Forestry can be a useful addition to an investment portfolio, but it needs to be carefully considered. Anne Hardie reports.

Today’s timber and carbon prices provide favourable financial returns as an off-farm investment option for farmers, not just in the long term when the forest is harvested, but with early-term cashflow as well from selling or leasing credits.

PF Olsen business development manager Scott Downs says the proposed ‘averaging’ in the Emissions Trading Scheme will recognise the average carbon sequestered over multiple forest rotations which will give the forest owner more carbon to sell without incurring a carbon liability.

“You have ‘safe’ carbon that is the residual carbon where the biomass of roots and leaves etc is returned to the ground and not taken off site – it can be a quarter to a third of the crop and you don’t have to account for this carbon at harvest time. The units from this ‘safe carbon’ is often the only units traded by smaller forest owners. The averaging system proposed for the New Zealand ETS could potentially double this safe carbon component”.

Admittedly, he says, investors are taking a punt on what the carbon prices are going to do and the long-term expectations of log prices are probably a little more reliable.

“I certainly encourage people to plant trees for the return from forestry and the carbon is a bonus. Think of the carbon as the cherry on top.”

Based on today’s outlook, forestry is a healthy investment option, he says, with the IRR (internal rate of return) estimated at more than 20%.

Plus, forestry can help to offset carbon emissions as at some point, agriculture is likely to become part of the trading emissions scheme, he says. Planting trees also assists farmers become carbon neutral which can be used as marketing tool.

Another incentive is the Government’s One Billion Tree planting programme which can provide funding toward the cost of planting and establishing trees. Though if a landowner takes a grant and plants pinus radiata, they are not eligible to enter the Emissions Trading Scheme for the first six years.

When contemplating buying or planting land in forestry, Downs advises farmers to get a forest consultant on board to look at prospective sites and give advice on what it will grow as well as the cashflow over the life of those trees. Establishing forestry in the middle of nowhere may mean you are going to have difficulty getting contractors to harvest it down the track, he warns. The land also needs to be assessed for eligibility as post-1989 forest land.

It has been a concern for today’s harvest as the industry harvests the ‘wall of wood’; a result of huge private forestry investment after the price spike of 1993 which saw log prices reach an historic record high. The increase in wood was entirely from the smaller forest owners with less than 1000ha and between 1992 and 1999 there was an average of 65,000ha per year of new commercial forest plantings. With that comes challenges at harvest, such as harvesting crews, trucking, ports and markets.

Downs says it’s a reminder for those planting forests today to think carefully about where they put those trees, so they can be harvested efficiently at maturity.

Colliers International specialist forestry broker, Warwick Searle, says forestry investors are paying about $9000/ha at the top end of the property market which will be closer to ports and have lower costs for roading and management. The lower end has been about $3000/ha, though he hasn’t seen too many at that price lately. Land planted in forestry before 1990 can be half the value of land in grass at that time because it cannot be registered for the Emissions Trading Scheme and carbon credits.

The highest market activity has been in northern Hawke’s Bay, Gisborne and around the East Cape, parts of Northland, the Top of the South and North Otago. Though forestry has always competed for marginal sheep and beef land, carbon prices and the carbon regime has made it more competitive, he says.

Because it’s relatively low management over the years, farmers can buy a property in another part of the country and have it managed by experts while receiving additional income from it, he says.

The log price is the ultimate goal, but there’s lot of different options for capturing the financial benefits from carbon as well.

“They used to say the typical rotation was 28 years, but we’re seeing 21 years now because the log market is so good. They’ll take less volume to get the top dollar when the log market is really pumping as it is now. A-grade logs are getting about $190/tonne and in rough numbers that can get it up to $90,000/ha, but that would be the upper end and on average it’s around $60,000.”

Of course, no-one knows what the log market will be doing 21 or 28 years in the future and as Searle says, it’s a commodity product that will go up and down in price. Fundamentally though, wood is increasingly recognised for its sustainability and used in more and more products and unless there’s a hiccup in a major market such as China, its future is positive, he says.

“It’s a complex beast, especially the carbon, but the good thing in New Zealand is we know the forestry industry well and we have plenty of consultants in all the regions to guide you through. For a dairy farmer with no experience in forestry, it would be key to get a consultant on board and get good advice to guide their investment from the outset.”

Though forestry is a significant industry in NZ – contributing about 3% of the country’s GDP and producing an annual gross income around $5 billion – it is a small player internationally with just 1.1% of the world’s total supply of industrial wood and 1.3% of the world’s trade in forest products.