Newsletter - May 2002

 

The following are some miscellaneous items that may be of interest to you as an existing or prospective investor in our products and services. We hope they are and we would welcome any feed-back, especially Application Forms for new units in Mt Whitnow Forest Partnership!

Forests v Shares

Those of you who have seen the graph in the Investment Statement for Mt Whitnow Forest Partnership comparing the growth in value of the US stock market and forests over the 90 years to 2000may be interested to read the enclosed extract from the New York Times.
My only comment is why don’t ‘financial advisers’, stock brokers, mutual fund managers and other commission ticket clippers give you this information?

Current Log Prices & Harvest Returns

With only young forests in the ground, current harvest returns are not as relevant to us or our investors as some might expect. It is what they might be in the future that interests us. However, past prices are relevant to making forecasts about future prices and also to valuing immature forests and thereby the units in our partnerships. So below is a chart showing typical prices for the last quarter as recorded by MAF:

December Quarter and 12-Quarter Average

Prices at point of sale for Radiata pine logs

As at: April  2002

Generic Log Type & Pricing Point March  2002
Quarter
March 2002
12-Quarter average

EXPORT (NZ$ per JAS m3 f.o.b.)

Pruned

214-230

201

Unpruned A Grade

105-117

114

Unpruned J Grade

98-109

94

Unpruned K Grade

91-113

88

Pulp

65-72

64

DOMESTIC (NZ$ per tonne delivered at mill)

P1

153-190

166

P2

99-160

130

S1

86-100

97

S2

87-94

88

L1 and L2

61-75

68

S3 and L3

50-80

63

Pulp

35-51

40

These current prices are quite close to those approved by independent forestry consultants for companies such as ours to predict future returns for pine plantations. They translate into net harvest returns of between $40,000 and $50,000 per hectare for fully stocked, fully pruned mature stands on good sites. That is what we aim to grow and the figures our forecasts of returns have been based on in recent years are in that range.
A key factor to note about log prices, whatever they are, is that although they are one of several factors determining the forest grower’s return, they do not determine whether there will be one. We need to emphasise that fact because most of the longer term investments compared to plantation forests actually depend entirely on price to determine if there will be a positive return at all.
Shares, property and even fixed interest can produce negative returns or returns that merely keep pace with inflation, but that risk is greatly reduced by forest growth. The chart on page 8 of the Investment Statement for Mt Whitnow Forest Partnership shows what happens to the profit if harvest returns decrease dramatically for any reason. It simply decreases, but it is still positive and still higher than the average managed fund for example.

Tax Credits From Gross Investment to Date

Over the page for your interest is a table showing the amount invested per unit in our four established partnerships to date, plus the tax deductions and savings made. We have added the amounts forecast for the first year of Mt Whitnow Forest Partnership too.

 

Invested

Deductible

Tax saved

Amuri Hills

$5,887

$4,743

$1,565

Six Hills

$6,093

$4,530

$1,495

Insignis

$8,245

$4,737

$1,563

Triple Ridge

$5,224

$2,784

$1,086

Mt Whitnow

$4,250

$2,340

$913

NB: The amount saved in tax is given at 33% for the first three partnerships and 39% for the more recent two and the current year’s sums included are estimated. After the initial set-up of the partnership nearly all further investment is fully deductible, plus some depreciation of land preparation costs feeding through from the first couple of years. Over time about 90% put into our investments will be deductible. This is nearly double the amount enjoyed by land buying partnerships, since their land cost is not deductible nor depreciable.

Kyoto, Carbon and Climate Change etc

In our last newsletter I hinted that the government might keep all carbon credits itself and that we should not mind because they could be more trouble than they would be worth. Well I think that is what they are going to do and I believe it is what most forest owners suggested they do. Forest growers should still benefit from ‘carbon accounting’ though as they are on ‘the right side of the equation’.
The government have proposed a carbon tax for 2007. This is good news for forest growers and negative for producers of competing materials like metals, plastics and concrete. We would of course like them to do even more to promote forest growing and wood use if the country gets the huge sums they hope it will for selling carbon credits. We would argue all of it should be used to promote forest products as the environmentally sound materials they are.
Related to this topic is a book I have recently read called the Sceptical Environmentalist by Bjorn Lomborg, a Danish Professor of Statistics. I recommend it to all of you interested in environmental debates. It is a book that has got some career environmentalists in a spin because he methodically shows they have habitually exaggerated the world’s real environmental problems while ignoring the improvements in recent decades and the reasons for these. That includes the ‘greenhouse effect’ from burning fossil fuels. If you have heard about this book it is quite likely you have heard it has been ‘completely discredited’. But I assure you it has not and such reports are just further mis-information.
Lomborg does not show we have no problems, only fewer than we have been told by environmental pressure groups and the media through which they promote their causes. What he shows is population and economic growth initially create environmental problems, then the wealth created solves them. He shows that in the developed world the environment was generally under most pressure until about 1950 but has been improving ever since. The same trend is occurring in the developing countries, some of which are over the peak of pressure and some are yet to reach it. Plantation forests are part of the environmental improvement equation and will be even more so in the future.
He does not find that the anthropomorphic greenhouse effect is unsupported by good science. He thinks it probably is a sound theory, but that it too is being misreported by pressure groups who want to alarm us with their prophesies of doom. He shows however that the intelligent way to deal with it is by ensuring there is continued strong economic growth and investment, as only that will bring on-stream clean technology to replace fossil fuels. This is already happening and he shows we are on track to replace carbon fuels by solar, wind and hydrogen fuels by 2050, purely by the simple fact that they will be cheaper. As carbon taxes may slow world economic growth, they actually may delay fossil fuel replacement and so could be negative for the environment. Slowing growth will also keep those living in poverty that way longer. More plantations would be part of a better solution but it does seem carbon taxes are likely in any case.
Lomborg’s book has led me to attending a night school series of lectures given by scientists at Canterbury University on climate change. I have learned they are mostly happy to accept that we are adding to global warming a little but far from convinced it should be labelled a ‘bad’ thing or that there is anything useful to be done about it, except adapt to it. The most relevant thing to note is that climate change is likely to be ‘good’ overall for Europe, Russia, North America and New Zealand but ‘bad’ for many developing countries and already hot countries. The reports in the media that extreme weather events will be more likely are wrong; the models do not establish any probability either way. They do show places already consistently very hot, very dry or very wet may get more so. Temperate to cool places like NZ and Europe are more likely to benefit overall from the likely rise in global temperature. The rise so far has been very little, possibly none.
Two further interesting facts are: the Arctic may be warming but the Antarctic is probably cooling over all; and so far there has been none of the sea-level rise models predict. As these are important facts that environmental activists and the media have not reported, I am even more convinced Lomborg is on the right track.

Charles Etherington,
Managing Director

Warren Forestry Ltd, New Zealand forestry investment provider
Warren Forestry Ltd, New Zealand forestry investment providerWarren Forestry Ltd, New Zealand forestry investment providerWarren Forestry Ltd, New Zealand forestry investment provider