Farm Forestry New Zealand

Forest for sale? Getting a fair return

Howard Moore, New Zealand Tree Grower August 2020.

 There is not a lot we can do about pandas. There is a lot we can do about selling trees. Of course, trees grow slowly and most of us do not have enough of them to schedule regular harvests, so we cannot change the frequency. However, we can address the question of trust and the likelihood of screams of joy. There are two ways.  One is information.

Knowing more

People, like pandas, have evolved an aversion to risk and while we are not always good at it − some of us still smoke, jump out of aeroplanes and attempt karaoke − in general we understand that the more we learn about a subject, the safer we are. Furthermore, we have learned to price risk and know the cost of uncertainty. People flock to McDonalds and Toyota because they want the comfort of not having doubt. We like the odd thrill, but we prefer the known.

This principle applies to trees. A buyer always has a market in mind, knows the specifications and tonnages which their customers want and knows what they are willing to pay. The buyer wants logs that meet the specification at an acceptable cost. If they think that the logs may not meet the specification, or that there may be trouble harvesting them, they will pay less. The poorer the information, the lower the price.

Having a choice

The second way of addressing trust and joy is with choice. It is somewhat ironic that while markets are fuelled by information, they also need a whiff of ignorance. The value of the goods to the seller must be less than the sale price, or else they would not sell. At the same time, the value to the buyer must be more than the sale price, or they would not buy. If there was full disclosure between them, goods would still find their way to consumers but the trades would not constitute a market as we know it because everyone would see the same opportunities and no-one would have an advantage.

In a normal market, on the other hand, the whiff of ignorance allows the seller to imagine finding a more desperate buyer, and the buyer to imagine finding a more desperate seller. Both believe a better deal might be done if only they had a greater choice of people willing to trade. We love to see competition among those on the other side of the table.

The two ways for addressing the questions of trust and joy work together. If the seller of trees provides good information, they will reduce the risk for the buyer and attract a higher price. They will also attract more buyers and increase their chances of finding one who is desperate. While good information leads to confidence, trust and higher prices, a desperate buyer can lead to screams of joy.

More value for NZFFA members

Apart from the panda analogy, all of this is generally well known and for some years, ForestX NZ Ltd has been successfully running an on-line forestry exchange designed along these lines, providing support for the sales of forests, land and standing timber. It has not had a big profile within the NZFFA, but it has had an effect on the market to the benefit of buyers and sellers, and the NZFFA supports it.

Last year we reviewed our strategic plan and agreed that we want to give more value to members and increase membership. That means we need to rely less on volunteers and more on paid staff, which means we need more money. As we do not want to charge members more or rely on the Forest Growers’ Levy Board funding, we need to earn money from doing things.  A group of volunteers was asked to look into it.

They produced a number of ideas, and after debate and risk assessment within the Executive, the first of these was implemented. Last November, the Councillors approved negotiating a referral and collaboration agreement with ForestX. In the agreement, the NZFFA will use reasonable endeavours to promote ForestX because it helps owners of small forests by creating further opportunities for buying and selling woodlots, improving transparency, liquidity and profitability. The NZFFA will include occasional articles on this service in the Tree Grower and will help promote ForestX on the website.

Partnership

In return ForestX will promote the NZFFA as a partner in its marketing. NZFFA members and any associates they introduce will get a discount on the listing fee paid by the seller on a successful transaction and we will receive part of this listing fee.

ForestX will use its website, experience and contacts to market each woodlot. In terms of my panda analogy and information, ForestX will help each seller by providing a market price assessment. This normally includes a pre-due diligence and transaction checklist, potential listing price based on a range of marketing options and a recommendation on possible local buyers.  It will help each potential buyer by providing −

• A forest description report which contains a map of the woodlot with stand information
• A map of its location with legal boundaries
• A description of local rainfall, terrain and tree growth rates
• A description of local hazards such as fire, wind and erosion
• A comment on carbon status, such as pre 1990 or post 1989 land, including any Emissions Trading Scheme documentation.

A new method

For many this is a new way of selling. At the moment most owners of small forests ask for managed sale proposals, choose one and then negotiate a harvest contract. They are paid, generally monthly, the nett revenue after the logs are sold, and they carry the log price risk.

With ForestX they can effectively sell the cutting rights for a lump sum so that the buyer takes the log price risk. The sale and purchase agreement, which is like a harvest contract, will have conditions attached to manage concerns such as the time of harvest, roading, restoration of fences and clean-up. Cutting rights sales work best when there is a high demand for logs, or the carbon price is high. Managed sales work best when the owner has harvesting experience, there are several contractors available and the log price is rising.

In terms of my analogy and choice, because it is on-line, the exchange allows each seller to reach many buyers here and overseas. ForestX also offers sellers four ways to conclude a deal − by setting a price, encouraging negotiation, using a closed tender or going to auction. A set price gives buyers a direct signal.

Anyone unsure and not wanting to give a price signal might consider a tender. Someone aware of competing buyers might use an auction to get the highest price. If there are any desperate buyers out there, this is how to find them.

Clear information

ForestX’s on-line exchange provides standard procedures for selling logs, standing trees, carbon, bare land or trees and land. It allows for a range of species and ages and is designed to give local and overseas buyers and investors clear information to make decisions and lodge bids.  However, while it offers professional reports and a wide range of buyers, ForestX is not a registered land agent.  Anyone wishing to sell land with or without trees needs to engage a suitably qualified person or ask ForestX for advice. There are land agents associated with the exchange but the seller is free to choose anyone,  understanding that their fees will be additional to the commission charged by the exchange.

A timely opportunity

ForestX has been operating since 2017 and receives about 50 listings a year. Around three-quarters of these usually involve land and trees, and often come from land agents who also advertise and market the properties.  A recent trend is for carbon forest companies to buy mature and semi-mature forests registered with the Emissions Trading Scheme for future price growth.

What we would like now is to have some NZFFA members use the exchange. The mating panda analogy is a little surreal and I would hesitate to describe any member as a cuddly bamboo freak, but the fact is that now and then we sell trees, there are questions of trust and the result may be unsatisfactory.

Screams of joy are rare. ForestX is offering us a way to improve the likely outcomes in terms of transparency, liquidity and profitability. For anyone thinking of selling, this looks like a timely opportunity do themselves some good and earn us some money. If you have not heard much about the exchange, go to ForestX.com and look at the range of forests, land and woodlots for sale. If I had a spare million or three, I would be there now.

Howard Moore is a Wellington member of the NZFFA co-opted to the Executive. Ever since he lost money on investments in movies, animal welfare, financial derivatives and musical education his wife has kept tight control of the family finances.