of Plenty, the report said it was now unlikely the expected peak annual harvest of 36m cubic metres would eventuate.
It was now forecast to be 6% lower at 34m cumecs in the 2020s.
The surge in carbon values accompanied greater industry confidence that this time around the Government would 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.
P F 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 achieved 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 were capable of growing at 20 cumecs a hectare a year, translating to a net cashflow of $1000-$1500 a hectare a year.
The report noted that would be better than most sheep and beef farms could achieve, acknowledging the drawbacks were the upfront costs and the 27-plus year wait to receive the income.
The extra value of forest plantings to help intensive farm operations manage nutrient losses could also hold value in coming years.
The report noted tighter sediment and nitrate loss controls could be offset with plantings, avoiding the need to reduce milk or meat production.
“I think forestry and farming are quite complementary for that and for forestry to offer another investment option to help with the commodity cycles we experience.”
Peter Clark
P F Olsen
Clark said the fresh-water aspect was one that could bolster forestry’s value rapidly as the primary sector sought 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 complementary for that and for forestry to offer another investment option to help with the commodity cycles we experience.”
