Over the past couple of weeks I have been catching up with a number of rural bankers, they all are telling me they are keen to do business. While I assume you could “throw a blanket” over them in terms of what they offer in interest rates, I have noticed a variation in the budget stock prices they use. Some seem to be more prepared to be in line with current returns. This can make all the difference to the budget so would recommend you check out some of the other banks, if your existing bank’s budget is giving you no joy.

While on the subject of banks those with surplus funds will be finding the current investment rates a tad disappointing. Once the rebuild of Christchurch gets underway and the world recession eases we could find inflation becoming a real threat. Those that owned property or had money in the bank in the 1970’s will know what inflation can do to their investments!!

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While the weather was mixed over the festive period I trust you were able to spend some quality time with family and friends. While it is a relaxing time for most the real-estate wheels continue to turn and this year has been no exception. I spent some time showing a Singapore based Expat Brit and his wife around the Hawke’s Bay. Taking them around and hearing their positive comments on things that we take for granted just reinforces to me how fortunate we are to live here in the Bay. Thanks to Napier Mayor Barbara Arnott who gave up her time to sell the region to them at the Sunday Farmers Market. Barbara, you’re welcome to join our Rural & Lifestyle team anytime!!!

Our team has been busy and certainly are reporting higher  enquiry for all our lifestyle listings at present and as our residential team are telling us, first home buyer enquiry is improving and this is positive for all property categories as this is where it all starts.

On the rural scene grass is plentiful with the Christmas rains and although it may be fine for our dairying cousins a surplus of feed for our sheep and beef farmers at this time of year comes with its own set of problems in terms of animal health issues such as facial eczema and worm burdens if they don’t have enough stock to control it.

Have a great week

Paul Evans
Manager – Rural & Lifestyle

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The rain seems to continue to fall at the right times and some of my clients are telling me it’s one of the best springs for some time. All good, as store prices for lambs at the yards continue to exceed vendors expectations meaning our breeding and finishing farmers are in for another good year. Although a grass market might see some margins cut for both lamb and cattle trading farmers as they try to keep the phenomenal spring growth under control.

I can’t say that we are seeing this flow through to the land market yet with prices being offered still below vendor’s expectations. As stated before there is a real lack of larger scale listings on the market at present and this may have something to do with those thinking of selling wanting to enjoy the returns and growing conditions themselves for another year. I am also sensing that some buyers are not keen to borrow significant amounts to get that bit of land next door even though the Banks seem to have loosened their reins somewhat. Potential buyers seem more focused on catching up with some deferred maintenance and/or reducing their existing borrowings.

Another positive with these good returns is that those that may have been under some financial pressure to sell may now be in a position to “farm” their way out of it. The result being we won’t see a flood of properties come on the market that has often been rumoured in the past.

Paul Evans Manager – Rural and Lifestyle

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It would be hard not to firstly acknowledge the Rugby World Cup and the impact it has had so far. Full credit to Martin Snedden and his team , they are doing New Zealand proud. There have been some very close games and the so called minnows of world rugby have really stepped up to the plate.

Over the past couple of weeks I have been catching up with a number of rural bankers, they all are telling me they are keen to do business. While I assume you could “throw a blanket” over them in terms of what they offer in interest rates, I have noticed a variation in the budget stock prices they use. Some seem to be more prepared to be in line with current returns. This can make all the difference to the budget so would recommend you check out some of the other banks, if your existing bank’s budget is giving you no joy.

While on the subject of banks those with surplus funds will be finding the current investment rates a tad disappointing. Once the rebuild of Christchurch gets underway and the world recession eases we could find inflation becoming a real threat. Those that owned property or had money in the bank in the 1970’s will know what inflation can do to their investments!! With this in mind check out our Stone fruit orchard which is up for auction on the 13^th October. This property offers a good long term lease with a home that could be rented as well. Depending on what you have to pay for it, this could return you in excess of 6%. Much better than what you can get in your bank at the moment and some excellent inflation insurance as well.

Paul Evans Manager – Rural and Lifestyle

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We are now on the home straight of 2011 and what a year it has been with major earthquakes, sovereign debt crisis in Europe, oil spillages and a long overdue Rugby World Cup Victory by our All Blacks and we still have an election to go!

Apart from the uncertainty from the Greek debt crisis and what it could potentially mean for us the rain continues to fall and the all indications are that new season lambs in the yards will be making over $ 100/head. All in all the 2011/12 farming year is shaping up to be a good one. This should feed in to buyer confidence for farm land.

A recent press release from The Real Estate Institute of New Zealand supports this , key findings from them were as follows:

• 56% increase in sales for the 3^rd quarter of 2011 cf to 2010.
• Largest number of sales over the last two years.
• Listings in some areas are short.
• Good start to spring with favourable growing conditions in most areas
• Banks appear to increasing their appetite to lend on Rural Businesses

My take on the figures is that the Hawke’s Bay has seen an increase in all rural properties sold for the third quarter of 18 up from only 5 for the corresponding quarter in 2010. I am sure all local real estate companies would agree there is a noticeable shortage of larger scale properties on the market to what it is normally expected for this time a year.

Enjoy the spring!

Paul Evans Manager – Rural and Lifestyle

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Permanent Forests for Carbon, Timber and Recreation

The following is a broad outline of the Permanent Forest Sink Initiative (PFSI) and potential of the scheme to positively impact on investment on commercial forestry investment in New Zealand. The article is not intended as a substitute for expert qualified project advice on PFSI or forest investment. As in any significant commercial venture, unless the investor has substantial experience and expertise then expert independent advice by a recognised qualified forestry consultant will be an essential early step before undertaking any specific venture. In New Zealand capable, qualified and very experienced forest consultants are readily accessible. The writer is able to refer potential investors to sources of expert independent project analysis and forest project management.

The Permanent Forest Sink Initiative

For decades in New Zealand, commercial exotic forests (mostly Pinus radiata) have been established with a cycle of tree planting, tending and harvest after about 25 to 30 years, depending on growth and the current timber prices of the day. Recent initiatives by the New Zealand Government as signatory to the Kyoto Protocol include the Permanent Forest Sink Initiative, a scheme designed to encourage investors and private land owners having land suitable for establishing a forest on their property to enter into a covenant for a minimum of 50 years for the purpose of generating a long term income from joint, long term carbon credit and timber  production  or from regenerating native forest, or on land unsuited to commercial timber extraction; from carbon credits on their own. In theory, a well managed PFSI forest may provide a permanent source of income from both carbon credits (AAU’s) and timber for the forest owner and is successors or future owners of the forest.

The Kyoto Accord

The Kyoto Treaty recognises that forests act as a natural pollution sink through their natural sequestion of carbon dioxide which is understood to be a principal cause of global warming.  It offers forest owners and investors planting new forests on eligible land the ability to earn internationally recognised Kyoto Protocol compliant emission units (Assigned Amount Units or AAU’s) for carbon sequestered in permanent forests established after 1 January 1990, or alternately retain their credits as liquid assets, or if so required; use AAU’s to offset their own industrial polluting activities.

Eligibility for PFSI

PFSI is separate to the Emissions Trading Scheme (ETS) which was designed for more conventional 25 to 30 year cycle carbon/timber forests, but in its operating principal is essentially similar, the primary difference being the longevity of the forest and selective, graduated harvest principal (as opposed to clear felling at maturity) leading ultimately to creation of a mixed age forest. Existing forest owners and land owners are eligible to participate in PFSI provided their forest or land intended for a PFSI forest is Kyoto compliant. Kyoto compliant land is land that was not in forestry on 31 December 1989. In the case of an existing forest joining the scheme the tree plantings must have been established after this date.

Assigned Amount Units (AAU’s)

Carbon credits in the form AAU’s are issued to forest owners for carbon naturally sequested by their PFSI registered forests. In the scheme one AAU is the equivalent of one tonne of CO² sequested which may be sold for cash nationally or internationally or alternately held for offsetting a carbon liability. The forest owner is bound by covenant to maintain the forest for at least 50 years. If or when the covenant is terminated the forest owner is then required to account for the AAU’s issued and if necessary re-purchase these at current prices to meet his obligations under the scheme. If the forest canopy is not maintained within the guidelines of the scheme within the period of the covenant for any reason including fire damage the forest owner is liable to repay AAU’s previously issued equivalent to the loss, however this type of loss may be covered by fire insurance. 

MAF definition of forest land

The Ministry of Agriculture and Fisheries (MAF) who administer the scheme define “forest land” as:

“A minimum area of one hectare of land with tree crown cover (or equivalent stocking level) of more than 30 percent, with trees with the potential to reach a minimum height of five metres at maturity in situ. A forest may consist either of closed forest formations where trees of various stories and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of 30 percent or tree height of five metres are included under this definition. So, too, are areas normally forming part of forest that are temporarily un-stocked as a result of human interventions, such as harvesting or natural causes, but which are expected to revert to forest.”

One significant aspect of this definition is that areas of native forest that would naturally regenerate if protected from livestock grazing may comply and so together with commercial timber forests also have potential as revenue earning carbon forests.

The PFSI forest harvest cycle

In a PFSI forest an early cash flow is generated from AAU’s issued and sold by the forest owner. It has been estimated that a well established and managed forest operation should create a positive income stream following the first thinning operation in the fourth year from planting. Subsequent carbon income should pay for ongoing operations and is likely to provide an income over and beyond this, increasing substantially as the forest trees mature and grow.

Depending on log prices and demand for smaller logs production thinning may provide a timber income stream as early as 17 to 18 years from planting. After approximately 25 years a continuous cover harvesting program of individual mature trees or small groups of trees can be implemented. Under continuous cover harvest guidelines a minimum of 80% of the forest of the basal area in each hectare of the forest must be retained. The very best accessible trees or groups of trees are selected for harvest and replanted as sufficient space and light is created by successive harvest operations, in practice, probably following the second harvest cycle. Surrounding trees with smaller stems inevitably benefit by the light created by removal of larger trees, accelerate in growth and eventually in turn are selected for harvest. The major objective in a PFSI forest achieved under this harvest regime is a mixed age forest.

A continuous forest cover

To maintain a continuous forest cover PFSI regulations require that harvesting operations are undertaken to retain a minimum of 80% of the existing pre-harvest basal area on each hectare of forest for the first harvesting operation. For subsequent harvesting; retention of either a minimum of 80% of the existing pre-harvesting basal area on each hectare or 80% of the previous pre-harvesting basal area – which ever is the greatest, is required.

Forest measurement

For the purpose of measurement in a PFSI forest, “basal area” is the measurement used to determine the volume of a tree and m² per hectare. The cross sectional areas of representative trees are measured at breast height (1.4 metres above ground on the uphill side of the tree) to calculate the total m² of trees per hectare.

Strategies for pruning and thinning a PFSI forest

While not affected by PFSI regulations, pruning and thinning policies need to be carefully considered for their long term consequences if income from both timber and carbon credits is the projected outcome. Traditionally, New Zealand forests have been planted at a little over 800 trees per hectare and thinned to waste leaving approximately 400 stems per hectare at about 7 to 8 years. In a typical well managed forest basal branches are pruned in 3 successive operations starting from approximately 4 years old over the next few years (aimed at achieving 1/3 clean stem from ground level and 2/3 of top growth) with the ultimate objective attaining a saleable stem of at least 6 metres to maximise saw log value. In recent years however low price premiums achieved from high grade saw logs as well as the obvious simplicity of management inherent in a no or minimal pruning forest management strategy has discouraged many forest owners from undertaking forest thinning and pruning operations. Relatively satisfactory net returns from cheaply and (in terms of management) easily produced pulp and lower grade saw logs have been seen large areas of un-pruned radiata forest develop throughout New Zealand. A rough formula used by foresters is that a sale price premium of $50.00 per tone for pruned logs is needed to justify pruning operations.  However in a PFSI forest income generated in the form of AAU’s issued and sold will when (or if) the forest covenant is eventually terminated (i.e. at between 50 to 99 years from planting) will need to be accounted for and repaid. The need at termination of covenant to account for AAU’s issued over the life of the forest means that the end value of the forest is going to be of considerable significance to the new generation of forest owners and should encourage maximizing the value of trees and timber within the forest through best management practices.  At current log prices (2010) well pruned logs are likely achieve a premium of $25.00 to $30.00 over un-pruned, however in establishing a new forest an investor is making management decisions for a log market in 25 to 30 years hence. Given favorable long term timber price projections there seems little logic in assuming un-pruned logs will necessarily continue to have a net profit advantage.

Terrain and access for harvest

More importantly, in practical terms it is difficult to project how a PFS forest could be progressively accessed and harvested (as is required to create a mixed age forest) if full and complete thinning and pruning operations had not been completed. It is obvious that to create a practical working PFS timber – carbon forest, very easy and accessible terrain will need to be selected in the first place, i.e. terrain suitable for development of a close network of logging access tracks and access to individual trees and groups of trees within the forest made practical by suitable terrain and aided by a full pruning and thinning regime.

Many large properties suitable for acquisition for forest investment will inevitably have greater or lesser areas of terrain unsuitable in terms of harvesting access for a PFSI forest, but suitable for harvesting by clear felling (and subsequent replanting) as a conventional carbon – timber forest. A property with mixed terrain may be developed with areas of covenanted PFSI forest as well as conventional carbon – timber forest registered under the Emissions Trading Scheme.

Areas with difficult access or terrain considered uneconomic for timber extraction can be planted tree species such as Eucalyptus purely for carbon sequestion and generation of AAU’s rather than for dual production of timber and AAU’s.  Alternately, steeper areas could be planted in slow growing but valuable timber species such as Californian redwood Sequoia sempervirens, or in colder areas Douglas Fir Psudotsuga menziesii which will mature over the period of the forest covenant, following which harvest decisions can be made. Some steeper areas may have potential for naturally regenerating native forest for which AAU’s may also be claimed.

Permanent New Zealand forests as hunting preserves

In New Zealand mixed aged forests and selective harvesting is a relatively new concept, but not in USA and especially not in Western Europe where standing forests have existed and produced timber for many decades. Recreation forms part of the tradition and even income of these forests, in particular hunting. In New Zealand forests inevitably attract red deer and in some localities fallow deer populations. In the many exotic forests located near New Zealand’s large areas of mountain range and native forest there are quite substantial wild deer populations. It is logical to assume that in chosen localities long term mixed aged forests would be an ideal environment for creation of private wild game preserves and that this potential might add significantly to the attraction of this form of forest investment, both for New Zealanders and overseas investors.

The potential for viable carbon and timber forests in New Zealand

As with any primary land based agricultural or horticultural investment anywhere in New Zealand or the world, a primary requirement is land that is physically and climatically well suited to its intended purpose, in this instance commercial forestry. While New Zealand has a large exotic forest industry (relative to its size and economy) spread over the entire country, it is also very true that growth rates as well as timber quality vary significantly, largely through the influence of climate from one Region of New Zealand to another. Variations in tree growth rates directly impact on the economics of log and timber production together with generation of AAU’s. This being the selection of a favourable site for a carbon timber forest is of primary importance. The following extract from lookup tables published by Ministry of Agriculture and Fisheries (MAF) demonstrate regional variations in growth rates reflected in the calculated average accumulated carbon sequested.

Carbon stock per hectare for Pinus radiata by region expressed as tonnes CO2 per Ha

The potential for viable carbon and timber forests in Hawke’s Bay

Carbon stock figures published by MAF demonstrate the favourable relative viability of timber and carbon forests in Hawke’s Bay, particularly in relation to South Island regions. However these figures do not tell the whole story as the figures are averages over a broad region and there are wide climatic variations and consequently significant growth variations within that area. As a broad generalisation, wide areas of Hawke’s Bay south of Napier City and as far as the Wairarapa Region much further south, are affected by a “rain shadow” behind by the central North Island mountain ranges. Here is a typical Mediterranean climate typified by relatively low summer precipitation and overall low rainfall averaging perhaps 650mm to 750mm, conditions not suited to optimum carbon and timber production. Smaller localised areas closer to the mountain ranges areas having higher altitude and a few coastal areas are exceptions.

North of Napier, from the Tutira Plateau in particular and Northern Hawke’s Bay and the Wairoa District in general, enjoy a significantly higher and wider spread of rainfall. Where accessible land with suitable soils and terrain is available at a viable price the potential for commercial carbon timber forestry is excellent. The neighbouring Gisborne District immediately north of Northern Hawke’s Bay enjoys similar growing conditions and is also an important region for commercial forestry.

The figure given for carbon sequested between 14 and 15 years for Hawke’s Bay and Southern North Island forests is 35 tonnes. A recently audited 15 year old well managed forest in the Wairoa District of Northern Hawke’s Bay was calculated to achieve 53 tonnes, a 47% improvement on the average given in the table.

Acknowledgments

The following have been sourced for information on PFSI

The New Zealand Emissions Trading Scheme:  Climate Change New Zealand

Forestry in a New Zealand Emissions Trading Scheme: Ministry of Agriculture and Fisheries

Permanent Forest Sink Initiative:  Ministry of Agriculture and Fisheries     

Forestry for timber and carbon:   7 December 2009, P F Olsen.

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The New Zealand Emissions Trading Scheme

A New Concept for in New Zealand Forestry Investment

The following is a very broad outline of the Emissions Trading Scheme and the potential of the scheme to positively impact on investment in new or recently established commercial timber forests in New Zealand. The article is not intended as a substitute for qualified project advice on ETS or forest investment and the views expressed are purely those of the author. As in any significant commercial venture, unless the investor has substantial experience and expertise then expert independent advice by a recognised qualified forestry consultant will be an essential early step before undertaking any specific venture. In New Zealand capable, qualified and very experienced forest consultants are readily accessible. The writer is able to refer potential investors to sources of expert independent project analysis and forest project management.

The Emissions Trading Scheme

For decades investment in the New Zealand forest industry by comparison to almost any other land based primary industry has in practical terms equated to an investment for an uncertain reward – in a distant future (about 25 to 30 years in respect to New Zealand pine forests). From 2008 much has changed. From that time the Emission Trading Scheme (ETS) offers investors an entirely new, exiting and financially rewarding form of timber forest investment.

NZU’s for an early cash flow

Traditionally, forest investment has involved substantial capital sums for land purchase, forest establishment and ongoing forest tending (tree pruning and thinning), with a subsequent revenue stream only at the time of harvest for a net return dictated by log or pulp prices at that time. From 2008 however new forests (together with existing forests that were established after 1989) can offer their owners not only future timber production, but also from an early growth stage generate credits (NZU’s) for the carbon naturally sequested by the forest. NZU’s may be sold on national markets or converted to AAU’s (Assigned Amount Units) for sale overseas to participating Governments so  generating of an early, substantial and reliable cash flow.

ETS legislation

The ETS legislation was passed in New Zealand in 2007 and came into effect on 1 January 2008. It allows  owners of forests that were established after 1989 on un-forested land, together with subsequent new forestry investments to join the ETS scheme and claim to carbon credits (termed New Zealand Units or NZU’s) for carbon naturally sequested by their forests. In the scheme one NZU is the equivalent of one tonne of CO² sequested which may be sold for cash, or alternately held for offsetting a carbon liability.

Principals of the scheme

The operating principal of ETS is that carbon emissions which are a primary cause of global warming, are taken up or sequested by trees over their lifetime. NZU’s are issued from a pool to forest owners who have joined the scheme to benefit from their ETS certified forests (audited by a recognised forestry consultant).

NZU’s may be sold to businesses within New Zealand who may use these to offset their own polluting industries or activities or alternatively sold by conversion of NZU’s to AAU’s (Assigned Amount Units) to other Annex 1 Kyoto member countries who actively purchase AAU’s to meet their obligations under the treaty.  There is a cap on the number of NZU’s which can be converted back to AAU’s being 10% of total number of AAU’s which were assigned to New Zealand in our first allocation under the Kyoto Accord allocation.

Cash flow and viability

Of critical significance to forest investors is the fact that depending on the open market prices achieved for the sale of their NZU’s, their forest operation should create a positive income stream following the first thinning operation in the fourth year from planting. Subsequent NZU income in well managed forests planted on suitable land will pay for ongoing operations and indeed is likely to provide an income over and beyond this, increasing substantially as the forest trees mature and grow. Analysis (PF Olsen) of the financial viability of Pinus radiata forestry investment for both carbon and timber suggests that conservatively, a return under satisfactory management on suitable land should be 12% on capital before taxation. The main variable factors in determining such return are actual prices received for NZU’s over the growth cycle of the forest, the price paid for NZU’s which are required to be returned to the ETS pool and the value of the logs at harvest.

NZU’s issued – and on harvest, accounted for

An important aspect of the scheme is that on harvest or clear felling of the forest, carbon sequested is considered to have been released (in the form of logs) and a liability in the form of NZU’s which were issued is created and must be accounted for. In calculating the forest owners liability the scheme recognises that approximately 75% of the CO² sequested during the life of the forest is removed in the form of logs but that approximately 25% remains on site bound in vegetation and organic matter which slowly decays, but is replaced by the carbon sequested by a new forest if the land is replanted to trees. NZU’s equivalent to the carbon removed in the form of logs not held by the forest owner (i.e. up to 75% of the total) will need to be purchased at their current price and returned to the pool for the forest owner’s obligations under the scheme to be satisfied. Approximately 25% may be retained by the owner – but only if the forest is to be replanted. If the forest is not to be replanted then the entire number of NZU’s claimed and issued will need to be returned.

 Retention of NZU income

The forest owners ability to retain income from 25% of the NZU’s issued within the first planting and growth cycle means that providing the owner does in fact replant the forest, this first forest cycle will inevitably be more profitable than the second cycle. Over the second cycle the forest owner is able only to claim 75% of the first cycle, or in practical terms; the difference between carbon at the beginning and end of the second cycle, following which all credits or NZU’s must be returned. Never the less carbon/timber forestry in the second cycle is significantly more profitable than timber alone. The second cycle creates the opportunity to retain 25% of NZU’s issued in the first cycle and achieves much better use of the capital used for initial land purchase.

 It should be noted that while the scheme is applicable to existing forests planted after 1989, forests planted after that date but prior to 2000 are unable to retain any portion of NZU’s issued on harvest, irrespective of replanting. In this instance the value of the NZU’s issued is in the positive pre harvest cash flow and time value of the money received. 

Summary

In summary, the over riding principal of carbon forestry as it affects any new (or post 2000) forest planted for timber production is that NZU’s are issued from the ETS pool for carbon sequested by living forest trees but ultimately are reclaimed when carbon is released in the form of harvested logs. Therefore income generated can not be treated as a direct return on capital or income earned for retention at the owner’s discretion as in almost any conventional business operation, but rather a substantial positive cash flow through the growth cycle of the forest having a substantial positive impact on the overall financial viability of the investment. In a well managed forest established on suitable land, logging income at the end of the growth cycle should more than pay for  repayment of NZU’s issued and liable for repayment. Financial analysis by PF Olsen for Pinus radiata based on a an estimated price of $25 paid for NZU’s has forecast a real rate of return (IRR) at 12% before tax. The eventual net return is of course reliant on the timber (stumpage) value at harvest and the price of NZU’s both received through the life of the forest and accounted for at harvest.

Investing for the future in New Zealand forestry under ETS

In New Zealand forestry is New Zealand’s third largest industry with exports exceeding NZ 3 billion annually. New Zealand has long experience, considerable management expertise, good infrastructure, research and marketing skills supporting the forest industry; all readily available to new investors. While forest investors have found the industry to be only marginally profitable over the past 15 years, even at conservative current price projections under ETS the economics of forestry in New Zealand change significantly for the better. Add to this the fact that studies (Aspey & Reed and UN – FAO) forecast that due to world population increases coupled with the depletion of natural non-renewable world timber supplies from deforestation, an international demand to supply shortfall for timber will reach 25%, or 2 billion cubic metres by 2050. If future timber export prices follow normal patterns dictated by supply and demand it is more than reasonable to suggest that new forest investment incorporating ETS is an outstanding long term prospect for prudent investors.

The potential for viable carbon and timber forests in New Zealand

As with any primary land based agricultural or horticultural investment anywhere in New Zealand or internationally, the primary requirement is good land that is physically and climatically well suited to its intended purpose – in this instance commercial forestry. While New Zealand has a large exotic forest industry (relative to its overall size and economy) spread over both Islands, it is also very true that growth rates as well as timber quality vary considerably from one region of New Zealand to another, largely through the influence of climate. Growth rates and quality directly affect both the economics of timber production and volume of carbon sequestion for which NZU’s may be claimed and so directly affect the economic viability of commercial forestry and for this reason forest site selection is of critical importance. The following extract from lookup tables published by Ministry of Agriculture and Fisheries (MAF) demonstrate regional variations in growth rates.

Carbon stock per hectare for Pinus radiata by region expressed as tonnes CO² per Ha

The potential for viable carbon and timber forests in Hawke’s Bay

Carbon stock figures published by MAF demonstrate the favourable relative viability of timber and carbon forests in Hawke’s Bay and lower North Island (Wairarapa & Wellington), particularly in relation to South Island regions. However these figures do not tell the whole story as the figures are averages over a broad region and there are wide climatic variations and consequently considerable growth variations within that area. As a broad generalisation, wide areas of Hawke’s Bay south of Napier City as far as the Wairarapa District are affected by a “rain shadow” caused by the central North Island mountain ranges. Here is a typical Mediterranean climate typified by relatively low summer precipitation and low overall rainfall averaging perhaps 650mm to 750mm, conditions not suited to optimum carbon and timber production. Smaller localised areas in the region closer to the mountain ranges, areas having higher altitude and a few coastal areas are exceptions.

 North of Napier and from the Tutira Plateau in particular, Northern Hawke’s Bay and the Wairoa District in general enjoy a significantly higher and wider spread of rainfall. Where accessible land with suitable soils and terrain is available at a viable price the potential for commercial carbon timber forestry is excellent. The neighbouring Gisborne District immediately north of Northern Hawke’s Bay enjoys similar growing conditions and is also an important region for commercial forestry.

 The figure given for carbon sequested between 14 and 15 years for Hawke’s Bay and Southern North Island forests is 35 tonnes. A recently audited 15 year old well managed forest in the Wairoa District of Northern Hawke’s Bay was calculated to achieve 53 tonnes, a 47% improvement on the average given in the table.

Acknowledgments

The following have been sourced for information on ETS and impact of the scheme on commercial forestry.

 The New Zealand Emissions Trading Scheme:  Climate Change New Zealand

Forestry in a New Zealand Emissions Trading Scheme: Ministry of Agriculture and Fisheries

Permanent Forest Sink Initiative:  Ministry of Agriculture and Fisheries                             

Forestry for timber and carbon (Full article reproduced below): 7 December 2009  P F Olsen

PF OLSEN                                              

As at 7 December 2009

Reproduced here with kind permission of PF Olsen

Forestry for timber and carbon

 Introduction

A new form of forestry

Planting and managing forests as an investment for the production of both timber and carbon credits makes forestry more profitable under the Emission Trading Scheme (ETS). When growing forests, the main capital requirements occur during the years of establishment and tending (pruning and thinning). In traditional timber-only forestry the revenue occurs only at the time of harvest some decades after the project s establishment and tending costs are incurred. With carbon forestry, on the other hand, annual revenues can be generated. This is a much more attractive cash flow for most people.

 Analysis based on radiata pine

This technical note is based on radiata pine for a carbon forest. Whilst other species may be suitable, at this stage we consider radiata pine to offer the best prospects for following reasons:

• It is a proven timber species with wide marketability.
• It is easy to establish and has fast early growth.
• The large body of knowledge and technology about the species makes it more reliable to forecast timber and carbon volumes.

Other species enthusiasts, however, should not be deterred as adding carbon credit revenues into the project cashflow will increase overall returns and reduce the reliance on timber only.

 Significant change to investment profile

Adding carbon credits to the product mix significantly changes the investment profile of forestry giving the forest owner the potential for:

• Near-term and annual carbon credit revenue either for more planting to create a multi-age forest, or for other uses.
• Producing carbon credits for offset against other carbon emitting activities such as livestock farming.

 The Emissions Trading Scheme

In September 2007 the NZ Government announced details of an Emissions Trading Scheme (ETS) which came into operation for forestry on 1 January 2008. Owners of post-1989 forests, planted on unforested land, have the opportunity to join the ETS. When joining the ETS, these forest owners are able to claim carbon credits, termed New Zealand Units or NZUs, for the carbon sequestered on this land from 1 January 2008; one NZU for every tonne of CO2 sequestered. These NZUs can be sold for cash, or held for some other use such as offsetting a carbon liability.

The ETS relates to the New Zealand government commitments in relation to the Kyoto Protocol. These international commitments took effect on 1 January 2008. International markets for carbon credits to date have been limited to those related to projects undertaken under the Clean Development Mechanism (CDM – developing countries) or Joint Implementation (JI – developed countries). From the 1 January 2008, Assigned Amount Units (equal to a New Zealand NZU) can be traded internationally, resulting in a market with significantly increased supply and demand.

Financial evaluation of timber and carbon forestry

PF Olsen has analysed the financial viability of plantation forest grown for carbon and timber including the costs and revenues associated with joining the ETS. Using our best estimate of costs and a conservative estimate of $25 per NZU (based on the prices paid for CDM and JI credits), we forecast a real rate of return (IRR) from a carbon forest on suitable land in New Zealand at 12% before tax.

 The following table shows the sensitivity of the assessed IRR of an example investment to both log revenue and the NZU price. The IRR is shown in real terms, over and above inflation, before tax.

Managing the liability for carbon emissions at harvesting

At the time of harvest, approximately 75% of the CO2 sequestered during the life of the plantation is removed in the form of logs. The remaining 25% of the CO2 sequestered remains on site and slowly decays. When replanted, this decay is offset by CO2 that is sequestered by the growth of the new crop.

The portion of NZU carbon credits that need to be returned at the time of the harvest is a liability that can be off-set all, or in part, by harvest revenue. While the IRR of timber and carbon forestry is not sensitive to timber stumpage revenue (as shown in the Table above), the timber stumpage revenue is important for covering the carbon emission liability at harvesting.

Cash flow turns positive following thinning

Forest owners who elect to join the ETS in respect of their post-1989 forests and/or plant additional forests on post-1989 forest land, depending on the price of NZUs, are likely to find that their forest cash flow turns positive following the thinning operation. The NZU carbon credits pay for the annual costs and, based on our current estimates, there is net revenue available then to pay for an expansion of the forest area, or use for other purposes.

Cash flow for forestry project with and without carbon credit revenue ($/ha)

 Net Present Value

The graph below shows the Net Present Value (NPV) curve for both the with carbon and the without carbon credit scenarios. The key point here is that the with carbon scenario has a positive NPV from day one (because the IRR is higher than 10%). The early revenues and increasing carbon liabilities provide an offset for the revenue at harvest age.

First rotation more profitable

Forestry with carbon credits and liabilities is more profitable for the first rotation than for any subsequent rotations because approximately 25% of the CO2 sequestered during the first rotation remains on site following harvesting. The amount of CO2 sequestered in the second rotation, and the associated NZU revenue, is reduced by about 25% compared to starting from a pasture base as in the first rotation.

The second rotation, if assuming similar log and carbon credit revenues, is financially less attractive. In the first rotation all CO2 sequestered from 1 January 2008 can be claimed and about 25% of these credits do  not need to be returned as these are retained on site at harvest. For the second rotation only the difference between the CO2 at the beginning and the end of the second rotation can be claimed and assuming the same amount is retained at harvesting then all credits claimed need to be returned.

 Please note, however, that despite the second rotation being less profitable it still shows a higher IRR than for timber only. Also, and importantly, the second rotation supports the first rotation s profitability by not requiring the surrendering of all the carbon sequestered during the first rotation.

Risk in carbon price fluctuations

The potential financial returns are excellent compared to alternative investment opportunities and the fact that the investment returns become less sensitive to changes in log revenue is also very welcome. The catch is the exposure to the price of carbon. In the example investment we have assumed that the NZU price remains constant over the life of the investment, but in reality this price may go up and down.

 If the price of the NZU goes up during the project life, then the increased NZU revenue is likely to compensate for the increased emission liability at the time of the harvest, but it is possible that if this increase was to happen just before the harvest, the impact on profitability could be significant.

 If the price of the NZU was to decline during the project life, then the profitability of the project is likely to decline, but this decline would be off-set by a decline in the liability for carbon emissions at the time of harvest. The impact very much depends on the extent of the price changes and when they occur.

Mitigating risk

The key to maximising the profits from growing timber and carbon credits is getting in early and spreading the risk of fluctuating carbon credit prices. This spreading of risk can be achieved in a number of ways:

• Selecting a regime that has a long and stable maturity profile.
• This means that harvesting can occur over a very wide period of time, and perhaps, under certain conditions, not at all.
• Creating a multi-age forest. This option is discussed below.

Should I Join the ETS with my Existing Post-1989 Forest?

Should I join the ETS?

Whether to join the ETS with my existing post-1989 forests depends on a number of factors including:

(1) Size of forest

There are joining and annual administration fees which may financially preclude very small forests and conversely economies of scale for larger holdings. The Government has kept its fees low with the intention to recover the direct costs of administering the scheme.

(2) Age of forest

Post-1989 forests planted prior to about 2000 will have no CO2 net of liabilities and all the carbon credits claimed during the growth of the forest will have to be accounted for at harvest time. Therefore, the benefit of the carbon credits is only the time-value of money (like an interest free loan if the credits are cashed up). Forests planted after about 2000 will have up to 260 tonnes per hectare of CO2 net of liabilities at harvest time (the younger the forest, the greater the amount of CO2 net of liabilities). This CO2 net of liabilities does not have to be accounted for provided replanting is undertaken. Therefore, the carbon related boost to IRR for forests planted after 2000 will be greater than for those planted prior to 2000.

 (3) Attitude to risk

This relates to the risk/return trade-off. Adding carbon to your forestry project does add risk (along with increased returns). The main risk relates to the price of carbon. A high price of carbon at harvest time could mean that the cost of purchasing NZU carbon credits for the carbon loss associated with harvesting is higher than the revenues received from selling the NZU carbon credits during the crop rotation and could also be higher than the net stumpage revenue from harvesting the timber.

 (4) Age mix of forests

Creating a forest with a mix of age classes spreads the carbon price risk and allows greater flexibility. It allows you to defer harvesting when the carbon price is high and log prices are low and bring the harvest age forward when the carbon price is low and log prices are high.

 (5) New planting capability

Additional planting to create a mixed-age carbon forest gives you the potential to leverage the greatest benefit (at lowest risk) from existing forest holdings, and get a very favourable return on investment from additional planting. Also, forests that are established on the basis of producing quality timber and carbon (rather than carbon alone) are lower risk as timber revenue provides a contingency in the event that the price of carbon plummets or the ETS ceases.

The right decision depends on individual circumstances

Whether to join the ETS and undertake new plantings for both timber and carbon is a complex decision and the right decision depends very much on each individual s situation. It is recommended that forest and land owners discuss their situation with PF Olsen prior making any commitments to joining the ETS or additional planting.

 Carbon pool PF Olsen is working on forming a carbon pool or fund to provide forest owners with the upside for carbon and mitigate the downside risks. This scheme is not available at present and there is no guarantee if and when it might be available. Such a pool, or fund, may particularly suit existing post-1989 forest owners who cannot plant additional forest. For those that can plant additional forest, some of the options below may be more attractive.

Investment Strategies New Planting

High IRR

Our analysis shows that the IRR for new carbon forestry projects is in the range 8%-16% pre-tax, depending mainly on the price of NZU carbon credits. This is achieved by planting radiata pine in an unpruned regime with a single thin-to-waste treatment. The optimum rotation age appears to be about 35 years although the IRR is not very sensitive to changes from age 30 to 50. Please note that these returns are for a specifically designed carbon forest regime from establishment to maturity and do not relate to joining an existing forest into the ETS.

 Next, we are going to discuss two investment strategies:

1) Planting single-age carbon forests to maximise annual revenues.

2) Planting multi-age carbon forests to hedge the price of carbon.

Planting singleage carbon forests to maximize annual revenues

Planting a new forest on post-1989 forest land as per our example scenario is forecast to yield an IRR of 12% real before tax. In this instance the regime is an unpruned radiata pine stand with a high final crop stocking. The rotation age is modelled at 35 years but such a forest is expected to be merchantable to at least age 50 years. This long maturation profile goes a long way to reducing the risk of fluctuating carbon prices and also maximises the generation of carbon revenues that can be used for other purposes.

Planting multi-age carbon forests to hedge the price of carbon

As mentioned above, a multi-age carbon forest has the advantage of further reducing the risk of fluctuating carbon prices. A multi-age forest can be achieved by either planting to complement existing post-1989 forest, or by embarking on an entirely new planting programme over several years.

Planting and complementing existing post-1989 forests

Planting to complement existing post-1989 forests will more readily achieve a good forest age spread (at least between the existing post-1989 forest and the newly planted forest). Also, the cash from the carbon credits from the existing post-1989 forests can be used to fund the new planting programme. Risk is lowered because the newly planted forest will be generating carbon credits at the time of the carbon liability from harvesting the post-1989 forest. This last feature is particularly important as the harvesting window of the existing post-1989 forest is likely to be relatively narrow (say 5 years) especially if it is a typical pruned regime on a relatively fertile site. This relatively narrow harvest window relates to pruned butt logs getting too large for market and/or developing too high a proportion of heart wood.

 Entirely new planting programme

   A planting programme whereby areas of land were established every few years would also produce the multi-age forest with lower risk associated with fluctuating carbon price. Such a progressive programme may also better suit some people s cash availability and there is the added benefit of being able to use carbon-based revenues from prior plantings to fund subsequent planting. This approach, however, will lower overall returns as establishment of the carbon forest will be slower.

Conclusion

Forestry for both timber and carbon improves the financial viability of forestry investments on land that qualifies for entry into the ETS. This investment opportunity is particularly attractive to those forest owners who have existing post-1989 forests as the credits from the new forestry plantings can be used to off-set the liability for emissions of the older

post-1989 forests.

Planting a single-age forest on pasture land is projected to yield excellent returns and the risk of carbon price fluctuations can be mitigated by growing quality timber.

Planting a multi-age forest over a period of time will yield lower returns in the short term but has the benefit of better spreading risk and lower cash demands. Returns are still forecast to be much better than timber only and most alternative land uses.

 Next Steps

 Individual circumstances need to be evaluated

Because each situation is different, solutions need to be tailor made. PF Olsen can assist you with the important steps to evaluate a possible carbon forestry project:

• Mapping and classifying your land.
• Developing a number of possible scenarios.
• Modelling the scenarios to forecast profitability, carbon and cash flows.
• Evaluating risk/return profiles for the various scenarios.
• Guidance on deciding on the best option.
• Costing and budgeting.
• Project planning and implementation.

First mover advantages

There will be first mover advantages in carbon forestry and interest in carbon forestry is starting to build up. Our expectation is that tree stocks and planting labour will become very scarce for the next few years. This scarcity is expected to be particularly acute for several reasons:

• Very low new planting rates last year means low tree stock propagation levels.
• Few tree stocks grown on spec these days.
• Limited seed available.
• Long lead time to propagate from cuttings.
• Current low level of silviculture means access to skilled labour for planting will be limited.
• Historically low unemployment levels will limit build-up of skilled worker capacity.

How to contact PF Olsen

To find whether the exceptional opportunity of carbon forestry is right for you contact your local PF Olsen representative, or phone PF Olsen on 0508 PF OLSEN (0508 736 5736) or email us at info@pfolsen.com

Disclaimer

The information contained in this technical note is based on “A guide to Forestry in a New Zealand Emission Trading Scheme – October 2009” . The actual impact on post-1989 forest land owners may differ from that outlined in this technical note and these differences may be material. We suggest you check with your PF Olsen forestry advisor before you act on any information contained on this technical note to ensure that the advice you receive is current and specific to your particular situation.

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The New Zealand government has a regulatory regime in place to control the sale of rural land to other than New Zealand citizens or to individuals who have not been granted new Zealand residency. These regulations mostly affect land over 5 hectares in size. A primary consideration of the Overseas Investment Corporation (OIC) when considering applications by overseas persons for the purchase of land over 5 hectares in size will be the applicant’s intention and ability to take up residency in New Zealand . Other aspects considered of importance could be the intention of the new owner further develop the property and or create further direct or indirect employment opportunities.

The current regulatory regime:

Under the regulations an \overseas person” must obtain consent in order to acquire or take “control” of 25% or more of:

1. Businesses or property worth more than $50 million dollars; land over 5 hectares and/or worth more than $10 million dollars;

2. Any land on most off shore islands;

3. Certain sensitive land over 0.4 hectares (e.g. on specified islands, including or adjoining reserves, historic or heritage areas, or lakes);

4. Land over 0.2 hectares including or adjoining the foreshore.

More information on OIC may be viewed at:

http://www.oio.linz.govt.nz/publications.htm

http://www.oio.linz.govt.nz/faq.htm

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In 2004 after an extended period of low growth a substantial proportion of Hawke’s Bay rural property experienced dramatic increases in value over the following four years, generally peaking late in 2007 to early 2008. Later in 2008 prices eased significantly, a trend which continued in 2009. In 2010 prices have stabilized to some extent but at levels significantly but not alarmingly lower than their peak.  The most significant statistics concerns the frequency of sales (or time taken to sell individual rural lifestyle properties). Through the “boom” period 2004 to 2007 it was undoubtedly true that the Hawke’s Bay rural real estate market was principally driven by competition created for lifestyle property from overseas and out of town buyers. Hawke’s bay has been the preferred “lifestyle” destination, not only for overseas migrants but also significant numbers of affluent New Zealanders moving from major urban centers, all keen to enjoy the Bay’s superior Mediterranean climate, quality schools, educational opportunities, rural environment and a relaxed rural lifestyle. There is no reason to suggest that Hawke’s Bay will not continue to a destination of choice for “lifestyle” buyers however for a variety of reasons but principally the recession affecting not only New Zealand but also most of the western world, the Hawke’s Bay rural and rural lifestyle property market has become very slow indeed.

In 2010 prices for Hawke’s Bay lifestyle property have stabilized to a large degree, although this is a generalized statement and different categories of lifestyle property have been affected in different degrees.  The rural category most affected has been lifestyle building sections or property i.e. bare land property for which values have fallen quite dramatically in comparison to rural lifestyle property with homes. To some extend this situation may reflect an oversupply fuelled by numerous rural lifestyle subdivisions initiated in the “boom” years. Another undoubtedly is the cost of building rural homes together with the current cautious attitude of New Zealand bank managers compared to a few years ago.

By comparison farm prices have been relatively stable although the number of sales has been too few to assess any meaningful trends. It is interesting to compare the relatively resilient 3 year median price trend for farms to lifestyle property which are down in value by nearly 20% (source Real Estate Institute of New Zealand)..

Median Sales, Hawke’s Bay, Farms – 3 year comparison.

April 2008         $1,550,000

April 2009         $1,332,500

April 2010         $1,410,000

Median Sales, Hawke’s Bay, Lifestyle propery – 3 year comparison.

April 2008         $500,000

April 2009         $415,000

April 2010         $410,000

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Historical Background

Within the Hawke’s Bay region, orcharding, viticulture together with various other forms of cash and process food cropping have become increasingly important over the past 30 years, never the less, the pastoral industry; in particular beef and sheep farming continues to be the basis of the Hawke’s Bay rural economy, as it has done from the time of earliest permanent European settlement in the mid 19^th century. The District was amongst the very first in New Zealand to be settled and developed for pastoral farming and from the middle of the 19^th century a number of early settlers acquired or built up very large pastoral runs that at one time covered much of Hawke’s Bay. A break up of these properties into smaller units was initiated in the early 1890’s, a consequence of the Seddon Government’s 1891 Lands For Settlement Act of parliament together with heavy land taxes imposed on large pastoral runs. The act encouraged and enabled land settlement, initially by military and volunteer servicemen, many who had served in the Maori wars. Following world war one the break up of large pastoral runs was further accelerated as a result of government social and economic policy of the day and of course, in many instances, as sons of early settlers inherited and further subdivided properties amongst themselves. Large properties, especially in more favoured farming areas, were broken up to form smaller but economically viable units; commonly of between 900 to 1200 acres. This remains a common size for pastoral properties in Hawkes Bay, although steeper hill country farms having lower stock carrying capacity or potential were significantly larger, while high country properties bordering and within the central ranges were of necessity considerably larger.

The Influence of Sir John McKenzie KCMG (1838 – 1901)

One man more than any, before or since, influenced the ultimate nature of land settlement and the distribution of farming lands in New Zealand and by consequence; the nature of the rural economy and society which has developed through to our present time. John (Jock) McKenzie (1838-1901) was born in Ross-Shire Scotland, son of a tenant farmer. He witnessed first hand and was forever deeply influenced by the misery, suffering and deprivation inflicted by Scottish chieftains as they consolidated traditional lands through massed eviction of their own clansmen. In 1860, looking for a better future, McKenzie migrated to the New Zealand Scottish settlement of Otago. He became involved in politics entering parliament in 1891 where he championed critical land issues of the day. In 1891 was made minister for lands. His story and the affect of his life’s work on the New Zealand rural economy and society – an affect that remains largely unchanged in the 21st century, is quite remarkable – though largely forgotten. His simple philosophy was summed up in the closing couplets of a poem he quoted before the crucial parliarment division on the Lands for Settlement Bill 1894:

“Yet millions of hands want acres,
And millions of acres want hands.”

In The Encyclopaedia of New Zealand 1966; Bernard John Foster (Principal Research Officer, Department of Internal Affairs Wellington) concluded:  “It is to him in large measure that we owe the fact that New Zealand is not a land of great landowners and peasant tenant farmers.” This story (from which this information is summarised) is recommended reading.

 Farming Patterns – Climatic Influence

Local micro-climate, terrain and soil types are the major factors that dictate individual pastoral farming patterns that have developed within the different districts which together make up the wider Hawke’s Bay farming region. This region is a long narrow portion of the North Island’s east coast, lying between the Pacific Ocean as its eastern boundary and to the west the imposing Ruahine and Kaweka Mountain Ranges.

Within Hawkes Bay there are subtle but significant climatic variations to be experienced (depending on the time of year) between the significantly wetter, cooler mountains and immediately adjacent countryside, through to drier, warmer inland and coastal areas. With localized exceptions however, much of Hawke’s Bay experiences a relatively (to much of New Zealand) short, cool winter and hot dry summer. Rainfall varies from between 700 and 800 mm per annum, but with a reliable distribution only between autumn and early summer.

This potential for summer drought is the major factor influencing pastoral farming practices within much of  Hawke’s Bay. Normal limitations to summer pasture growth dictate that many hill country properties operate principally as “store” sheep and beef breeding units.  In effect, depending on the individual growing season, a varying proportion of lambs and young cattle are likely to be sold for finishing on more intensive farms. Other properties, perhaps with better terrain and better developed pasture, are able to finish most or all stock on the property and in good seasons, purchase further “store” trading lambs and cattle for fattening.

The normal seasonal cyclic pasture growth pattern of short winters followed by spring and early summer growth, a (normally)mild summer drought followed by a critical two month period of autumn grass growth, has proven over many decades in Hawke’s Bay to be ideal for healthy livestock breeding and rearing.  Seasonal climatic variations tend to disrupt the life cycle of common animal parasites and diseases and for this reason Hawke’s Bay compares favorably with other New Zealand pastoral regions having higher year round rainfall patterns.

From the equitable Mediterranean climate, most Hawke’s Bay farms experience strong healthy pasture growth from early spring through to early winter. Over broad areas grass growth slows but does not entirely stop, even in mid winter, giving the District a deserved reputation as New Zealand’s best winter livestock country. Autumn droughts are fortunately rare, but did occur in Hawke’s Bay in 2006, a first in the experience of many younger farmers. Autumn droughts are serious events for pastoral farmers who rely on autumn pasture growth to build up livestock condition before winter, especially in breeding stock, as well as provide sufficient pasture reserves through to spring.

The Pastoral Economy in Hawkes Bay

In the early 1980’s the New Zealand economy, including the farming industry, was substantially deregulated by the government of the day, a policy that caused considerable short term hardship to many farmers as well as other business sectors together with their workers throughout the country. In the long term however, deregulation together with removal of all subsidies, tariffs and all manner of bureaucratic business restriction was the impetus required to achieve and to sustain our current level of  prosperity as a viable trading nation; irrespective of seemingly inevitable, cyclical, price highs and lows affecting different primary commodities from time to time.

An immediate effect of deregulation was a reduction in the national sheep breeding flock by about 25%. The Labour Government deregulation included the removal of all farming subsidies and to a large extent the reduction in sheep numbers that followed demonstrates the extent to which farmers had been farming for subsidies to that time. What followed was a significant diversification into other forms of farming, cattle and bull beef farming, deer farming, forestry, horticulture, etc.  Just as significantly, from the 1980’s to the present time efficiency levels have increased, considerably so on a great many properties.
 
Through improved productivity based breeding programs together with better and more sustainable management practices, there have been significant ongoing increases in farm production and profitability within the remaining flocks and herds. As a result the fall in volume of lamb and mutton exports has been considerably less than the fall in breeding flocks. Beef exports have in fact increased substantially.

The immediate, short term problem affecting Hawke’s Bay farmers and common to all New Zealand pastoral farmers are low wool and lamb commodity prices. To a significant degree low lamb prices to the farmer are a result of the artificially high New Zealand dollar value relative to the currencies of our export markets, as well as the relatively short term price cycles dictated by international supply and demand. Low wool prices however have been a relatively long term phenomenon and arguably of even more concern. 

The effect of wool prices on the pastoral economy:

From earliest land settlement, wool has been a primary income source for New Zealand and Hawke’s Bay farmers and the long term sustained falls in wool prices are obviously of major concern. New Zealand is the largest cross bred wool trader in the world and like other North Island farming Districts, the Hawke’s Bay wool clip is almost entirely crossbred wool. Cross bred wools are used internationally for broadloom and hand knitted carpets, knitting yarns and textiles. Sadly, despite woollen carpets and garments having greater aesthetic appeal, wearing ability (in carpets) and even fire resistance, wool prices have fallen in real terms between 3 and 6 % per annum for the past 20 years, a result of effective competition from alternative synthetic fibres as well as, arguably, poor marketing and the inability of the New Zealand wool industry to manage its affairs effectively and gain any significant competitive advantage for a superior commodity. Never the less, a sustained fall in overall global wool production, together with an emerging world wide consumer preference for natural products, suggest that if the wool industry were to implement a united and effective global marketing strategy, the future for New Zealand cross bred wool would be promising in the long term. Increased export quotas, part of a very recent free trade agreement between New Zealand and China are very promising for the long term future of the sheep industry.

A survey of east coast hill country farms (Meat & Wool New Zealand – Economic Service) estimated an average gross wool income for 2007/8 of $36,100 as part of a total gross income projection of $266,000. Other major income sources estimated were sheep (excluding wool) at $127,200 and beef at $89,400. The total net farm profit (before tax) was estimated as a net loss of $1000.00, a serious drop from a $44,400 profit provisionally estimated for 2006/07, $57,486 in 2005/06 and $91,000 in 2004/05. The decline in net profitability is as much a reflection of severe drought that affected much of the East Coast in 2007.

 Farm Productivity in Hawke’s Bay

On farm productivity improvements have resulted not only from the introduction of new sheep and cattle breeds but also by the continuing improvement of existing traditional breeds, in particular, a move away from show bred stud herds and flocks into production recorded and selected breeding systems. Internal farm sub division and pasture improvement using new improved, high production and drought resistant pasture species and the appropriate use of fertilizers continues to benefit the productivity of most properties in the District.

The following livestock statistics demonstrate a substantial drop of stock in all categories, reflecting extended un-seasonal drought conditions between summer and early winter 2007 rather than any long term trend in Hawke’s Bay.

The following livestock statistics demonstrate a substantial drop of stock in all categories, reflecting extended un-seasonal drought conditions between summer and early winter 2007 rather than any long term trend in Hawke’s Bay.

Sheep Numbers

Sheep numbers in Hawke’s Bay at 30^th June, 2007 were reported (2007 Agricultural production Census) at a little over 3.6 million which is about 10% of the national flock numbered approximately 40 million. Hawke’s Bay has the second largest sheep numbers (behind the combined Manawatu – Wanganui Regions) but 5^th largest behind the South Island Regions; Canterbury, Otago and Southland.

Beef Cattle Numbers

Hawke’s Bay cattle numbers were reported as 438,000, lower than both the Waikato and combined Manawatu – Wanganui Regions. In the South Island, Canturbury had a similar total but other Regions significantly smaller numbers.

Deer Farming

Deer farming for both venison and velvet (soft, undeveloped deer antler) has been an important diversification in Hawke’s Bay where in 2007 total numbers were reported to be 88,000. Most deer farming is carried out in areas having an above average summer rainfall. About 85% of the herd is based on Red Deer breeding. The balance is largely comprised of Wapiti or Wapiti – Red Deer crosses, especially for commercial venison production. Venison farming follows a similar pattern to other forms of livestock breeding and finishing. Most properties have breeding herds but a proportion specialise in finishing weaner stags to about 18 months of age, purchased from breeding properties. 

Western Europe; principally Germany, is the principal export market, taking approximately 85% of exports. The future for deer farming looks bright with long anticipated price increases for export venison realised in 2008. Average prices in July 2008 are $7.98 per kg, compared with $4.96 the previous year and a 10 year average of $5.36 per kg. (source Deer Industry New Zealand). Over 2002/03 prices were even lower at around $2.54 kg, believed to be a flow on from the very high prices – around $10.00 per kilogram which were paid to growers in 1999. As a result our principal overseas markets sourced alternative and lower quality supply from Eastern Europe. The long-term future for venison given sensible marketing and stable price structure is likely to be significantly better.

Dairying in Hawkes Bay

Hawke’s Bay is not an important dairy farming District. Scattered areas of dairying are located in localized areas having normally reliable summer rainfall and consequently safe summer pasture growth pattern. Such areas include the Patoka District located inland west of Napier, the Tutera plateau north of Napier and western areas of southern Hawke’s Bay. There are a relatively small number of dairy farms scattered through other areas of the District which use pasture irrigation.

 Commodity Prices in Hawkes Bay

Over the 5 years up until the 2005/06 season pastoral farming in Hawke’s Bay experienced a considerable upturn in prosperity, a direct result of greatly improved commodity prices for beef, lamb and mutton from those experienced in the previous decade, although wool prices remained low. Farmer and investor confidence surged to high levels, a fact reflected in considerable increases in land prices. The combined affect of low lamb and wool prices and unseasonable drought severely has affected farm profitability from 2006/07. Net average farm profit is calculated to have dropped from $91,933 in 2004/05 to $55,542 in 2005/06, to $44,400 in 2006/07.

Future trends look considerably brighter for East Coast and Hawke’s Bay farmers. In June 2008 lamb prices are up 34% on the previous year and USA beef prices more than 20% with further increases anticipated (source Westpac Agribusiness). Westpac predict $4.39/kg average return for NZ lamb in the 2008/09 season compared with $3.83 in the current season and 20 cents kg more for beef with an average of $3.36 for the coming season.

The high value of the New Zealand dollar continues to be a significant constraint on farm profitability however recent falls in exchange rates are significant and are likely accelerate in the near future, together with internal interest rates with which they are strongly related. Most significantly Allen Bollard, Governor of the Reserve Bank of New Zealand, recently emphasised the need for interest rate cuts based on evidence of a softening New Zealand economy. Allan Bollard has considerable room to move on interest rates as The Reserve Banks bench mark interest rates have been maintained at high levels compared to our trading competitors, reflecting successive government’s obsession with maintaining a low national inflation rate. High internal interest rates have made New Zealand a natural choice for international currency investment and speculation which has been the principal driver for New Zealand’s artificially high exchange rates.

 In the long term it is anticipated that the New Zealand pastoral industry will be a major beneficiary of a reduction and hopefully even the elimination of European, Asian and North American farm subsidies.

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