Reports of Our Death Exaggerated
You may have noticed that we, and others like us (but not as interesting) have not produced a new forest investment scheme for over a year now. You may also have gained the impression that growing pine & fir plantations is no longer profitable enough to justify being separated from the capital required for so long. Well, the former fact is directly linked to the latter impression and until that changes we will remain reluctant to produce new product. We think it will change because the impression is quite exaggerated and other investments that have been looking so good are likely to dull before long.
Despite the air of depression in some parts of the NZ forestry industry, forest growing is still very profitable. For example, a recent harvest of a very ordinary stand of pruned pines in a drier part of the North Canterbury foothills netted $22,500 per hectare. It was a 32-year-old farm forestry block on marginal farmland that had been planted, pruned and thinned (not nearly ideally) by the farmers themselves. Even if one puts a high value on the land use cost, their labour and other costs, the rate of return would have been very good. And this is during what many say is a recession in NZ forestry, so it should give us confidence in the future. It proves that although the forecast returns of a few years ago would not be achieved at the moment, forest returns are robust and even in 'tough' times compare well with other long-term investments.
Quite another story are those selling mixed aged forests bought at higher prices, often funded by debt. They are making losses but the new owners are likely to make good profits in due course, in my view. It is a buyer's market for the big players, so only those who have to, or have cold feet are selling forests.
Positive Forest Ownership Changes
Huge savings and investment funds have bought large forests and this trend looks like continuing, with CHH now wanting to sell some of its estate too. This is very good news in my view. These new owners have more in common with us and many other smaller forest owners despite their size. They are not listed companies and not wood processors. They do not have a high cost of capital, or a short-term focus. Nor do they want to just grow fibre as fast as possible. Their priority is likely to be a steady increase in forest value rather than just harvest cash at the earliest opportunity. That means pruning the good stands and longer rotations, as both substantially add value to the wood grown and hence the forest.
Lack of Confidence In NZ?
It appears to be a vote of no confidence in NZ industrial profitability that CHH are returning capital to their shareholders rather than investing it in on-shore processing. Commentators say that energy supply uncertainty, Kyoto Protocol costs & uncertainty, RMA costs & uncertainty, and new labour laws all add up to a comparative disincentive to invest in NZ industry at the moment. But of course many NZers do not want industrial plant here. They presumably prefer NZ as a blend of reserves, dairy farms and cafes. We can all be tourist guides, waiters or quaint poor folk, and our children can be servants to the rich in their coastal mansions or high country retreats.
Well as tree growers, that is another reason to add value before harvest so overseas processors as well as the remaining local ones seek our logs.
At last the government has outlined what it says it will 'give' the forest owners for using their forests to claim credit at Kyoto conferences. It amounts to so little of relevance or value that I shall not waste ink on it. The industry has rejected it. So the government may reconsider but don't hold your breath. Meanwhile Landcorp, a government farming business, plans to turn 25,000 hectares of flat central north island plantation into dairy farms. This may well be sensible land use (it's only forest due to cobalt deficiency), but it is very much a 'no no' in Kyoto terms. No doubt they will overlook mentioning it at the next international conference!
Wood for Good promotion
One thing they could spend a tiny bit of our excessive taxes on, as they do for tourism, is a New Zealand Wood for Good promotion. There is one by that name in Europe and similar ones in North America. By clever use of long-term advertising they remind everyone of the environmental, social and economic benefits of wood use and managed forests. In New Zealand it would be easy to do this just for plantation grown wood, since here the government would not want to encourage native forest management for wood. There are no votes in it.
Kakapo Thrive on Pines
Forest Research reports DOC has discovered Kakapo thrive on Radiata pine, especially the conelets. On Maud Island, an old farm forestry plantation became their favourite haunt. Forest Research are helping DOC with Radiata conelet supplies. Maybe that's why they have been breeding so slowly: A poor diet of natives? But I note on DOC's website no mention of Radiata pine and they have now moved all Kakapo off Maud Island. I'm sure they have good reasons, other than Radiata being just another weed in conservation circles!
Wood Certification & Plantations
In recent years a global forest environmental certification industry has developed. Although it aims to foster the good management of native forests it is being adapted to plantation forests too. Certification helps to get into some markets, so the bigger NZ growers have joined schemes and some smaller ones are doing so too. We have not, yet. Since we are 20 years from selling any wood it makes sense delaying this expense as long as possible. I'm pretty sure our forests will qualify and I expect certification to get easier and cheaper in due course.
Greens Hardwood Hypocrisy
I note at last something I wholeheartedly agree with the Greens, Greenpeace and Forest & Bird on. They condemn the huge increase in tropical hardwood freely imported into NZ in the last few years. Like me their response to the sellers' claims it is all sustainably produced is: 'Yea right!' But the answer is not only investigation of such claims but reversing the corrupt policy the Greens engineered which sees virtually all our vast native forest resources conserved for possum food! A tiny part of our native forest in private hands still sustainably produces a small trickle of wonderful wood but it is such a small industry it cannot get off the ground. In my view DOC for example, should be a major native timber producer, promoting our great native timbers to the world and using the income to destroy pests. Only a minor part of their estate (our estate) would need to be managed for wood and it could be done 'state of the art'. Tourists to DOC visitor centres would be able to view and order native hardwood furniture to be shipped home by DOC along with a certificate describing its sustainability and the number of pests destroyed or new trees planted with the proceeds. It is only ignorance and prejudice that stops this happening.
Trinity: Tax Dodge or Forest Investment?
Unfortunately we may never know for sure, since all the cases are likely to settle out of court I reckon. The IRD has challenged very large tax losses claimed for a scheme based around Douglas-fir investment in Otago & Southland. About 4,000 hectares I believe. A cunning plan to get hugely inflated future tax credits up-front has come hugely unstuck with those backing out no doubt paying heavily to the IRD in settlement. Very smart Auckland tax lawyers were behind it. Needless to say, our partnerships have a boringly traditional structure, clearly just plain old forest investments. We must lack ambition!
Interest Grows in 'Alternative' Species
In NZ 'alternative' refers to anything other than Radiata pine. We grow a lot of Douglas-fir and some Cypress (Macrocarpa & Leyland). These two are the only established alternative investment species. By that we mean they grow well, we have the knowledge of how to do it commercially and there is an established market for the timber. Some Eucalypts and an Acacia called Blackwood have been on the verge of graduating to this viable alternative status too. The problem with Eucalypts is pests and diseases keep arriving from Australia and doing more damage than can be tolerated. And Blackwood is hard to grow straight, although it can be done.
The latest alternative candidate is Californian (or Coastal) Redwood. An American company wants to establish a Redwood industry here and is well on the way to having its first 2,000 hectares planted, a lot of it in Canterbury. A large area at Hundalee that was formerly just gorse & broom is now in Redwoods and Douglas-fir thanks to this company. I wish them well and welcome their vote of confidence in our country.
When we do our next investment partnership we may well include some Redwoods as we do have some suitable sites available to us. We will certainly be planting more Douglas-fir and Leyland Cypress, as they are clearly viable alternative species.
Our Saving Habits
I see they tell us we Kiwis (and most anglophile countries plus Spain (?)) have not been saving much if anything over the last few years during the big property boom. The 'feel good' factor of rising property values and low interest rates has caused us to borrow more, spend up large and party. So there may well be a long hangover arrive at some point to teach us a lesson. Well those of you who have invested in plantations are by character profile, very likely to have savings stashed away in other assets too, so you are the people who probably will avoid that nasty hangover. Yes you forest grower types always drink a pint of milk before going out on the turps and put a hand over your glass once midnight strikes, don't you? Good-on-ya-mate.
PS: Views expressed above are mine, not necessarily those of Warren Forestry Ltd. (They are more polite)