In This Issue

• Introduction
• Clarky's Comment
• New Monitoring Tools Assists with Identification and Protection of Native Bats
• ERMA Recommends Continued Use of Methyl Bromide
• Log Market
• Russell's Report: Update from Future Forests Research
• "Did you know?" - Unravelling the Incidence and Value Impact of Resin Blemishes

Introduction

We welcome Future Forests Research (FFR) and Solid Wood Innovation (SWI) - formerly WQI - which are both going to provide regular articles for Wood Matters. PF Olsen is a staunch supporter of well-managed and efficiently-delivered R&D. It is the only way to achieve sustainable competitive advantage. "If you don't innovate, somebody else will." FFR and SWI have agreed to provide a regular update of their programmes and findings with a view to giving Wood Matters' subscribers a glimpse of their research direction and outcomes and the value it can deliver for forest owners.

We don't have any new information for readers in the carbon forestry space at present. While there is uncertainty around the international response to climate change there is little enthusiasm to invest in new planting. New planting is needed for post-1989 forest owners to de-risk selling their existing credits. In the meantime we have completed processing post-1989 registrations and claiming 2008/09 NZUs and are now focussing on the pre-1990 allocation applications (the time line of which is expected very soon).

The "carbon market" in New Zealand remains very thin with few trades. The consensus "price" for NZUs remains at NZ$20/unit.

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Clarky's Comment

Another devastating earthquake in Western China and disruption to European air traffic from the Iceland volcano are further reminders that Earth is a dynamic and living planet. Unfortunately we only have one Earth. If we are to respect the needs of our children and their children we must take the view that we are short term custodians on the planet and have a duty of care to hand it over to our children in good shape.

That concept is well understood by those charged with brokering a new international agreement on climate change, but has little relevance to a Chinese or African peasant trying to feed his/her family. Political realities and lobbying by interest groups opposed to any change to the status quo are at present stalling meaningful transition to a lower carbon-emitting world. This is despite the inescapable fact that on-going reliance on fossil fuels for 80% of all our energy needs is not only unsustainable from a fossil fuel supply perspective, but also makes the task for reversing atmospheric green house gas concentrations more difficult as time goes by.

So what is the relevance of this to us in New Zealand and to forest owners in particular?

Nothing we do inside New Zealand can have any meaningful effect on global green house gas concentrations. But if we can develop the science and land-use policies to show that we can produce much needed food and wood fibre, without degrading our soils and water resources, while also reducing CO₂, N₂O and even potentially Methane emissions, we could have a big impact on agricultural-based emissions world-wide. Forests also have an important part to play in both steep-land soil protection, clean streams and absorption of atmospheric CO₂.

In this regard the government's initiative to facilitate global cooperation on researching solutions to agricultural emissions and sustainable farming is appropriate and should be supported by all New Zealanders. The development of a National Environmental Standard covering land-use and the current focus on national policies affecting water use and quality is also appropriate.

What is disappointing is that Horizons Regional Council appears to be backing off their One Plan in the face of farmer lobbying to maintain the status quo. The One Plan sought to overlay soil and water protection issues into land-use practices in the Region. The initiative followed the 2004 floods that clearly illustrated the environmental and financial costs of the status quo land-use practices.

Most farmers are acutely aware of the need to manage fertiliser application and stocking to minimise environmental risks, and many are actively managing at-risk catchments with retirement or tree planting. With adequate communication, those using best practice on land that is capable of being grazed sustainably should not feel threatened by the Horizons' initiatives.

If some of the land cannot be sustainably farmed, and/or damage to waterways is material, then clearly we will not be handing NZ's land and water resources over to our children in good shape, and something needs to be done to address that.

What's important from a New Zealand Inc. perspective is that land users are regulated equally for environmental impacts under the RMA and Council Plans. The recent focus of regional councils on sedimentation during the harvesting of plantation forests is indicative of the increasing environmental awareness and values being placed on land users by society. Pastoral farming faces important challenges in this area and those farmers that acknowledge and address this reality will be best placed to survive as environmental standards for land-use demand new practices.

Tree planting can help get the land-use balance right. With carbon credits now having value, it is much more financially attractive to plant commercial forests than before the introduction of the Emissions Trading Scheme.

To its credit, Horizons Regional Council has sought to encourage tree planting. It has signalled the intent to make forestry, including harvesting, a permitted use provided that the NZ Forest Owners Association Environmental Code of Practice is followed, along with other non-regulatory measures. The question is, will this be enough to encourage afforestation of sensitive and highly erodible landscapes?

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New Monitoring Tools Assists with Identification and Protection of Native Bats

PF Olsen has recently increased its capacity to implement rare fauna monitoring within our managed forest areas with the purchase of a bat monitoring box.

The Digital Bat Recorder was developed by Stu Cockburn of the Department of Conservation's Electronic Facility. The box records the echolocation calls made by both long-tailed and short-tailed bats.

When viewed on a specially developed programme supplied with the bat box, calls can quickly and easily be identified, and the species distinguished. Below is an example of the echolocation sound waves. The top line shows waves recorded at 28 kHz which is the frequency short-tailed bat calls are obvious. The bottom line is at 40 kHz, the frequency of the long-tailed bat. Each oscillation along the line is a long-tailed bat call.

Indigenous forest is the bat's preferred habitat, particularly along the edges. However, areas within exotic plantations that have big gnarled old trees, indigenous forest pockets, stream edges or indigenous forest edges can provide habitat.

When we identify that exotic plantations have bats present, we need to establish whether this is transient use or if they are roosting within the forest. The local Department of Conservation office is a good source of local knowledge. If it is believed the bats are in fact roosting within the exotic forest, we can try to identify which trees they are roosting in and look at planning to protect them.

So far we have set up the box in Ponaua forest, south of Murupara. Over the three nights, long-tailed bats were identified every night. The forest is close to Te Urewera, a very large expanse of DoC indigenous forest. It is likely the bats originate from Te Urewera and are using Ponaua as a feeding ground.

We will continue with our monitoring schedule using the bat box by sending it around our regional branches.

For more information on New Zealand's native bats, see the DoC's website at http://www.doc.govt.nz

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ERMA Recommends Continued Use of Methyl Bromide

The Environmental Risk Management Authority's (ERMA's) reassessment of methyl bromide is in its final phase. ERMA received 92 submissions and approximately 40% of submitters asked to speak at a hearing.

Methyl bromide is a fumigant used to treat logs exported from New Zealand. It is an odourless, colourless, heavier-than-air gas, used internationally as a broad-spectrum fumigant. It has proved to be a highly effective means of treating timber, agricultural produce, buildings, vessels and containers to eradicate a wide range of pests (including soil-borne fungi, nematodes, weeds, insects, mites and rodents) because of its good penetration and rapid action.

Methyl bromide is an ozone-depleting substance. However its use for quarantine and pre-shipment (QPS) is allowed under the Montreal Protocol (an international response to concern over depletion of the protective ozone layer), ratified by New Zealand in 1987.

The good news is that ERMA recommends the re-approval of the use, in the medium-term, of methyl bromide for quarantine and pre-shipment (QPS) purposes only, with tighter controls. However, this is only a preliminary recommendation. A final decision will be made after consideration of public submissions and evidence provided at public hearings.

In terms of its assessment of human health risks, ERMA concludes that "with controls in place, the risks to operators are low with potential for acute adverse effects on the health of operators only if controls are not adhered to." For "occupational and non-occupational bystanders, the ERMA concludes that, with controls in place, the risks to health are negligible if additional controls (specifically monitoring requirements) are introduced to provide assurance that the risks can be managed safely."

"This is a pleasing result", says Peter Weblin, Marketing Manager for PF Olsen. "At present there are no alternatives to methyl bromide for phytosanitary treatment of logs to India, and no feasible alternatives to using methyl bromide for deck cargos of logs to China. It is a very important component of the New Zealand log export business."

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Log Market

Export

High log inventory in China continues to weigh on the market and price has declined for the past 2-3 weeks. Currently the price of A grade is reported at USD135-140/JAS m3 CFR (cost and freight). This decline is making anyone holding log inventory nervous. In a rising market, holding inventory is advantageous. In a declining market, however, it can quickly produce large losses for traders. So far, there does not appear to be panic-selling and the drop in price is being used to stimulate demand from end-users to clear the stocks. If this happens in an orderly fashion, price should stabilise.

Some diversion of volume to Korea and India will assist with inventory reduction in China.

The drop in CFR price hasn't impacted much on New Zealand at-wharf-gate prices yet, as prices were set at the end of March when CFR prices were higher. If the current situation continues, we expect NZ at-wharf-gate-prices to drop in May.

Domestic

As anticipated, domestic log prices rose for the second quarter (April-June 2010). This is in response to pressure from higher export log prices to secure volume for domestic log processors. Fortunately, most market segments have seen wood product prices increase and some have also benefited from favourable movements in foreign exchange (e.g. lowering NZD/AUD cross rate).

There is strong demand for sawn timber. Sawn timber production for the December 2009 quarter was up 18% on the same time a year earlier.

Increases in US lumber prices have been attributed an improving trend in US housing data and to a response to the Chilean earthquake.

Ocean Freight

New Zealand break-bulk ocean freight rates have continued to firm with spot prices around USD50/JAS m3. This is a continuation of a trend of steady price increases from the beginning of last year when rates troughed at around USD20/JAS m3. This is a similar trend to the Baltic Dry Index which responds to global supply and demand for ocean freight.

There are widely divergent views in the market place of the direction of ocean freight rates for logs from New Zealand. Although the current rates are historically high, the improving outlook for global growth and the declining age of the global Handy-size fleet (the sector that transports NZ logs) will tend to underpin rates.

Indicative Average Current Log Prices

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.

Commentary: Why is Volatility Damaging for the Forestry Sector?

Readers may have heard the term (high) volatility to describe the forestry sector. What does this mean, and what are the implications? Firstly, in this instance, we are referring to the harvesting and marketing part of forestry (although forest establishment and silviculture experience similar high volatility in levels of activity).

Take look at the chart of Ministry of Agriculture and Forestry quarterly prices below (adjusted for the inflation per the CPI). These are prices for the two main export log grades (A grade and K grade). From this chart you can see that prices can double or half over periods of three years, and increase/decrease by 150%/50% over periods as short as one year.

Fortunately, domestic log prices tend to be more stable, and dampen the impact of this volatility (more on that later).

These wide swings in prices occur hand in hand with wide swings in volume (i.e. activity levels).

So what is the impact of this volatility?

1. We go from one extreme of too many harvesting and cartage contractors and not enough work, to acute shortages of contractors. Contractors become reluctant to invest capital in equipment and training. Workers experience redundancy and dislocation. Innovation, productivity improvement and safety suffer.
2. Infrastructure such as port facilities are either under-utilised, or over-crowded. Planning becomes guess work, and confidence in investment in additional facilities fades.
3. Similar adverse impacts on all service firms supporting the harvesting and marketing sector, such as professional managers, inventory contractors and port services firms.
4. Planning and budgeting becomes very difficult. Actual results vary significantly from expectations.
5. Forest owners/investors become disillusioned when returns are significantly below expectations.

So what causes this high volatility? There at three main drivers, all of which themselves are highly volatile:

• The foreign exchange rate.
• Ocean freight rates.
• Log price at destination market.

Therefore, the volatility for the export log sector is structural and unlikely to change in the near future.

As mentioned above, the domestic log sector exhibits less volatility. And less volatility will result in a stronger forestry sector overall.

Therefore as New Zealand's log harvest increases from the current 23 million m3 level to the forecast 35 million m3 in the next 10 years, it would be highly desirable if most of this increase was taken up by expansion of a competitive and sustainable domestic log processing sector.

It is in the best interest of all forest owners and forestry services firms to share this vision and goal and actively work toward making it a reality.

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Russell's Report: Update from Future Forests Research

from Russell Dale - CEO - FFR

I welcome the opportunity of providing a regular update on Future Forests Research (FFR) for the readers of Wood Matters. Forestry is heavily based on science and innovation, and the research that is the foundation of our forest industry today is recognised internationally. However to improve our competitiveness with other wood producers and to grow market share for wood against competing products, we must continue to innovate. The wool industry is a good example of what happens when an industry stops investing in its future and loses contact with its customers.

PF Olsen has a strong commitment to innovation and the value of doing this in a collaborative way. Our location within the PF Olsen office in Rotorua allows us to keep in contact with our customers in industry and their needs and enables PF Olsen staff to be aware of our research programmes and to be early adopters of research outcomes.

Future Forests Research (www.ffr.co.nz) is an industry-controlled company established collaboratively by the forestry sector and Scion to improve the engagement between industry and research. Its objective is to raise the profitability and sustainability of the forestry sector by delivering research outcomes that are relevant to industry, are world class, and deliver value to FFR investors.

Our research programmes are organised under four themes -

• Radiata Management,
• Environment & Social,
• Diverse Species and
• Harvesting & Logistics.

One example of the value of the research is the benchmarking of harvesting operations by FFR across member organisations. This enables those companies in the Harvesting Theme to benchmark the productivity of their harvesting operations with other companies on a fully confidential basis. This is of considerable value to forest managers, but also to forest investors who can use this to assess the performance of their forest managers, and has already been used for this purpose by some members of this theme.

A second example of the value of the research is the development of a new forest inventory system called Timberline. This involves automated tree counting from satellite or aerial imagery and transect sampling, instead of the conventional bounded plot system. The system is currently undergoing operational trials by four companies, including PF Olsen. Earlier trials have demonstrated potential cost savings of between 25% and 35% over current inventory methods.

In future updates I will highlight other FFR developments of interest to forest owners and readers of Wood Matters.

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"Did you know?" - Unravelling the Incidence and Value Impact of Resin Blemishes

from Keith Mackie - CEO - Solid Wood Innovation (SWI)

The value of appearance logs is impacted very heavily by resin blemishes.

In the photos below Log A could be worth $124 per cube (Agri-fax March 2010 P1 price) but Log B, if cut to appearance material, will have negative value.

Resin blemishes come in many forms; (resin pockets, resin streaks, resin blemishes, resinous heartwood & resin canals) and whilst they are generally not a problem in structural products, they cause major value loss in appearance manufacturing.

The appearance of resin features (see Log B) on cut log ends is a sure indicator of resinous defects throughout a stem. As a general rule, if there are 2-5 resinous defects on a cut face then there will be approximately a 40% drop in value and it will not be sensible to cut appearance products from it (and cut patterns more suited to green lumber products would be more appropriate.)

Research over the past 5 years by WQI (now Solid Wood Innovation - SWI) has helped unravel the causes for resinous defects, their prediction in various regions in NZ and locations in stands and some relatively simple segregation rules and replanting decision tools.

More detail will follow in future issues of Wood Matters.

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