In This Issue

• Introduction
• Clarky's Comment
• PF Olsen Concludes First CFR Sale to China
• Log Market and Ocean Freight
• Staff Changes
• PF Olsen Features in latest Selwyn Plantation Board Annual Report
• Definition of Forest Land
• Clarification of Post-1989 forest
• Deforestation Exemptions
• ETS Update from MAF
• MAF Provides Detailed Response to Questions of Post-89 Forests, the ETS and Forestry Rights
• Opportunity to lower Tax Burden on Harvesting Income
• Creative Ideas on Expanding Use of Wood

Introduction

Welcome to Wood Matters last issue for the year. In this issue we devote quite a bit of attention to the Emissions Trading Scheme as the political and legislative process provides more certainty. Whilst some post-1989 forest owners have already decided they wish to participate in the ETS and claim their 2008/2009 New Zealand Units early next year, many will see 2010 as a chance to more fully evaluate the opportunity and monitor developments in the carbon market, assess their own situation and forest portfolio and look out for financial and contractual instruments that are likely to emerge to manage carbon price risk.

We also cover PF Olsen's first "delivered log sale" (CFR) to China, and provide the usual log and ocean freight market commentary.

Due to the Christmas and New Year break, Wood Matters will resume its monthly coverage in February 2010.

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Clarky's Comment

Climate Change

As forecast by many commentators in advance of the COP15 Copenhagen Climate Change conference, there is no new international binding agreement to replace or extend the Kyoto Protocol yet. Work on that will continue during 2010 leading up to COP16 in Mexico in November.

However positive progress in the Land Use and Land Use Change (LULUC) rules that affect forestry was made at Copenhagen. The international LULUCF discussions were ably chaired by Bryan Smith of MAF. David Rhodes, NZFOA CEO was also in Copenhagen for the duration and in constant dialogue with the NZ negotiating team to ensure that forest owner interests were well supported.

If the forestry rules are eventually agreed (as they almost were) then this will present a situation that New Zealand can live with. It would provide recognition of carbon in harvested wood products and it would also effectively provide offsetting. Post-1989 forestry would be unaffected.

We wish you a relaxing break and prosperous 2010 and thank you for your support through 2009.

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PF Olsen Concludes First CFR Sale to China

On November 20th, the Silver Lake set sail from Port Chalmers with a load of PF Olsen client logs destined for China. This is the first time PF Olsen has made such a CFR sale (we usually sell the logs at the gate of the New Zealand port and let the exporters handle the shipping and export documentation).

A CFR sale stands for Cost and Freight and it involves the seller arranging shipping and selling the logs delivered to China in US$. It also involves managing the export documentation which is focussed on receiving a Letter of Credit (LC) from the purchaser's bank. This LC is a promise by the purchaser's bank to pay the log seller on presentation of compliant documentation that confirms what goods are being shipped, and how. Whilst one has to be very particular about how documentation is presented, this is a very secure method of payment. In addition to the purchaser's bank promise to pay, PF Olsen also arranges for its bank (the BNZ) to guarantee payment.

So why is PF Olsen going to the trouble of CFR log sales?

As part of PF Olsen's market-direct strategy, we have been reviewing our log export supply chains to ensure that we are getting the best deal for forest owners. Our trip to China in January of this year (see Wood Matters Issue 6, China Trip Report and a plethora of enquiries from China, India and Korea for logs this year has enabled us to form relationships direct with Asian log end-users.

In addition, log export options at Port Chalmers have traditionally been very limited with insufficient competition to support good prices for forest owners.

Earlier this year we formed an agreement to sub-charter shipping space from a large, national NZ forest owner and manager and gain the capability to ship logs direct to China or Korea.

The culmination is taking our market-direct strategy one step closer to the customer and making a more efficient and cost-effective supply chain.

"This is a significant milestone for PF Olsen, notes Peter Weblin, PF Olsen's Marketing Manger. "Successfully executing CFR sales is a new area for us, but critical for us to become better at understanding and managing the supply chain. Ultimately, it is the price we can get for forest owner's logs that adds to their bottom line".

"Clients should be aware that we are not necessarily rolling out CFR sales to other parts of the country", continues Weblin. "We will look at each port on a case by case basis and any changes will be based on a measurable advantage or benefit for forest owners".

The move has definitely been a success for our Otago/Southland region, by improving export log prices. It has also meant the local PF Olsen team has had to learn about port operations such as stevedoring and marshalling, as well as developing a relationship with Port Otago for log storage and wharfage. We thank C3, Southern Cross Stevedores and Port Otago for their excellent service and making the Silver Lake consignment a success. "It's been a bit of a learning curve", admits Dave Thode, PF Olsen's Otago/Southland regional manager (left). "But we are pleased to be able to offer forest owners in this region a strong and viable log export alternative. Our first shipment has already arrived in China and been well-received".

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Log Market and Ocean Freight

It's hard to ignore the stark contrast between the log market now and this time last year.

Domestically, last December we were facing the unknown, but daunting, repercussions of a major global financial crisis.

In terms of the export log market, this time last year, the main pillar of market strength, China, was cancelling orders and battening down the hatches. Log suppliers faced the prospect of having to reduce production in the New Year.

Fortunately the malaise that hit the China market reversed as rapidly as it occurred and by the end of the first quarter of 2009 demand and prices picked up considerably. The market continued to strengthen (with some minor blips) through the year. Even a concerning China log inventory build in August failed de-rail the strengthening trend.

To put it in perspective, it was hard to sell Radiata A grade for USD80/JAS (CFR) m3 in China in December 2008; now prices are around USD125/JAS m3. However, much of that price increase has been offset by the strengthening NZ$ and increasing ocean freight rates. Such was this offset that NZ at-wharf-gate prices have only increased from around NZ$78/JAS m3 to $92/JAS (Port of Tauranga) through the year. Ocean freight rates have moved from a low of USD25/JAS m3 earlier this year to a high of around US$50/JAS m3 for spot rates currently.

As the year comes to an end, China has become New Zealand's largest consumer of logs, with volume exported to China this year expected to be about double that of 2008. Fortunately demand and shipments to Korea and India are buoyant, providing valuable pricing and volume tension in the market.

Whilst the domestic market is still relatively weak, there are definite signs of increasing demand for wood products in New Zealand and Australia and some large processors are reporting low inventories of product. One large processor recently commented to PF Olsen that they have been caught out by the swiftness in the turn-around, and are playing catch up with production. We understand that a number of mills are planning increased production next year.

So, "touch wood" 2010 may see a strong log market and raising fortunes for forest and woodlot owners harvesting their long-held forest assets.

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Staff Changes

Following the resignation of John Rogan in November, Mike Hodgson is due to take over the role of Regional Manager, Southern North Island in January 2010. Mike has worked as a Harvesting Manager for PF Olsen based in Rotorua for the past 9 years. Prior to that Mike worked for PF Olsen as a Consulting Forester in Nelson for 4 years.

Qualified with a Bachelor of Forestry Science Mike immigrated to New Zealand in 1996. His wife and two young children will join Mike taking up residence in Masterton in the New Year.

Mike has a broad range of forestry and harvesting experience and will bring an important professional capability to the region. He is looking forward to meeting PF Olsen clients and log purchasers and working with them get the most from their forestry investments. Mike will join the local PF Olsen management team comprising Lorraine Kennedy (Administration and Office management), Bob Baistow (Forestry management) and Rob Coulson (Harvesting management).

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PF Olsen Features in latest Selwyn Plantation Board Annual Report

Below are excerpts from Selwyn Plantation Board's 2009 Annual Report to shareholders. PF Olsen was appointed Selwyn's forestry and harvesting manager in May 2008.

The full report can be found at www.spbl.co.nz/About+Us/Annual+Reports.html

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Definition of Forest Land

MAF held an informative workshop for PF Olsen to assist us with understanding the Emissions Trading Scheme for forestry. One part of the workshop was "How to define forest land". This is very important for people to understand as it will affect whether they can enter the ETS, or whether they have a deforestation liability. Many situations will be clear-cut. However, some situations, such as establishment of a commercial forest on reverting scrubland, may not be so obvious. The following photos were presented by MAF to assist with interpretation.

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Clarification of Post-1989 forest

We have discovered some confusion about what is post-1989 forest. You must look at when the land was originally planted, not when the current tree crop was planted. If it is second rotation it probably isn't post-1989 forest even though the current crop may have been planted after 1989. If the original planting took place before 1990, then it is actually pre-1990 forest land and is not eligible to join the ETS and earn carbon credits for the increase in carbon stocks. Looking at it another way, to qualify as post-1989 forest, the current tree crop must have been planted on non-forest land (not harvested cutover) after 1989.

However, if you deforested (i.e. converted your forest land to another land use) between 1 January 1990 and 31 December 2007 and subsequently planted it in trees again at a later date, this would qualify as post-1989 forest.

Below is the definition of post 1989 forest land from MAF.

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Deforestation Exemptions

The following are some important points regarding pre-1990 deforestation exemptions.

• The opportunity to apply for a pre-1990 deforestation exemption is a one off.
• The prior deadline (1 July 2010) for applying for exemption has been removed. A new date has yet to be set.
• Applications for an exemption cannot commence until the final forestry Allocation Plan is issued (unlikely to be issued before the second quarter of 2010).
• If the deforestation has already taken place and land is eligible for an exemption, applications can now be received.
• Deforestation of 2 hectares or less of a person's total pre-1990 landholding(s) in the five year period from 2008-2012, or in each subsequent five year period, is automatically excluded from the ETS.
• It is not the Government's intention to restrict the removal of tree weeds (self-sown exotic forest species that can overtake the land). Definitions of what constitutes a tree weed and how the exemptions are to be applied have not yet been finalised.

When applying for less than 50 hectare exemption, the applicant will need to provide a statutory declaration from each person who owned the land on 1 September 2007 that they owned in total, on that date, less than 50 hectares of pre-1990 forest land.

Where pre-1990 forest land was jointly owned as at 1 September 2007, none of the joint owners (except for a professional trustee) at that time is permitted to own more than 50 hectares of pre-1990 forest land in association with any other person if the exemption is to apply. Similarly, if the land was owned by tenants in common, none of the tenants at that time is permitted to own more than 50 hectares of pre-1990 forest land in association with any other person if the exemption is to apply. Each tenant in common's interest in the land at that time is to be treated as a divided interest for the purpose of determining their total pre-1990 forest land ownership. These criteria are restricted to legal ownership and not beneficial interests.

Owners of exempt pre-1990 forest land are not eligible for the free allocation of New Zealand Units (NZUs) in respect of the exempt land through a Forestry Allocation Plan. Before applying for an exemption, landowners should therefore carefully consider whether or not they wish to forgo any entitlement they may have to an allocation of NZUs.

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ETS Update from MAF

MAF, in their latest Sustainable Forestry Bulletin (Issue 11), updates key changes in the legislation relating to the recently passed Climate Change Response (Moderated Emissions Trading Scheme) Amendment Act. This is important reading for forest owners. The Fact Sheet is a particularly useful summary. See http://www.maf.govt.nz/sustainable-forestry/news/bulletin/index.htm

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MAF Provides Detailed Response to Questions of Post-89 Forests, the ETS and Forestry Rights

In response to two key questions from PF Olsen, MAF provided the following answers (slightly modified by PF Olsen). Please note that the answers are MAF's interpretation only, and should not be seen as a binding ruling. MAF and PF Olsen advise readers to obtain their own legal advice prior to taking any action or making decisions.

The Situation: A forestry right holder wishes to become a participant in the ETS and the landowner gives them permission to do so.

Q1. What liability, if any, would the landowner face if the forestry right holder as the participant did not meet his/her carbon liabilities by surrendering NZUs? e.g. harvested forest, became bankrupt and forestry right expires without surrendering NZUs.

A1. The landowner would not inherit the carbon liabilities that accrued while the forestry right holder was the participant. Section 192(7) of the Climate Change Response Act (CCRA, as amended) provides, in essence, that the transferor (i.e. the forestry right holder) continues to be liable in respect of any obligations that arose in relation to the carbon accounting area while the transferor was a participant.

Q2. The forestry right expires and the forestry right holder, as the participant, has surrendered the NZUs required to fulfil their obligations. Is the landowner obligated to replant the land (or allow land to regenerate)? Or can the landowner now deforest without any penalties?

A2. Again, section 192 of the CCRA (as amended) applies. The obligations of the landowner, once the forestry right expires, depends on whether the land remains in the ETS or not. If the landowner only permitted the forestry right holder to participate in the ETS during the term of the forestry right the forestry right holder would need to ensure the land was removed from the ETS before expiry of the forestry right. In most cases of existing post-89 forests, this will mean surrendering (at harvest) the equivalent number of carbon credits as claimed.

Where the land remains under the ETS on the expiry of the forestry right, section 192 applies and, in summary, the following is required to happen:

• the forestry right holder (as transferor) is required to file an emissions return (and pay carbon liabilities or receive credits)
• the forestry right holder and the landowner are required to notify the Chief Executive of the transfer of the forestry right
• the forestry right holder ceases to be the participant as at the date of transmission
• the landowner becomes the participant in relation to the forestry right interest as at the date of transmission
• the Chief Executive enters the landowner into the register as a participant in the ETS (if not already on register)

It would be possible, however, for the landowner to then decide to opt out of the ETS (i.e. after the s 192 process registering them as a participant). To achieve this, the landowner would need to follow the provisions in the CCRA re removal from the register as a participant (and this would include filing an emissions return for the period they were a participant).

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Opportunity to lower Tax Burden on Harvesting Income

Some solid detective work by Hew McKellar, President of the Western Farm Co-operative Forestry Company Ltd and Hunterville-based farm forester, has revealed an important opportunity for some forest owners to spread their harvesting revenue over five years.

Previously there was confusion relating to an error in Inland Revenue's guide notes. The activity of "growing trees for production of timber" was (incorrectly) included in a list of activities that do not quality for the Income Equalisation Account Scheme. We understand that Inland Revenue is correcting this error.

However, the scheme is only available to taxpayers who are not companies, public authorities, Maori authorities or unincorporated bodies who derive income from forestry.

There is a five year limit on the length of time that funds can be in an income equalisation account. After the five-year limit, any deposit in the person's income equalisation account is refunded to the person.

If you would like more information on this matter, and prior to taking any action relating to this information, we suggest you contact your tax advisor, accountant or the Inland Revenue.

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Creative Ideas on Expanding Use of Wood

We know that concrete, steel, aluminium and synthetic composites all compete with wood and fight for market share. Well, we have come across a breakthrough innovation in applications for wood. Might need a little refining to get a lot of uptake (good for mother-in-laws perhaps?)

Signing Off for 2009

On a more serious note, we here at PF Olsen wish you all a very Merry Christmas and a Happy and Prosperous New Year. We appreciate your support and look forward to some truly positive developments for forestry and timber products next year and beyond.

And here's a more sensible use for wood.

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