Farm Forestry New Zealand

NZFFA’s recent interaction with Shane Jones

Hamish Levack, New Zealand Tree Grower May 2018.

This is a report on NZFFA matters raised with Shane Jones, the Minister of Forests, by Neil Cullen, President of the NZFFA and Hamish Levack, vice President, on 28 February 2018. The Minister’s responses are included in this article.

Wood supply, afforestation and reforestation

The NZFFA affirmed its strong support of the government’s new policy to accelerate afforestation to about 50,000 hectares each year. However, we also pointed out that planning was needed to incentivise exactly where the new planting should go so as to obtain sustainable regional log supplies. Without this, new investment in domestic wood processing would not occur. The Minister agreed.

Telling potential investors that changes in global wood supply and demand, technology trends, and environmental imperatives favour investment in forestry

The NZFFA drew the Minister’s attention to the article on forestry profitability published in a recent issue of the Tree Grower. On the basis of likely future global changes in the supply and demand for wood, the trend for substitution back to wood from other construction materials, the expected longer-term effects of the Emissions Trading Scheme, and the other environmental benefits of forestry, investment in afforestation was looking to be of much more value than hill country farming in many locations.

The NZFFA pointed out that during the next decade about 14,500 small-scale, forest-owning entities are likely to be producing about a third of the national log harvest with a cash flow of up to $12.5 billion. However, in general, forestry was not really the focus or main source of income, and their blocks are scattered, of mixed quality and sometimes badly located.

For these, and other reasons, such owners have often received poor or sometimes negative returns. Some had poor advice at the time of planting, and some at the time of harvest. The result has been a decline in confidence in replanting and afforestation. Sound advice, information and support will be vital for any increase in nett stocked forest area. The Minister agreed that the government needed to spend money to improve the public’s understanding of these matters, and that the NZFFA had a role to play in assisting such forestry facilitation and extension work.

Encouraging economies of scale

To improve returns from smaller forests, growers in New Zealand will have to reduce costs because they cannot raise international prices. Costs could be reduced by aggregating forests to achieve economies of scale, providing continuity of work for contractors and a regular log supply for markets. The NZFFA pointed out that voluntary aggregation of small forests could be achieved by the use of cooperatives, companies or partnerships, and this would provide substantial benefits to existing owners as well as new investors. However, such benefits needed to be demonstrated with successful pilot examples.

The Minister agreed that MPI needed to work with the NZFFA to develop technical and feasibility studies for collaborative forestry, and perhaps even provide some start-up funding for related pilot projects.

Reducing the barriers to buying and selling forests, and the impediments to forest aggregation

The ‘cost of timber’ clause of the current Income Tax Act makes it difficult to buy or sell small forests. When standing trees are sold, the seller must immediately pay tax on the income, but the buyer cannot claim the matching expenditure until the trees are harvested or resold.

Calculations suggest that, depending on the age of the forest, the buyer’s offer might be 20 to 30 per cent lower than the seller’s expected price meaning there is little likelihood of agreement. Although immature forests do sell, the market is thin, illiquid and not necessarily rational. This discourages fresh investment and forest aggregation.

The NZFFA has been working with the Inland Revenue Department and MPI to resolve this problem. Officials now agree that the Income Tax Act could be modified to allow the aggregation of small-scale forests without penalty. The Minister was supportive of this and asked his officials to set up a meeting with Stuart Nash, the Minister of Revenue, to give priority to the necessary legislation changes.

Improving the Emissions Trading Scheme to encourage afforestation

The Minister agreed that James Shaw, the Minister of Climate Change, had said that there would not be any adjustment to the Emissions Trading Scheme for around the two years it would take to develop the necessary new legislation to ensure ‘zero carbon by 2050’.

The NZFFA pointed out that to get land owners interested in planting trees, the government would have to at least signal future high and stable New Zealand Unit prices and take steps to mitigate forest grower anxiety that carbon emission liabilities at harvest time might not be affordable. Such steps could include averaging and the recognition of embedded carbon in harvested wood products.

The Minister told the officials to organise a meeting between James Shaw and the NZFFA to sort this out.

The NZFFA’s potential role

Small-scale growers own over 30 per cent of this country’s production forests and most are unaffiliated to any forestry organisation, but the NZFFA represents them to MPI and the Forest Growers’ Levy Trust. The latter has helped fund the NZFFA’s work to develop channels of direct communication with these owners, and the NZFFA has offered these channels with our other resources and networks to help the government achieve its afforestation targets. Specifically, the NZFFA offered to assist by −

• Further developing its postal and email address lists of forest owning entities as channels to contact those already engaged in the sector
• Using its existing head office and 27 regional branches to encourage and support afforestation and provide a conduit for forestry advocacy
• Partnering with Beef & Lamb New Zealand, the Poplar and Willow Research Trust, Scion, Tane’s Tree Trust, and relevant local authorities to contact and educate rural land-owners about afforestation
• Disseminating positive messages about the potential for forest investment and informing individual potential and current forest investor.
• Sharing experience on the best establishment and management of radiata pine as well as indigenous and alternative species
• Updating best practice management guides, providing case histories and field demonstrations of successful forest investments
• Informing and reminding landowners of the co-benefts of forestry, such as erosion control and soil conservation, riparian planting, fodder, bio-energy, nectar for bees, water quality, shelter and amenity
• Running a large conference with the theme of promoting afforestation in 2019.

In return the NZFFA asked the Minister to support the NZFFA where it could. In particular, mutual benefits would result if the government helped fund the NZFFA to carry out some of the services above. Increased membership would be a bonus because it would produce wider and more consistent support for small-scale growers.

The Minister agreed with this and asked the MPI officials to interact with the NZFFA to develop these ideas. He indicated that he would need to receive a business plan before any government funding could be approved.

The need for foreigners to obtain Overseas Investment Office approval before they can purchase forestry rights

In January, Treasury floated a discussion paper about amending the Overseas Investment Act. It invited submissions on a proposal to include Forestry Rights as ‘sensitive land’. Apparently, this amendment was needed before the government could sign the trade and investment pact, know as the CPTPP, involving New Zealand and ten other Pacific region countries.

The NZFFA submitted that forests of 1,000 hectares or less should be considered ‘small forests’ because the Forest Growers’ Levy Trust differentiated small from large forests on this basis.

The NZFFA went on to say that, because getting an application through the Overseas Investment Office was cumbersome, expensive and time consuming, it reduced exit options and anything which did that would reduce value. The claim was that the inclusion of cutting rights as ‘sensitive land’ would inevitably result in a reduction in demand for forestry land, and a reduction in the price of trees in the ground, and as timber. In addition, the indirect results would be to discourage land owners from planting or replanting land in forest, which would reduce the area of land planted in forest.

In the long run, this would harm the interests of all players in the New Zealand forestry industry, including land owners, service providers and New Zealand processors. This would also have environmental and economic consequences which would be contrary to the government’s stated goals regarding forestry.

The NZFFA had copied these objections to the Minister of Forestry before the meeting. The Minister said that he supported the NZFFA position but that decisions would be up to the majority in caucus. However, he promised to present our views at caucus.

Subsequently David Parker, the Minister for Trade and Export Growth, confirmed that the Minister of Forestry’s views had indeed been taken into consideration. In March, David Parker announced that overseas investors will be able to purchase up to 1,000 hectares of forestry rights each year, and any forestry right of less than three years duration, without approval from the Overseas Investment Office In addition, processing applications by the Overseas Investment Office would be streamlined and unnecessary impediments would be removed.

Hamish Levack is a member of the NZFFA Executive.