In This Issue

• Clarky's Comment - Farming for Carbon a Viable Option
• Implications of Australia's Changing Forestry Scene
• Future Forests Research Welcomes Government Support for Harvesting Research
• Did you know? - Assessing Propensity for Intra-ring Checking
• Log Market and Ocean Freight
• Understanding the Different Harvesting & Marketing Management Options
• People Changes at PF Olsen
• Forest for Sale
• Update on the Emissions Trading Scheme

Clarky's Comment - Farming for Carbon a Viable Option

Over the last month we have seen quite a lot of negativity from the pastoral farming leadership about the damage and cost of the Emissions Trading Scheme (ETS) to farm businesses. We are not sure how widely these views are held by farmers. Regardless it seems to us that of any business group pastoral farmers, in particular sheep and beef, are in the best position to capture the upside from the forestry provisions of the ETS. The following recent press release from New Zealand Forest Owners Association articulates this view very well:

Carbon forestry is a viable option for land owners looking for new income streams, say forest owners

"Two recent studies indicate that plantations grown on hill country could be used to offset farm emissions and to improve overall farm profitability," Forest Owners Association president Peter Berg says.

"Many farmers already grow woodlots and small plantations, however much land suited to forestry has not been planted, because trees don't provide an annual cash income.

"Carbon forestry changes this model - providing an annual stream of carbon credits starting about five years from planting. The credits, in the form of NZ Units (NZUs), can be sold on the open market or kept in the bank."

Farm Forestry Association president John Dermer says a lot of comment about the ETS has been very negative and he suspects this has put most farmers off.

"My advice to farmers is that they should take a close look at the opportunities and to make up their own minds whether they can make some money out of it. I suspect many hill country sheep and cattle farmers and dairy farmers with run-off blocks will be pleasantly surprised at what they discover," he says.

"Having said that, you need to get it right. The ETS is complicated and there are risks that need to be managed, so it's very important to take expert advice."

Canterbury University Professor Bruce Manley and forest researcher Piers Maclaren have examined the financial returns and risks associated with carbon forestry under the New Zealand ETS.

In an article^[1] to be published in the academic journal Forest Policy and Economics, they explain that the main financial benefit of carbon forestry comes from the "time value of money". In other words, income from the sale of carbon credits earned as the forest grows can be invested in more trees, something else, or used to pay off debt.

When the trees are harvested, about 75 per cent of the credits earned have to be returned to the government. This is because about 25 per cent of the carbon from the trees, in the form of stumps, roots and other plant material, remains with the land until the new crop becomes established.

"Manley and Maclaren's studies show that radiata pine is a better investment than Douglas-fir or shining gum (Eucalyptus nitens) and at higher carbon prices, it's best not to thin or prune the trees," Mr Berg says.

"However, the highest carbon regimes also involve the highest NZU repayment risk when the crop is harvested. So many carbon foresters are likely to continue pruning, or planting Douglas-fir, so they have a high value timber crop to sell at harvest.

"Other ways to manage this risk include spreading forest establishment and harvest dates, deferring harvest and planting a portion in long-lived species such as Douglas-fir or redwoods."

A recent AgResearch-led study^[2] looked at the potential to use new forests to offset farm emissions and what this meant for farm profitability and cashflow.

Results showed that when carbon values reached $30 to $40/NZU over 60 years, forestry plantings were a cost-effective option to hedge carbon price risk. Farms with existing post-1989 forestry benefited most from additional plantings as they were able to make immediate use of carbon being sequestered in existing plantations.

Mr Berg says that at a conservative carbon price of $22 a tonne it is possible to make an 8% return on capital from hill country forestry. Not only is this much higher than can be achieved from sheep and cattle, it is often possible to plant trees on parts of the farm where livestock productivity is low.

"The ETS also provides an opportunity for farmers on erosion-prone farmland to make their properties much more sustainable. There is good evidence to show that forestry prevents 80-90 per cent of soil erosion.

"Carbon forestry, like all investments, has associated risks and opportunities that need to be carefully considered. But there is now quite a large body of research information available for land owners wanting to make an informed decision."

Sources:

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Implications of Australia's Changing Forestry Scene

For a conservative industry sector, the amount and pace of change in forestry is sometimes quite astounding.

In Australia during the last 18 months we have witnessed substantial change at a scale that probably could not be predicted, and there's more to come.

Forests changing hands

Four leading Managed Investment Scheme providers, with a combined forest area approaching 500,000 hectares, have gone into voluntary administration and/or receivership over the last year and the Queensland Government recently sold its 250,000 hectare plantation estate for $603 million. The Forestry SA estate is expected to be sold in the next 18 months, the WA Government intends to sell its sharefarm business and a change of government in NSW will probably also result in the Forests NSW plantation estate being sold.

Shift in ownership trend

If these transactions unfold as expected, then the majority of these forests will probably be purchased by TIMOs on behalf of institutional investors, a pattern that has already begun with the purchase of the Timbercorp estate by Global Forest Partners, the involvement of GMO in the Taswood joint venture and Hancock Natural Resources Group's ownership of the former government plantations in Victoria and Queensland. According to industry commentators, there is substantial availability of international funds for purchase of Australian forests.

Forest management will change

These facts mean not only that forests are changing hands, but the way in which forests are managed will also change.

With the shift to institutional ownership and a focus on return on investment, greater pressure will quite rightly be brought to bear on improving forest management efficiency, reducing costs and improving revenue options. The way in which forest management services are engaged and wood is sold will change - fewer long-term contracts and continuing industry consolidation along the supply chain.

Reduction in plantation area

Another anticipated outcome is a net reduction in Australia's plantation area, as marginal plantation land is returned to alternative economic uses. The announcement recently by Elders that it will write off 25,000 hectares of plantations in central Queensland and write down the value of its Esperance plantations in Western Australia is partly an example of this. Many current plantation sales are likely to result in the tree crop being liquidated and the land returned to alternative uses.

Government policy implications

Amongst this change, there is emerging a new set of challenges for Australian governments. In the absence of a Carbon Pollution Reduction Scheme, there are few real incentives for greenfields commercial forestry projects. Additionally, the state-based nature of environmental regulation for forestry, as well as localised policy issues with planning, water and remnant vegetation protection, results in genuine inefficiencies for forest managers, particularly those operating in more than one state. Australian governments generally profess a desire to see forestry expand and the forest industries - both primary and manufacturing sector - are still economically significant. With governments moving from forest growing to policy, there is a strong argument for rationalising economic and environmental policy to remove inefficiencies and perversities.

Forest management focus

Finally, foresters and processors themselves will need a paradigm shift at a rate commensurate with the increasing commercial focus of the new forest ownership regime in Australia.

Change is a given and its here to stay for Australian forestry.

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Future Forests Research Welcomes Government Support for Harvesting Research

The Government's allocation of new Primary Growth Partnership funding to improve forest harvesting technology has huge potential to benefit the New Zealand economy and make logging safer for workers on the ground.

Government will contribute up to $3.27 million over seven years, to be matched by the forest industry in a $6.5 million harvesting research programme that will produce estimated total net benefits of over $100 million by 2016.

Future Forests Research Ltd (FFR), the industry-driven company that promotes research partnerships between forest companies and Government, will manage the research programme on behalf of the Forest Owners Association.

We see multiple benefits from this programme. It will enable us to build on existing work by developing new high-tech harvesting machines to increase productivity and reduce the cost of extracting trees on steep slopes, as well as reducing hazards to workers.

That will enable the industry to contribute to a partnership with New Zealand manufacturers to develop better equipment for domestic use and export.

Steep country forests already contribute more than 40 per cent of New Zealand's log harvest, and this is forecast to rise to over 60 per cent in coming years. Present harvesting methods on this terrain, such as labour-intensive cable logging, have changed little in 50 years and are costly and hazardous to workers on the ground, who can be working out of sight of operators of cable hauling equipment.

New methods of operation with machines purpose-built for steep terrain would remove workers from hazardous areas.

FFR began a modest research programme in this area in January 2008 with a small, totally industry-funded budget.

New Zealand's competitors are very active in applied research to reduce harvesting costs, yet New Zealand has done no research in this area over the past 10 years.

Russell Dale
Chief Executive
FFR

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Did you know? - Assessing Propensity for Intra-ring Checking

Intra-ring Checking

Did you know you can assess stands for the propensity for intra-ring checking (IRC)? IRC is an intermittent wood quality issue but is critical in some appearance product lines (see photo above).

IRC is the checking that occurs within earlywood bands of radiata pine sapwood, primarily in the butt log. It is different to drying checks caused by stress and end-drying that typically cross growth rings. It can be described in simple terms as cell columns splitting apart from each other under increased water tension during drying.

Sampling technique - core based method

The collapse of 12mm increment cores, after over-drying, is assessed. See photo below - the core displays severe collapse in the sapwood on oven drying. This equates to high IRC in lumber.

The core based method is now being routinely used by some forestry companies, such as PF Olsen, for assessing stands where intra-ring checking might be an issue. The method is based upon sampling around 20-30 trees per stand.

Implications for Tree Breeding

The Radiata Pine Breeding Company assess breeding material and cull stock which have a high propensity to develop IRC. This provides a long-term solution to the issue but doesn't help people with trees in the ground.

What are the Benefits of Assessment of Intra-ring Checking?

As with most research from SWI, the primary objective of techniques to identify and segregate inherent wood qualities is to eliminate wasteful cost. Generally, the closer this segregation can occur to the forest resource, the greater amount of wasteful cost can be eliminated. Wasteful cost occurs in many forms and includes transporting, handling and processing logs which, at some point along the supply chain, prove to be unfit for purpose. The greatest wasteful cost occurs when a wood product is installed in an end-use application and then fails, requiring a full refit to remedy the problem.

Figure 1 below shows a conceptual model of reducing wasteful cost by segregation as close to the forest resource as possible.

Keith Mackie
Chief Executive
Solid Wood Innovation

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Log Market and Ocean Freight

Log Market

June saw steady export log markets with some positive signs from China. High log inventories in China have fallen from over 1.0 million m³ to less than 700,000 m³, and prices have stabilised.

Fears of a dramatic downturn in China's economic activity were reduced when China reported exports in May 2010 10% higher than April 2010 and 50% higher than the same time last year!

In contrast to the woeful economic news this month from the Euro-zone, demand in Asian economies remains firm. HSBC released its estimates for GDP growth in key markets for 2010; 10% in China, 8.5% in India and 5.2% in Korea, with overall Asian GDP forecast at 5.9%. The one major exception is Japan with forecast of GDP growth of 1.7%. Despite this, the Japanese wood market has been boosted recently by an earthquake-induced import shortage of Chilean lumber.

Demand forecasts for 2011 are at similar levels, with Asian growth forecast at 5.2% - and this is also good news for the medium-term demand for logs and wood products.

Log exports from NZ are expected to ease a little from the record April level of around 1.0 million JAS m³ (per month).

At-wharf-gate prices fell in June around $3/JAS m³ adding to price reductions last month. Since the peak in April 2010, at-wharf-gate prices are down around $10/JAS m³.

The outlook for export logs from here on out is mixed with varying forecasts from different log traders and commentators. If the ocean freight rate and exchange rates have stabilised, as they appear to have done, and Radiata pine can provide a competitive wood option for Asian markets at current (in-market) prices, it would appear that there is limited downside to at-wharf-gate pricing at present.

The domestic log market continues to be strong. Lumber exports to the USA were up 30% in the first quarter of 2010 compared to this time last year. This is due to a combination of increased activity in the housing sector in the USA as well as earthquake-affected reductions in supply from Chile.

In volume terms, China is the biggest single-destination importer of New Zealand-produced lumber (in addition to the largest importer of NZ logs) taking 22% of all lumber exports year-to-date. Due to higher value products, however, Australia and the USA make up the 45% of New Zealand's lumber exports by value, with China trailing at 16%.

Relatively static conditions in the Australian and New Zealand property and construction sectors is seeing continued steady demand for product. Some increasing of the NZD/AUD cross rate this month will ill-effect returns from processed product exported to Australia, but at around 0.80 (currently) it is still well down on the high of 0.90 experienced last year.

Ocean Freight

Handy-size log bulker freight rates for NZ to Asian trade continued a persistent rise early in the month to settle at USD 50-55/JAS m³, but have subsequently stabilised. Latest tentative reports are of some softening in rates which is hopefully a harbinger to coming off a peak.

As reported previously, however, the medium-term outlook for the Handy-size sector is overall firm rates due to the:

• Higher-than-average age of the fleet (compared to other sectors such as the Cape-size and Panamaxs).
• Relatively low scraping rates (due to the higher rates making it more economic to continue operating older vessels).
• Relatively fewer new-builds of Handy-size vessels.
• High demand for Handys for coal and steel shipments to China.

Recent Ministry of Agriculture and Forestry Bullish on Future Returns from Forestry

The just-released Situation and Outlook for New Zealand Agriculture and Forestry (SONAF) (see link SONAF Report) is decidedly bullish on the outlook for commodity producers in New Zealand, including forestry. With a combination of a forecast increase in timber prices and lowering of the NZD/USD cross rate to 0.51, returns for forest owners are forecast to lift significantly over the next five years. Unsurprisingly, this relies on continued high demand from China for our commodities. Lets hope they are right, even if only partially!

Summary

Overall, modest firming in the higher domestic grades (pruned and structural) and modest weakening in export grades, resulting a slight decrease in over returns on a weighted average basis.

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.

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Understanding the Different Harvesting & Marketing Management Options

This article was provided by Peter Wilks, (PF Olsen Branch Manager, Nelson, pictured left) for a local Nelson/Marlborough publication and is a timely reminder to forest owners to make sure they understand what arrangements they are getting into for harvesting their woodlot.

With so much woodlot harvesting happening of late due to good log prices, we have decided to devote this month's column to explaining the role of harvest managers and log buyers in woodlot logging. We explore two distinct options facing forest owners wishing to harvest their woodlot.

Full Service (Management and Marketing)

Under this option a harvest manager, such as PF Olsen, works on behalf of the forest owner. The manager directly employs each of the sub contractors for logging, cartage and earthworks and is responsible for supervising all these operations.

There should be a signed Harvesting & Marketing Agreement between the service provider and the client specifying in particular the obligations of the harvest manager. Generally this should be to maximize the net revenue to the owner, while minimizing and managing all the risks. Such risks include breaches of the Resource Management Act and Health and Safety in Employment Act, as well as credit risks from non-payment.

The harvest manager is also responsible for ensuring logs are cut to maximum value, marketing all the logs to best advantage, ensuring timely payment, reconciling dockets and deliveries.

The advantages of this approach are that the forest owner has full control over the operation yet has the benefit of using a professional company to manage the parts of the operation that require particular skill and experience.

Marketing Only

Under this arrangement the forest owner usually employs the logging and cartage contractors directly but sells the logs through a log buyer/trader. There can be an advantage under this system if the forest owner has the experience (and time) to oversee the operation themselves and thereby avoid the need to employ a harvest manager.

However, the forest owner needs to be aware that in employing contractors directly, they become the principal under the HSE Act and responsible for managing all aspects of health and safety. This can be a big undertaking and responsibility. If things go awry, it can be very costly.

In our experience, this option rarely provides the best overall return to the owner unless the owner has a small DIY type operation where they can be personally involved in the day to day running of the harvesting operation.

In most cases however, the small savings that are made by not employing a harvest manager are outweighed by lack of focus on log-value recovery, narrow range of marketing options (log traders usually don't like selling to their opposition), and the inherent risks that come with responsibility for environmental and health and safety issues.

Summary

It is important to decide what management option best suits your situation. If you decide to employ a harvest manager ask plenty of questions before engaging them and make sure that your interests come first. For most forest owners there is only the one chance to get it right!

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People Changes at PF Olsen

New People to Welcome…

Ged Terry joined PF Olsen in the middle of May. Since gaining a B.Com (Forestry) at Lincoln University, Ged has worked for other major forestry companies in NZ as well as spending four years in the UK where he utilised his skills in project management and logistics.

Ged will lead our Central North Island Harvesting team.

Craig Treloar joins the Otago/Southland team commencing 21st June. Craig's previous forestry experience has been in the Rotorua/Tokoroa areas where he was involved in a wide range of forestry and wood processing activities. Previously Craig was with Fulton Hogan in Dunedin.

New to the permanent workforce, and complementing the administration team, is Lani Dawson, our new Receptionist in Rotorua.

Pictured left is the face behind the voice that greets callers to our Rotorua Head Office.

…And Say Farewell

Bob Shirley, our Kaitaia Branch Manager, is leaving PF Olsen at the end of June after nearly 20 years service. Bob has been a valued member of our staff and we wish him well in his new role as Harvest Manager for Juken Nissho based in Kaitaia. Whilst Bob will be missed by fellow PF Olsen staff, contractors and clients, his role and responsibilities will be ably taken over by Tiwha Everitt, with assistance from Peter Bullen, PF Olsen's Northland Regional Manager, and his team based at Kawakawa.

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Forest for Sale

Kauapepe Forest, Northland

PF Olsen is pleased to offer Kauapepe forest for sale on behalf of the forest owner via a sealed-bid tender for either the Forestry Right, or Lump Sum stumpage. The tree crop was planted with Radiata pine in 1986-1988. Each of these age classes, except the relatively small area planted in 1988, has been pruned, on average about 300 stems per ha to about 6.8 metres. The final thinning to waste operation, to about 300 stems per ha, took place during 1995-1996. See the table below for a stand summary.

The forest is located about 20 km by road West of Mangamuka Bridge, North of the Hokianga Harbour in the Northland region. Access to the forest property is off Kauapepe Road. From State Highway 1 at Mangamuka Bridge turn West on Mangamuka and Broadwood Roads and turn North onto Kauapepe Road.

The region in which Kauapepe Forest is located is serviced by domestic and export log market options. Wood in the northland region is characterised by high density and high stiffness. This makes the timber sought after for structural and engineered end-used applications.

If you are interested in participating in the tender, please click here and we will send out more information.

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Update on the Emissions Trading Scheme

Pre-1990 Forestry Allocation Plan Update

We have been advised by the Ministry of Agriculture and Forestry (MAF) that the application process to apply for the pre-1990 allocation is now not likely to commence until August 2010 with the Forestry Allocation Plan not being finalised until late July. Until such time we cannot begin to process applications.

MAF Publication Updates

MAF has recently published an updated Guide to Forestry in the ETS, including an introductory version. These documents are essential reading for those interested in joining the ETS and will answer many questions relating to post-1989 and pre-1990 forest land. These documents can be viewed at the following links:

MAF has also published a detailed land classification guide for forestry in the ETS. If you have doubts as to how your land is classified in the ETS, this guide will help you determine its status. It gives 19 examples of how to classify land under the ETS which covers the most likely scenarios. This guide can be viewed at the following link:

Don't Leave Your Post-1989 ETS Registration Application To The Last Minute!

In the May edition of Wood Matters we discussed flexibility in timing of applying for carbon credits for commitment period one (CP1), i.e. 2008 to 2012 sequestration, and expressed a view that you could wait until 2012 to make a final decision. Whilst there is some flexibility, please note that it is risky leaving it to the "last minute".

One deadline for claiming carbon credits for CP1 relates to needing to become fully registered into the ETS by the end of December 2012. Fully registered means the application is received, processed and approved by MAF. If you miss this deadline, you will no longer be able to claim your carbon credits for CP1; they will be lost forever.

Whilst at first glance, it would appear you have plenty of time, there are two risks with waiting until "the last minute" to register in the ETS:

1. There may be complications associated with proving eligibility.
2. If a large number of forest owners seek registration at the same time, close to the deadline, MAF could struggle with processing them all in time.

Be aware that delaying joining the ETS until later in 2012 does run the risk of disappointment from the factors above. Therefore, for those that have not already decided whether or not they will join the ETS, it is highly recommended that such a decision is made so you can submit your registration application sometime in 2011 or early 2012 at the latest. To date about 350 post-1989 forest owners are registered in the ETS out of potentially several thousand.

In making your decision on whether or not to join the ETS with post-1989 forest land, you need to consider the following factors:

1. Your desire to generate income from selling carbon credits. If you don't intend selling your credits, you should question whether it is worth incurring the costs of registration and claiming credits with no offsetting additional revenue. On the other hand, some people feel that claiming the credits is a good "insurance policy" against possible legislative changes such that carbon has to be accounted for at harvest, regardless of whether you've joined the ETS or not. [Editors note - this is a somewhat cynical view but cannot be entirely discounted. As the Carbon Monitor points out, Governments cannot bind subsequent Governments.]
2. Managing the liability, and price risk, for the carbon credits you have to account for at harvest (capped at the total number carbon credits received). If you have sold all your carbon credits, will your harvest revenue cover the cost of the carbon liability? Do you have other post-1989 forest of different age classes or the ability to plant new forest to help offset the carbon liability?
3. Risk of loss of carbon via catastrophic event and the ensuing liability.

The ability to manage carbon liabilities and minimise carbon price risk exposure at harvest will hopefully become clearer over the next 12 months, still giving you time to make an informed decision and fully register before December 2012. Please email colin.hercus@pfolsen.com if you have not already received our paper "Forestry for Timber and Carbon" for further information on these issues.

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