Clarky's Comment
Why do we have Surplus Tree Seedlings in 2009?
Millions of tree stocks may have to be dumped at nurseries around New Zealand. How has this come about?
 The United Nations Framework Convention on Climate Change was adopted by 192 countries, including NZ at Rio de Janeiro in 1992. In December 1997 the Kyoto Protocol (KP) was signed and set binding targets for 37 developed nations, including NZ, for net greenhouse gas emissions during the 5-year period 2008 to 2012. New Zealand, along with most other signatories later ratified the Kyoto Protocol and it effectively became international law for those nations that signed up.
During the early part of the new millennium it was thought that New Zealand would be able to meet its KP target emissions due to continued forest planting that would offset any expansion in economic activity in agriculture, transport or industry. But around 2000 new tree planting effectively halted, mainly in response to declining log prices, but also because at that time the government's policy was that it would exclusively own the rights to any carbon sequestered in post-1989 forests.
Following an aggressive media campaign by the newly formed Kyoto Forestry Association, and a rethink by government, this policy was reversed and in the September 2007 Emissions Trading Scheme Engagement Document the treatment of both pre-1990 and post-1989 forests was outlined. These policies were captured in new legislation passed just prior to the Labour coalition breaking for the November 2008 election campaign.
That legislation was in time for forest nurseries to take orders and sow seed for 2009 planting. Forestry investor confidence had been given a boost and plans for land acquisition and planting were initiated.
In submissions leading up to the passing of this legislation, forest industry and other rural land users argued for changes that would preserve the flexibility of land use that has been important for New Zealand's past economic growth. This requires changes to the way pre-1990 forests are treated. The National party and most of the minor parties expressed sympathy for this position and committed to re-visit it in the event they formed a new government. The new government is meeting that commitment, but unfortunately, the broad-ranging nature of the current review of the scheme has spooked forestry investors that were preparing to plant trees in 2009.
While the ETS legislation is still in place, the forestry sector is the only sector currently covered. The key questions for potential forestry investors are not just in respect of what changes may be made to the forestry sector legislation (if any) arising from the review, but also how other sectors will be treated. Treatment of other sectors matters to the forestry sector because:
- Agriculture
- Forestry competes with dry stock farming for land. Land is the single biggest cost and constraint to forest investment. The motivation of farmers to plant trees to offset farm emissions, or to sell or lease low productivity land for forestry depends on the treatment of the agriculture sector in the ETS. Agriculture is excluded from the Australian Carbon Pollution Reduction Scheme until at least 2015, and even after that, inclusion is uncertain. Alignment with Australia looks attractive to our farming sector. But in New Zealand farming accounts for nearly half the national emissions. The question to ask is whether on-going shielding of farm emissions to that extent by the taxpayer is sustainable or smart in terms of innovation, or behavioural change, to reduce farm emissions?
- Stationary Energy, Industrial Process and Waste
- The NZ ETS is designed to include all sectors and all gases to achieve least-cost net greenhouse gas reductions. But the current review has opened the door to a new wave of lobbying to delay entry, or the phase-in, of emitters' obligations. From a NZ Inc perspective it is important that we strike the right balance between loss of industry and jobs to non-Kyoto countries and getting the ETS working.
Clearly there is little incentive to plant forests to create carbon credits while it is uncertain whether, or when, any of the emitters will be required to account for their emissions by purchasing those credits.
So that is why there are many millions of surplus tree stocks in nurseries this year, facing the prospect of becoming expensive compost! While the ETS review is in process treestock orders have been cancelled and farmer planting of trees and forest investor activity remains low. This is expected investor behaviour, especially during our current financial crisis when the appetite for investment risk is low. The other awful prospect is that whilst tree stocks face being wasted this year, it is highly likely that there will be a shortage of tree stocks in subsequent years.
Does Current Farmer/Investor Sentiment Create an Opportunity?
First let's take a look at the big picture and assess whether this whole climate change and ETS thing is likely to go away.
Overwhelming scientist opinion is that:
- Climate change is caused largely by a build up of greenhouse gases.
- The build-up of greenhouse gases is largely a result of human activity (dominated by burning of fossil fuels and forest destruction).
- Humans can do something to change or reverse that build up.
Furthermore, the most recent evidence is that climate change is accelerating and at the upper end of former projections, adding urgency to both finding solutions and adaptation measures.
The other key driver is that climate change is causing floods, sea level to rise, droughts, fires and storms. All of these effect people and people, in most countries, vote politicians in and vote out. Politicians ignore the effects of climate change at their peril. Even if the scientific case to make any short-term change is weak, the political and economic value of being seen to do something is real. New Zealand in particular relies on trade access and a clean-green image for our national wealth. We really have no option but to join international efforts to attempt to reduce greenhouse gas emissions.
Now let's look at how forestry might play a part in NZ. New forest planting can only buy time to reduce our reliance on use of fossil fuels. But in NZ we have an almost unique situation of land with good soil nutrition and plentiful rainfall that is not competing with high intensity crops for food production. Some estimates say up to 3 million hectares of pastoral land could be converted to forestry with positive economic and environmental benefits. The reality is that only a portion of this will be made available over the next 20-30 years unless there is a major driver for existing farmers to change land use.
Conclusion – My Opinion
My expectation is that climate change is not going to go away, and that politicians in most western countries as well as in China and India at least, will rise to the challenge of attempting to do something about it. There may be delays in agreeing the rules for any follow-on international treaty after 2012, but that does not mean the issue has gone away. NZ will continue with an ETS in some form for the foreseeable future. Plantation forestry will play an important role in offsetting expansion of NZ's agricultural and industrial emissions over the next 30 years at least.
Land will be the biggest constraint to expansion of the forest estate. Once the ETS review is completed in a few months it is likely that competition for land to grow trees will intensify, but that will be for planting in 2010 and beyond. In the next few years, at least, access to tree seed of the best genetics will also be a constraint. Seasonal labour to plant and release the trees from grass competition will also be a real challenge – meaning labour costs will rise.
Trees planted in winter 2009 will not sequester much carbon between now and 2012, but will be sequestering carbon for the next 30 years at least. Planting trees in 2009, when there is little competition for land, tree stocks are available and labour is not under pressure seems to have some attractive early-mover advantages to me.
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Record Log Exports Through Lyttelton Port
A buoyant log export market, fine late summer weather and a new log exporter has resulted in PF Olsen exporting a record volume of logs through Port Lyttelton in March. During the month PF Olsen delivered over 7,000 JAS m3 of Radiata pine for export via log exporter Tenco Limited.
"We are very pleased with this result", says Scott Downs, PF Olsen's Regional Manager. "For some time we have been working on improving forest owner returns by establishing an independent log exporting operation in partnership with Tenco (a New Zealand-based exporter of logs and sawn timber)."
It's important to note that the log exports are not conflicting with the domestic processing sector. "We make sure that domestic log demand is satisfied with the right grade of logs before directing logs to export", points out Scott. "At present the down-turn in the Australasian housing and construction sectors is reducing domestic log demand and log exports are a valuable component of the marketing mix".
The project has also been crucially assisted by support from the team at Lyttelton Port. Due to a downturn in car imports, some unused space became available at the port. After negotiations with PF Olsen and Tenco, this area of land was leased by PF Olsen and made available to Tenco to commence its log export operations. "We are very appreciative of Lyttelton Port's support", says Peter Weblin, PF Olsen's Marketing Manager. "We are impressed with the Port Company's strong commercial orientation and understanding of how important it is for ports to be an impartial export gateway."
Another key supporter in the project was Selwyn Plantation Board. They saw an opportunity to improve their harvesting returns and have backed the entry of Tenco on the Port.
Logs in storage at Lyttelton Port awaiting loading for export.
Initially Tenco started exporting logs through Lyttelton Port in containers. During much of last year break bulk shipping rates were very high, and container shipping rates much more competitive. This initiative got Tenco started at Lyttelton Port and gave them the confidence to switch to break-bulk as soon as the competitive situation changed back in favour of bulkers.
On a recent visit to the Port, however, Ronnie Moore, Port of Lyttelton's Customer Relationship Manager, pointed out that it's not all plain-sailing handling logs in a port that is such close proximity to the town of Lyttelton. Noise and dust are two issues that have to be managed carefully to minimise disruption to the community. Noise is closely monitored and controlled and dust is minimised by operating on sealed surfaces and periodically spraying water over the site.
Port Lyttelton is a good example of mixed land use. This photo shows logs being unloaded from a truck to stock with the Lyttelton town immediately adjacent in the background. From what we could see, the Port Company does a great job of balancing the demands of an efficiently operating port and the needs of the community.
PF Olsen forest owner clients are benefiting from the new independent export option at Port Lyttelton and improved harvesting returns.
Harvesting returns at George Gould's 8.5 hectare Radiata pine woodlot at Glenmark have benefited from the good prices being achieved for export logs supplied to Tenco at Lyttelton Port.
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Stark Reality of Poor Pruning Hits Home at Harvest Time
The PF Olsen Otago/Southland team has recently had first-hand experience with late pruning and over-thinning.
 As part of their appraisal process for the forest owner, Dave Thode (PF Olsen Regional Manager – Otago/Southland – see photo, left) and Mort Shepherd (PF Olsen Harvesting Manager based in Gore) felled trees and cross-cut the stems at the branch nodes. "Short of a more expensive, formal Pruned Log Index study, this is the best way of assessing pruned log quality", says Dave. "It becomes clear very quickly what you are dealing with".
The disks showed that pruning was late, especially the last lift. In addition, the final thin was too severe, leaving too few crop trees and encouraging large branch growth. In addition, the final prune was late. This has resulted in not only a large knotty core but also large occlusion scars (occlusion is the process of the cambium forming over the branch stubs and eventually laying down clear wood) – see photo below. This leaves little clear wood in the upper part of what would become the pruned log.
 Contrast this with a well-managed pruning operation, minimisation of the knotty core and maximisation of the clear wood (see photo below).
 "To put this in perspective", says Dave, " Over the 50ha area of the block, there is likely to be an average loss of about $12/tonne (average stumpage) if the logs don't meet the minimum acceptable pruned log recovery. This will equate to a loss of value of around $270,000 over the whole block. This really brings home how much value loss there can be from poorly scheduled and poorly managed pruning operations".
See also Issue 3 of Wood Matter for the article "Poor Pruning Operations Can Cost Dearly".
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Log Market
Export
The same drivers as last month prevail, with increased intensity of demand from China. Enquiries for log supply to China reached an all-time high at PF Olsen in the last week, averaging two per day. This is usually a good indicator of near-term market strength. A shortage of Russian logs and a large gap between NZ Radiata pine and Russian log prices is helping to push up demand and CFR pricing (CFR pricing is the price of logs at the port of destination). This increase in CFR price is important as ocean freight rates and foreign exchange have both had an adverse change of around 15% over the past month. The net result has been stable to slightly reducing export log prices at-wharf-gate (NZ) in April.
Large volumes of NZ Radiata are now being diverted to China and there is concern that high levels of supply will coincide with typical easing of the China market at this time of year. The difference this year, however, is reducing Russian supply. Reductions in the 20-25 million m3 annual log supply from Russia to China is proportionately very significant compared to the 2 million m3 annual New Zealand log supply to China (2008). Therefore reducing Russian log supply could leave a supply gap that New Zealand log exports couldn't possibly fill even with very large increases in supply.
However, there have been recent reports that the Russian Government is considering the possibility of cancelling export duties on logs for some species for companies that are involved in large investment projects. This concession, if implemented, shows that Russia intends to expand domestic processing by using both a carrot (the concession) and a stick (the log export tax scheduled to increase from 25% to 80% later this year or early next year). This concession may work for companies based in Finland who have been importing logs from Russia. Whether this carrot, if implemented, will result in Chinese companies investing in wood processing in Russia is yet to be seen.
Korean log buyers are still facing tight credit conditions but demand is building. Increased volumes are expected to Korea in the next few months.
Similarly demand is increasing in India but India remains a very challenging market.
Japan log buyers are very pessimistic, weighed down by a very poorly performing economy and weak internal as well as export demand. There is significant downward pressure on log price.
Domestic
Weak manufacturing and construction sectors have contributed to the New Zealand economy experiencing its largest contraction in 16 years. Gross Domestic Product fell 0.9% in the December 2008 quarter. Residential building consent activity continues to be very low. We are seeing more mills reducing operating hours or reducing shifts or even closing. Payments for logs from many mills are becoming delayed and some mills have fallen into receivership. Domestic log processing heavily reliant on export markets are still experiencing weak demand/price as most customer's
economies contract. The reversal of the trend of weakening NZ$ is putting further stress on mill's viability.
This is a challenging area for PF Olsen, balancing mill's needs for log supply at affordable prices with trying to maximise forest owner returns but not take on unacceptable credit risk. In some areas we have been able to increase log exports at good prices to balance supply and demand. This often means transporting logs over longer distances.
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