In This Issue

• Introduction
• Clarky's Comment
• Afforestation Grant Scheme
• Seminars
• Hawke's Bay Farm Forestry Association's "Carbon - Ready or Not" Seminar
• Log Market
• Massive Drops in Ocean Freight Rate
• Poor Pruning Operations Can Cost Dearly
• Making Forestry Work Safer

Introduction

It's hardly worth repeating that we are living in turbulent times and seeing unprecedented volatility in asset prices, capital and financial markets. And as we observe the spectacle, we know full well that there will be further flow-on effects into the NZ economy and our livelihoods.

As this third edition of Wood Matters goes to press we hear about the planned closures of Carter Holt Harvey's sawmill in Putaruru and plywood plant in Mount Maunganui, with the loss of over 300 jobs. This is clear evidence that the down turn in the property and construction markets is hitting log processors hard.

In our section on the Log Market and Ocean Freight Rates we report on market conditions clearly being influenced by the credit crisis and housing down-cycle. What is unclear at this stage, however, is how this will play out for the near-to-harvest forest owner, especially when balanced against a number of significant positive influences facing the export log market.

Peter Clark devotes all of Clarky's Comment to the Emissions Trading Scheme and brings us up to date with important new developments. Lower ETS entry costs are a pleasing new development which will reduce barriers to entry. We also feature the Afforestation Grants Scheme (AGS) which may provide a more attractive incentive for some to develop forestry projects.

In this edition, we profile current and planned seminar activity both in the harvesting and carbon forestry areas, as the industry works hard to disseminate information and opportunities arising from the ETS.

Excellent achievements and an important new collaborative safety initiative are covered in Making Forestry Work Safer.

And finally, the little talked about, but vitally important topic of getting pruning operations right is highlighted in Poor Pruning Operations Can Cost Dearly.

Clarky's Comment

The Emissions Trading Scheme was passed on 26th September 2008 with numerous amendments. Which of these affects the forestry and wood processing sectors and how?

• The most material change is the exclusion of Russian "Hot Air" Assigned Amount Units (AAUs), unless "greened". These are units arising from the reduced pollution in Eastern Europe following the collapse of the Berlin Wall divide. Exclusion of these units will underpin the price of NZUs - probably close to the cost of a Certified Emission Reduction (CER) at around NZ$40/NZU. This change has a mixed outcome for forest owners. If you are a seller of NZUs then it is positive. But for the two thirds of our national plantation estate that is pre-1990 this is negative as the wood processors will be hit hard by the additional cost of electricity. However this cost increase should affect more energy-intensive building products (such as steel and concrete) even more and make wood more competitive in a carbon-constrained world.
• Owners of pre-1990 forest land that owned their land prior to 1st November 2002 will receive around 60 units as compensation for loss of land value, up from 39 units in the original Bill. Post-2002 landowner compensation remains at 39 units, and Crown forest licence claimants get 18 units on settlements taking place after 1st January 2008.
• The delay of entry of liquid fuels to 2011 is negative for forest owners wanting to sell NZUs but positive for harvesting and log transport that are by far our largest supply chain costs for logs to port or mill.
• A new National Biodiversity Standard is to be developed. This is in response to concerns that the planting of exotic species would threaten existing indigenous vegetation. We will be watching the drafting of this standard carefully to ensure it does not have the perverse and overall negative environmental effect of making forestry planting uneconomic within hill country catchments of otherwise low-producing pasture due to the presence of small patches of emerging scrub.
• The cost of entering your post-1989 forest into the ETS is set at a modest $489 plus GST per application (regardless of scale). Fees for filing returns will be in the order of $100/return. This effectively removes compliance cost as a real barrier and should encourage entry for all but very small forests.
• If processing an ETS entry application takes more than four hours, then there will be an additional charge of $120 per hour. This could affect applications of large estates (multiple forests) and applications that have poor records or supporting data.
• Tax treatment of NZUs is favourable. Details are not set out in this column but in essence NZUs are not taxed at the time of sequestration, or at year-end as "Stock", nor on change in value. The principle adopted is that emissions units are taxed on revenue account, and follow the cash cost and receipts. All transactions in emissions units are GST zero-rated, meaning that GST on input costs of making the supply is fully claimable, but no GST on purchase or sale of units. "Partial Compensation" units allocated in respect of loss of land value to pre-1990 forest landowners are treated on capital account - no tax on sale of these units (with some exceptions for land developers).
• Key dates have been set. There is now no end-date to enter your post-1989 forest into the ETS - previously within 18 months - (other than the final reporting date for CP1). The most critical deadline is 30th June 2009 for the pre-1990 forest <50 ha exemption applications. The catch is that exemption applications cannot be accepted for processing by government until after the Forestry Allocation Plan is finalised in April or May 2009. This leaves a very short window. Some forest owners could be caught out if they have not yet worked out if they qualify for the <50 ha exemption and made a decision to apply.
• Some time soon after 30th June 2009 pre-1990 forest land owners will be able to apply for their allocation of "partial compensation" units. It is important to apply, as the default position is that these landowners are in the ETS and subject to deforestation liabilities. Not to apply is to be subject to full liabilities without any compensation, a lose-lose scenario.
• MAF has published a Guide to Forestry in the Emissions Trading Scheme. This is now available from MAF's website.
• Government officials are taking a pro-active leadership role in seeking changes to the post-2012 terms. The key elements NZ is seeking are land use flexibility (changing the location of a forest without penalty), delayed accounting for emissions based on the effective life of wooden products, and retention of the rule that sees post-1989 liabilities capped at level of credits earned ("fast forest fix").

Summary of Key Dates

Afforestation Grant Scheme

An initiative to address climate change

The Afforestation Grant Scheme (AGS) is one of the new initiatives announced by the government to address the effects of climate change.

Under the AGS the Crown will provide money for new planting of tree species including Radiata pine, Douglas fir, Redwood, Cypress, Eucalypt and indigenous species. In the public pool applicants can tender for as much funding as they wish but tenders are rated on the three specific benefits and the tendered price.

How does it work?

Successful tender applicants will sign a grant agreement which will be valid for a term of only 10 years. Over this period the Crown will accumulate the carbon credits and will be liable for any carbon losses due to fire, wind or other natural disaster. After 10 years the agreement ends and the forest grower is then free to choose to enter the ETS, harvest or change the land use.

Tender rounds

The first tender round closed on 30 June 2008. PF Olsen Ltd prepared one application for a Rotorua client and this application has been approved. In total $927,000 for planting 447 hectares was approved from the first tender round.

The second tender round closes on 31 October 2008.

Advantages of the AGS

The AGS has several advantages:

• The tender application process is easy with a simple form to complete.
• Application levels appear relatively low which means you should have good chance of success.
• You have an even greater chance of success if some of the land has a Land Use Capability class of VIIe or worse, if the Regional Council requires forest cover, if forest cover will improve the water quality and if bio-diversity will be enhanced.
• The agreement could be terminated early by repaying the grant and interest. This means that you could then deforest or enter the ETS (MAF are still to clarify this point).
• The minimum application size for the AGS is only 5 hectares.

Attractive for low-sequestration species

The AGS is particularly attractive if you intend to plant low carbon sequestration species (such as some of the indigenous trees) as they sequester little carbon in the first 10 years. Of the public AGS pool, 30% is set aside for low carbon sequestration species.

Worthy of consideration

Given these benefits, if you have eligible land, want to do some tree planting and have doubts about some of the risks associated with the ETS, you should consider applying for an afforestation grant. To make it easy, PF Olsen can manage the whole project for you, from applying for the grant to planting and looking after the trees.

Next steps

If you want specific carbon forestry advice or wish to get a carbon forestry project started, contact your local PF Olsen representative or Freephone 0508 PFOLSEN (0508 736 5736), or email info@pfolsen.com, or visit our website www.pfolsen.com.

Seminars

A successful harvesting seminar was held on Wednesday 10th September at Alexandra Park, Greenlane, Auckland. Our Kawakawa and Rotorua offices jointly organised the seminar which was attended by 55 clients, forest owners and would-be forest owners. The next day we received a very positive email from one of the attendees:

"Last evening's seminar was very informative, well presented and I will take a lot more interest in our investments. Thanks PF Olsen for their excellent seminar which was pitched from the angle of ...... PF Olsen specialise in NZ forestry and have the experience and personnel to be able to manage every aspect of your forestry, aimed at maximizing your investments on a long term basis. We are here if you want us. There was certainly no hard sell."

Thanks for the feedback, its great to hear the seminars are being well received.

Whilst Carbon issues were touched on briefly during the 1½ hour session, it was clear that some attendees would have preferred longer on this topic. This feedback and the fact that the Emissions Trading Scheme (ETS) legislation has now been passed, has lead us to scheduling two more of our popular Carbon Seminars in November - see details below. In these seminars we cover background information about Carbon, its markets and emission trading schemes, but more importantly we look as ways forest owners and would-be forest owners can maximise the opportunities now made available under the ETS (see also Clarky's Comment at the beginning of this newsletter).

Upcoming Carbon Seminars

Seminar 1

Date: Tuesday 4th November 2008
Venue: Windy Ridge Café Bar and Conference Centre, SH3, Ohaupo
Time: 4:30pm - 6:00pm

Seminar 2

Date: Tuesday 25th November 2008
Venue: Taupo - exact venue to be confirmed
Time: 4:30pm - 6:00pm

Note: There is no charge for attending these Seminars and a light refreshment will be served.

If you would like to attend one of these seminars, please contact PF Olsen on 0508 PFOLSEN (0508 736 5736) or email alexis.lewgor@pfolsen.com.

If you know of others that might like to attend, you can Forward this copy of Wood Matters to them by clicking on the Forward button at the bottom of the newsletter.

Hawke's Bay Farm Forestry Association's "Carbon - Ready or Not" Seminar

The Hawke's Bay Farm Forestry Association's (HBFFA) "Carbon - Ready or Not" seminar was held in Havelock North Thursday 18 September 2008. This was a well attended event with Bob Pocknall, PF Olsen's Hawke's Bay manager and other local HBFFA organisers putting together an excellent line up of knowledgeable speakers. An audience of over 200 heard from a range of speakers including Julia Hoare from Price Waterhouse Coopers, Bruce Manly from the University of Canterbury, Peter Weblin from PF Olsen and MAF representatives.

These types of forums are good opportunities for people to not only update themselves on current thinking, but also to meet and talk with others interested and involved in forestry and carbon/climate change issues.

One of Julia's messages came across load and clear: Even if you are sceptical of climate change and doubt the science, from a business perspective, you cannot ignore it. She emphasised how it is important to get your business "carbon-ready".

Bruce Manly presented the findings of a study undertaken by the University which looked at different species and forestry regimes and concluded that well-managed carbon forestry presented a viable opportunity to achieve superior rates of return.

Peter Weblin (see photo above) presented a more practical perspective and explored the decision-making and planning required for successful carbon forestry projects. "Whilst there are exciting new opportunities for growing trees in a carbon-constrained world, each individual's situation is different and there's not one solution for all", pointed out Weblin. "For example, whether you currently own trees, their species and age-class, whether you can plant more trees and whether you also have emitting businesses (such as farming) are some of the critical variables that influence project design."

Now that the Emissions Trading legislation has been passed, this seminar constitutes one of those important steps in developing knowledge and understanding of this complex issue.

PF Olsen has more Carbon Seminars scheduled.

Log Market

Export Log Market

Export log prices rose again in October by an average of $4/JAS m3 extending their 5th consecutive month of price increases. Notable was the wide range of price changes with some traders staying more or less flat and some posting larger increases - a function of their exchange rate and ocean freight rate exposure in a highly volatile market. These at-wharf-gate prices are being driven by the lowering value of the NZ$ and lowering ocean freight rates (see Massive Drop in Ocean Freight Rates). There is actually downward price pressure on delivered log price (at Asian ports) based on weak demand from Korea and a very weak won.

Another positive factor (as reported in last month's newsletter) is the impending large increase in Russian export log tariffs, still scheduled to come into effect in January 2009. Just how this will play out in terms of demand and price for NZ logs is unknown, although (credit crisis aside) considerable upside on both price and demand is being forecast by some commentators.

So going forward, we have the positive influences of the Russian log tariff, the lowering value of the NZ$ and much lower ocean freight rates. These will be offset by an as-yet-unknown negative impact of the credit crisis on Asian economies and log demand (which could pan out to be substantial once the dust of the credit crisis settles).

Container-traded logs continue to post competitive prices and provide excellent sales opportunities, especially for forest owners in the Auckland, Napier, Wellington, Lyttleton and Port Chalmers catchments. Shipping conditions going forward, however, are expected to move to favour break-bulk as break-bulk rates fall much faster than container rates. However, a new Auckland-based container log export operator commenced this month providing an alternative for exporting client logs through Ports of Auckland.

Domestic Log Market

October saw renegotiated prices for the final quarter of 2008. Prices were held on most grades with some modest falls in pruned log prices in some instances.

Many domestic log processors are facing tough times with continued property and construction weakness in main markets. There has been some relief in the form of more favourable US$ and AU$ cross rates, although the latter has rapidly moved unfavourably in the last two weeks. We are seeing an increase in age-debtors and increasing vigilance in terms of credit management.

Crow's (the widely read authority on the North American lumber and panels markets) chillingly reports that the Case-Schiller 20-city composite index of house prices in the USA has fallen 20% nationwide since July 2006. Some areas have fallen by over 35%, especially in Arizona, California and Florida. Whilst NZ clear wood from pruned logs is increasingly seeking alternative homes in Australasia and Europe, the North American Moulding & Better and Shop markets are still critical for New Zealand.

In these volatile times, our Harvest-Ready strategy is more important than ever. If you have a woodlot over 23 years of age, Getting Harvest-Ready is one of the best investments you can make. It gives you great option value. How ready will you be to get your logs to market when you decide you want to harvest? To find out about getting Harvest-Ready call your local PF Olsen representative, or call us on 0508 PFOLSEN (0508 736 5736), or email us on info@pfolsen.com.

Massive Drops in Ocean Freight Rate

The trend of significant drops in break-bulk ocean freight rates has intensified since reported in last month's Wood Matters (see Freight Looking at Providing Relief to Beleaguered Forest Owners).

Below is an updated table of the DryShips Inc. Baltic Dry Index (BDI) for a range of ship sizes. These prices are US$/day charter rates. The BSI T/C Avg. is the Supramax ship size closest to the Handymax and Handysize that carry NZ logs to Asian markets. This index has dropped from US$67,976 a year ago to US$19,283 as of 10 October 2008 - a massive reduction to less than a third of the value a year ago.

In the current environment we are seeing drops of 20% in one week. According to Galbraith's (international ship brokers), high inflow of new-built ships and record stock piles of iron ore in China are two of the leading factors driving shipping rates lower. In addition, the current global credit crisis is no doubt bearing weight on freight forwarding demand.

"Because ships are fixed in advance of log supply and log prices are set monthly, we have not yet seen the full extent of these ocean freight rates flow into at-wharf-gate prices for NZ logs", says Peter Weblin, PF Olsen's Marketing Manager. "We also expect this volatility to affect the various log traders differently, depending on whether they fix short or long in the market. This reinforces the value of our flexible marketing model. We can move volume to the log traders that are paying the best price, rather than having to accept lower returns for traders that may have picked the market wrong".

The really big question, however, is will Asian demand and log prices hold up sufficiently to enable NZ forest owners to take advantage of the much lower freight rates? And will the domestic log market be sufficiently robust to take the non-export volume?

The other issue is the impact on the container log trade, as featured in last month's WoodMatters (see Exciting New Logistics Initiative Provides $20/JAS m3 Cost Savings). The recent increase in the volume of logs being shipped in containers is partly based on lower freight rates available from back-loading containers. Whilst container freight rates have not fallen anywhere near as dramatically as break-bulk rates, there is plenty of room for shippers to drop the price of the back-load journey. "How this plays out in terms of future shipping patterns for logs is unclear", says Weblin. "However, its pleasing to be making decisions related to which freight mode is dropping the fastest, and, once again, our flexible marketing model will allow us to allocate client logs to those that can pay the highest at-wharf-gate price".

The photo below shows client logs being stowed into containers in Dunedin for export via Port Chalmers. The yellow device on the left (looks like a bridge span) is used to ram the logs into the end of 40 foot containers. We understand that getting the logs out at the other end is rather more difficult!

Poor Pruning Operations Can Cost Dearly

We often field enquiries from woodlot owners concerned they are paying too much for their pruning. Frequently it turns out that the problem is related to the basis of payment. Rather than paying for the work by the hectare of treatment, they are paying by the tree. And because they don't have accurate stand maps, and don't have a quality control system, they have no choice. This can cost them dearly.

The main problems that arise are:

• Too many trees get pruned. This is a natural tendency because the more trees pruned, the more the contractor gets paid. Anything over 385 stems per hectare requires an exceptional growth site for trees to attain the required pruned log diametre at harvest.
• The high pruned stocking usually gets carried through to final crop stocking. If it's the same contractor doing the waste thinning, they will be reluctant to cull out the excess pruned trees (that's more work, and it could raise the question why so many trees were pruned in the first place). If it's a different contractor, often workers will still base target stocking on the pruned-tree stocking on the assumption that it is correct and they think it's a waste to cull out pruned trees - even if there are too many of them.
• Smaller trees get favoured. Pruning smaller trees involves much less work than the bigger dominant trees, but the price is the same.
• Pruned tallies get inflated. This is also known as "ghost" or "phantom" tallies and is a regular problem with less scrupulous operators. If the forest owner doesn't have an accurate map of net stocked area, it is much more difficult to pick up inflated tallies.

Normally the net result is woodlot owners pay too much for a poor job, and have no way to verify the quantity of work done versus the invoiced amount. Worse still - ultimately the pruning generates little or no clearwood, and pruned logs are excluded from the high value markets. We regularly see examples of this through our woodlot harvesting operations. However, because of client confidentiality, and client privacy, we cannot report on specific instances.

We estimate that where this problem is arising, some woodlot owners are paying in the order of 30% too much for the work. Combined with lost future harvesting returns, the cost to woodlot owners is significant.

The key to avoiding this problem is an accurate stocked area map, good quality control plotting and paying for the work per hectare (not per tree). This means the forest owner is in control of the operation and can't get ripped off.

PF Olsen undertakes robust quality control using accurate maps and contractor's payments are solely based on this assessment. Importantly, we do not calculate payments based on tally information from contractors.

With the price of pruning labour in the region of $0.90 per metre, a well managed 5.5 metre prune height on 350 stems per hectare will cost $1,732 per hectare (all lifts combined). With the issues discussed above inflating the cost by approximately 30%, an additional $620 per hectare can quickly appear. This would bring the operation cost to $2,252 per hectare.

The cost associated with degraded pruned logs and subsequent lost revenues amounts to much more. If all of the pruned volume has to be downgraded from pruned logs to a S20/S30 mix (due to inadequate diameter growth) there is a significant loss. With pruned logs currently selling for around $130/tonne and the S20/S30 mix for $75/tonne, the lost value in this example is 150 tonnes x $25 = $8,250/hectare!

Top quality silvicultural management and mapping investments are easily justified considering the magnitude of the above costs and revenues. An example of a PF Olsen woodlot map is shown below.

Note: If you click on the map above, you can view it at actual size.

The woodlot maps created during this process have many other benefits:

• Required for entry into PF Olsen's Group Scheme insurance for wind and fire.
• Required to verify areas associated with forest valuations.
• Used in harvest planning and pre-harvest inventory.
• Used in harvest planning and management.
• Will be required to join the Emissions Trading Scheme.

Making Forestry Work Safer

PF Olsen Supports Industry Initiative to Lower Accidents in Forestry

The NZ forestry industry was featured in the September/October issue of the ACC's Health and Safety Guide. A pleasing trend has been the steady decrease in serious injury claims to ACC from forestry accidents over the past five years. Figures show that 217 fewer workers were moderately or seriously injured during the financial year July 2006 to June 2007 compared to three years earlier. That's a 40% reduction. Whilst that's a great result, ACC's Don Ramsay noted that any injury or death is one too many, and there is still a lot of work to do.

The contribution and support of PF Olsen's Health and Safety and Quality Manager Nic Steens was noted by ACC in particular. Nic emphasised PF Olsen's commitment to health and safety and why it's so important. "We want to promote forestry as a high-quality work environment, but to do that we have to have good levels of health and safety. If a company has a poor health and safety record, it is considered to be a poor employer, so it works in a businesses favour in more ways than one", says Nic.

The industry's next big push is aimed at improving safety connections across business activities in the form of a year-long "Workplace culture, leadership and forestry" pilot project. The pilot is collaboration amongst the Department of Labour, PF Olsen (on behalf of the Forest Owner's Association) and ACC. The project is about creating a robust safety culture beyond just reaching compliance and is about leadership and making safety part of everyday activities and behaviour. The heart of the project is four main work shops during the year which will be facilitated by safety culture expert Dr Hillary Bennet.

PF Olsen's active support and investment in safety involves understanding the importance of safety to a thriving forestry industry. "Without a safe working environment, young people won't want to make forestry a career path and skill shortages will worsen", points out Peter Weblin, PF Olsen's Marketing Manager. "That will make finding good contractors for our client's woodlots more difficult, and make the work they do more risky (if not sufficiently skilled and trained)".