Clarky's Comment
ETS Deliberations
 The Select Committee has been sitting each Monday and hearing many submissions on what different sector groups and agencies would like to see in New Zealand's domestic climate change policies. Some have been calling for a "do nothing" policy. This is supported by neither National nor Labour for very compelling reasons of international credibility and trade implications. Our best guess is that we will have an ETS, with the pre-1990 forest provisions altered to accommodate offsetting i.e. deforestation on one site replaced by a forest of equivalent biological growth on another. This concept is however not getting a great deal of traction in the international negotiations for post-2012 so the government will be concerned about the fiscal implications of such a policy. That may be reflected in the allocation of pre-1990 forest land "partial compensation" units.
Discussions to date around post-1989 forests have focussed on enhancements that further de-risk the scheme to encourage new planting. Specifically a Force Majeure clause that would cover forest losses from causes not reasonably insurable by the forest owner, and potentially an "averaging" scheme that would enable forest owners to secure 50% of the forest credits from new planting, but face no harvest liabilities provided the forest is replanted.
A better understanding of any amendments to existing legislation, including the treatment of other sectors (so important to make an ETS work for forestry) will be revealed following the Select Committee report in late June or early July.
What About 2009 Planting?
We are not aware of much new planting planned for 2009. This is hardly surprising given the uncertainty created by the ETS review. In all my involvement with the ETS over the last 5 years (including as a member of the Government's Climate Change Leadership Forum) I have not heard anyone in either the private sector or government dispute that increased tree planting is an important part of the NZ domestic climate change response. This applies regardless of the flavour of what the rest of the domestic policy looks like.
Being highly capital intensive it is desirable that this new tree planting is funded by the private sector rather than the taxpayer. But in 2009 we are in a unique situation that the private sector does not have the confidence to start investing until the outcome of the current ETS legislation is known. Thus if ANY material area of new land planting is to be commenced in 2009 it must be carried out by government or initiated by a government policy that makes it attractive for the private sector. Such activity need not be subject to finalisation of the ETS review.
Treestocks and planting labour are available now for a 7-10,000 ha afforestation programme. Some private land is available for lease. Access to a small area of government land (e.g. Department of Conservation) land may be needed if the government were to fund the tree planting. Getting started this year would mean the infrastructure around larger planting programmes in future was not further eroded.
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Brief Update on Important Deadlines Related to the Emissions Trading Scheme
The Ministry of Agriculture and Forestry has advised that due to the Select Committee Review process and review of submissions on the draft Forestry Allocation Plan, the following key dates could be affected:
- June date for final Forestry Allocation Plan.
- 30 June deadline for exemption of pre-1990 forests of less than 50 hectares from the ETS.
- 31 July deadline for registration to receive the free allocation units for pre-1990 forest landowners.
See Forestry Allocation Plan Submissions Close
PF Olsen is continuing to advise pre-1990 forest landowners to become prepared to make either an application for free-allocation units, or the 50 hectare exemption. Whilst there is still doubt about the nature and deadlines associated with these processes, it is important that eligible forest landowners do not miss out.
PF Olsen is still accepting requests to undertake these processes on behalf of forest landowners. Contact Colin Hercus on 07 921 7232 or e-mail Colin on Colin Hercus . Please note that if no action is required due to changes in the legislation, there will be no cost charged for PF Olsen's involvement.
Some Interesting Statistics on the ETS from MAF
If you were wondering what was actually happening in regards to real action regarding forestry and the ETS, MAF provide some interesting statistics below.
Post-1989 forestland Participant Registration Applications
MAF has received 174 ETS participant registration applications covering 52,581 hectares of post-1989 forest land. Verification of eligibility has been completed on 95 applicants who have been registered as participants.
As at May 6 2009, 79 applications are still being verified with many of these waiting for additional information from land owners.
Emissions Returns
MAF received 45 eligible emissions returns, claiming 692,583 NZUs. 687,000 NZUs have already been transferred into participants holding accounts over the past four weeks. The timeframe for submitting an emissions return in 2009 has now passed. However, registered participants will be able to submit an emissions return during the first quarter of 2010 and claim any NZUs to which they were entitled back to 1 January 2008.
Pre-1990 forest land Participant (Deforestation) Notifications
Three mandatory participants have notified that they undertook
deforestation during 2008/09 and have been registered.
These participants are required to submit an emissions return during the first quarter of 2010 specifying the area deforested and quantifying the number of emissions units they are obliged to surrender. Those units must be surrendered by 30 April 2010.
Source: The "Sustainable Forestry Bulletin" produced by MAF. To subscribe to the Bulletin, please email sustainableforestrybulletin@maf.govt.nz with "Subscribe: Sustainable Forestry Bulletin" in the subject line and your contact details in the body of the email.
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Log Market
There has been very little change in market conditions since last month.
The domestic timber market conditions continue to be soft with local processors going into survival mode, forced to cut production and minimise costs. Regional shortages of key log grades are emerging with pressure on forest owners to support domestic log supply in lieu of higher export returns. This strategy can make good sense for those seeking market access over extended periods as historically there are times when domestic log prices are stronger than export prices.
Continued high demand from China, increasing demand from India and signs of Korean buying are positive for the export log market. At-wharf-gate NZ$ prices, however, are up against the headwinds of an appreciating NZ$ and rising ocean freight rates (reported rates just over US$31/JAS m³).
The Agrifax overall log index increased by $0.50/tonne to $74.50/tonne in the May report. Overall expectations are for some weakening in price for June.
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Harvesting Strong in Mid-North
At the start of 2009 PF Olsen warned all their contractors supplying engineering, harvesting and trucking services that harvesting activity could be very subdued in the coming year. This proved to be the case in January and into February based on weak demand from China and a soft domestic market. However, by mid February China log demand had picked up and in combination with PF Olsen's China-direct export initiative harvesting activity has increased dramatically since then.
The graph below shows the growth in harvesting activity.
PF Olsen harvest crews Keefe Logging, Paniora Logging (2 crews), Tom Harrison & Sons and Phil Sadler have been fully extended and are working six day weeks to meet demand. Cartage contractor Marsden Transport Solutions has also been maxing out their logbook hours to get the logs to market. PF Olsen would like to acknowledge the tremendous effort being put in by these contractors to ensure that our commitments to our forest owner clients and log purchasers are being met.
While the PF Olsen market-direct export initiative is leading to improved forest owner returns (see below) and been instrumental to clients to saying "yes" to harvesting, there have been three other factors at work -
- Being Harvest-Ready: The upturn in pricing and demand in mid February was a dramatic reversal of market conditions in late 2008 and early 2009. Only clients that were Harvest-Ready could leverage off this sharp upturn to appreciate the improved returns. Being Harvest-Ready in this case meant harvest infrastructure (roads and skids) were in place and harvest management contracts were signed. By Harvest-Ready forest owners could say "Yes, go for it" when presented with this opportunity to harvest.
(see also our Harvest-Ready flier)
- Forward Pricing: PF Olsen has been able to obtain pricing for the following month much earlier than has been experienced in the past. In special cases this pricing has been able to be fixed for a two-month period which is important if you are Harvest-Ready, want to harvest but a hauler crew does not become available for a month or so.
- Terms of supply: Very favourable and secure payment terms have been arranged with the export log purchasers which all but completely eliminates payment risk. This peace of mind is very welcome in the current difficult trading environment.
Whilst PF Olsen is committed to supporting the domestic log processing market, we are pleased to bring an export option that greatly reduces the risk of not being paid.
Logan Negus, PF Olsen's Mid-North Harvesting Manager inspects logs delivered to Marsden Point prior to shipment.
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Northland Region Success Stories
Success Story One - Henley forest
The Henley forest is 5 hectares comprising 3 stands of 19 to 26 year old partly-pruned forest on Gammons Road near Kaikohe. Malcolm Henley wanted to get the best returns from his forest, but wasn't sure how to go about it.
When PF Olsen was initially asked to estimate what net stumpage could be expected from this forest, we estimated a net return to the forest owner of $8.55/tonne (this was based on September 2008 prices). Because Malcolm was contemplating a graded-managed-sale method (as opposed to selling by fixed price stumpage) we cautioned him that the actual result would depend on how the market was at the time of harvesting, and whether we could place his volume into some highly favourable markets PF Olsen was developing.
The forest was readied for harvesting and harvesting commenced in November and operations and sales ran through to December.
To the forest owner's delight, the actual result was a much higher net stumpage of $18.94/tonne. The reasons for this much higher result were:
- As part of its China-direct strategy, PF Olsen had established a much higher price for export pruned, S grade and other unpruned export grades.
- A good domestic market was found for logs for poles and house piles.
This result was particularly pleasing and this is what Malcolm Henley has to say about the job: "When PF Olsen told me that their estimate was $8.55/tonne it was just above my expectations so I felt it was realistic. They said they believed there was considerable upside if market opportunities developed favourably and when you look at the result, they were right! The harvest crew (Tom Harrison & Sons Ltd) were excellent to deal with, efficient and they tidied up real well. All in all being Harvest-Ready as advised by PF Olsen has paid off for me and I am very happy with the result."
Clearly a pleasing result, Malcolm Henley has been able to enjoy excellent returns from a young, and relatively low quality stand.
Success Story Two - Winter Cable-Hauler Logging
Achieving continuous year-round harvesting in the Northland region is challenging due to the water sensitive clay soils. However, to maintain harvesting infrastructure and good market access, it is important to try to keep wood flowing through the winter months.
This resulted in PF Olsen initiating an innovative arrangement whereby our China-direct export log purchaser agreed to offer slightly higher prices to secure volume from a forest which would be cable-hauler logged through the winter months. The higher log prices recognised that there would be higher roading costs during the wetter winter months. In addition, fixed prices for June and July log supply were agreed in April. This gave the confidence to schedule a harvesting contractor and get the block Harvest-Ready.
This arrangement has been a win-win for all parties. The forest owner will achieve good secure stumpage returns, the log purchaser maintains good winter supply volumes, and the harvesting contractor keeps his operations going through the quieter winter months.
Success Story Three - Great Returns from 18-year old Forest
PF Olsen was approached in October 2008 by Wells Family Farms from Pakaraka. They wanted to remove some pines from their Dairy block. In six different blocks, the woodlots totalled about 4.5ha of untended 18 year old shelter belts and gully plantings.
Our initial impressions was that the owners would get a small bill from the removal of the trees and costs would exceed the revenue from marketing the wood from the young trees.
Some data was collected and a net stumpage estimation was undertaken. The export prices used were the best they had been for the previous 18 months, but the calculated stumpage return was only $3.75 per tonne.
From the time the estimate was done and when the logging started in early 2009 PF Olsen's market-direct export strategy was starting to pay dividends. The export prices we were able to achieve for the owners were significantly better than other options.
We also sonic tested the logs and the small suppressed trees on the inside of the blocks produced remarkably stiff wood, with sonic readings of over 3km/sec. So even though the wood was relatively young, the high stiffness enabled the sale of this type of wood into the domestic house pile market.
The final net stumpage was $11.75 per tonne, more than a 200 % increase from the estimated value.
Just to put the icing on the cake, the overall volume taken from the woodlots was greater than estimated.
This resulted in a $6,000 estimated net stumpage into a $33,000 actual net stumpage.
See also When is the Best Time to Harvest your Forest?
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New Opportunity Challenges Conventional Wisdom on Best Time to Harvest your Forest?
"What is the best time to harvest my forest?" is a critical question facing forest owners and has been a central theme in our Harvesting Seminar series. In the seminars we dealt with the issue of how the woodlot is performing. We presented a theoretical graph showing the value increment of a typical woodlot relative to a threshold rate of return. As a woodlot matures, its value increment starts to fall below the threshold rate of return and this creates an "Earnings Gap" - this is the opportunity cost of holding the asset relative to alternative uses for the money tied up in the trees. See graph below.
The conventional wisdom is that the economically optimum age to harvest Radiata pine is between 25 and 30 years. A recent harvesting job in Northland challenges this thinking. Admittedly, the driver for this harvesting job was to enable conversion to pasture. However, the harvesting returns suggest that it may also have been an economically optimum age to harvest this type of forest relative to the current market conditions.
The 17 year old woodlot near Mangakahia has so far yielded a net stumpage of $15.27/tonne over the 3,742 of harvesting to date. Most of the volume is being exported to China. One of the features of the China market we discovered during our January trip to China (see story in WoodMatters 7 - link) is that there is a lot of motor-manual handling of logs at the sawmills. The mills are not well equipped to handle really large logs. Also, the smaller diameter logs, if good form, are more like the Russian logs that the Chinese sawmillers favour. These factors make the smaller K-grade logs attractive for export at present.
This harvesting job, and the one described elsewhere in the issue (see Success Story Three - Great Returns from 18-year old Forest - link), show relatively high returns from what has traditionally been regarding as immature forest. Part of this opportunity relates to the characteristic that Northland wood is more dense and stiff than its counterparts from more southern climes.
What do these case studies tell us? They tell us that the best time to harvest can vary greatly in different situations. If a forest owner wants to make sure that potential opportunities are not missed, all options should be considered, and forest owners should be prepared to get Harvest-Ready at an early age.
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Stumpage Sales Method Losing Traction
Selling woodlots via fixed price stumpage tendering has all but died in Northland over the last 6 months. So what is driving this trend? It appears that that those previously prepared to bid for stumpage are now finding it too risky due to:
- Highly volatile foreign exchange rates.
- Wide fluctuations in shipping costs.
- General nervousness about the strength of domestic and export log markets .
The financial risk of bidding a single and fixed price for an uncertain mix of log grades (composite stumpage basis), with uncertain harvesting costs and market conditions should not be under-estimated. The only factor that pushes a stumpage bidder to reduce his price discount for risk is competition and the number of parties prepared to bid is reducing as well.
Lets look at two of the other factors that drive successful stumpage sales:
- Pool of competent and mobile harvesting contractors - good contractors are hard to come by and this situation will worsen when harvesting levels increase.
- Bidding from domestic log processors - since TDC was taken over by Carter Holt Harvey, there is little, if any, stumpage bidding from domestic processors.
The other important factor to consider with stumpage sales is price "lock in". Whilst you may benefit from a fixed price if the market falls, conversely you will miss out on an opportunity if the market rises. Even if the market stays constant (which is rare) you will generally do better with a graded-managed-sale as you will avoid the discount for risk inherent in the stumpage bidding process.
 This is how Peter Bullen, PF Olsen's Mid-North Manager puts it: "If you want more certainty, stumpage sales may work better for you. Currently, however, if you want the best returns, getting Harvest-Ready and timing your harvesting well is a better way to go".
HarvestPro's Zane Cleaver who acts as forestry advisor to White Cliffs Forests Ltd in Northland confirms this sentiment. Zane explains that White Cliffs has been harvesting for eight years. For the first 7 years sales had been by the composite, pay-as-cut stumpage method. With the decline in the number of stumpage bidders in recent years Zane advised White Cliffs in 2009 to switch to the managed-graded-sale method. So far this change has resulted in improved returns for White Cliffs which is now supplying logs into PF Olsen's China-direct export programme.
Willie Clarke's crew with Pruned logs they have produced for export to China via Marsden Point. The pink colour is anti-sapstain treatment applied to the log ends.
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Afforestation Grant Scheme (AGS) Update
Regional Councils are now beginning to offer funding under the AGS. In most cases, their funding is a fixed subsidy per hectare (rather than the bidding approach). This provides more certainty into the process. Applicants may apply for both subsidy streams (although can only one can be allocated).
As mentioned in prior articles (Issue 3), the AGS may suit some land owners who wish to minimise outlay of their own cash and are prepared to forgo at least the first 10 years of carbon credits. If you would like to know more about the AGS or would like PF Olsen to prepare an application for you, call your local PF Olsen representative, or FREEphone 0508 PF OLSEN (0508 736 5736) or e-mail us at info@pfolsen.com or visit our website www.pfolsen.com.
Some interesting statistics from MAF…
MAF has given out $2.96m in AGS grants over two rounds so far, with a third round to be allocated this year. In 2009 and 2010, AGS projects will create 1,429 hectares of new forest at an average price of $2,029 per hectare for tree species that absorb carbon quickly and $625 per hectare for species that absorb carbon slowly. A total of 26 projects have been funded in the Waikato, Gisborne, Manawatu, Wellington, Marlborough, Canterbury and Otago regions. More than 60 tenders have been received for the third round, which closed on 30 April 2009.
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Come and Visit Us at Mystery Creek Field Days!
With all the exciting new initiatives happening in forestry, PF Olsen has decided to have a stand at Mystery Creek this year. Whilst we have been absent from this big Agricultural Field Days event for the last few years, we felt there was so much happening is the areas of carbon forestry and log marketing that is was important to have a presence and provide an opportunity to meet with old clients and meet new people.
Whilst there is still considerable uncertainty around the Emissions Trading Scheme, there is still a thirst for information. The ETS and Carbon Forestry will be a theme of the PF Olsen stand and we will also be available to discuss any aspects of forestry, log marketing and forest crop insurance. Come and visit us!
Here is a link to the site map of our location.
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