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.

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.

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

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

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.

Historical Background

Within the Hawkes 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 concequence; 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 Hawkes Bay to be ideal for healthy livestock breeding and rearing.  Seasonal climatic variations tend to disrupt the life cycle of common animal parisites 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 beurocratic 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 pracices, 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 Hawkes 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.

Grapes for winemaking were first planted in Hawke’s Bay by Roman Catholic missionary priests who established their first vineyard in 1851. Their presence remains today through the premium wines produced at the Green Meadows Mission Estate Winery. Another early settler to establish commercial plantings was Bernard Chambers, who established a vineyard on his Te Mata sheep station near Havelock North in 1892 (The internationally recognised Te Mata Estate was developed from this old vineyard in the 1970’s by John Buck and fellow investors. This outstanding winery continues to demonstrate the ability of this site to produce great wines). In 1895 an Italian viticulturist, Romeo Bragato, travelled through the country visiting Te Mata on the way, looking at viticulture prospects. He is recorded as stating that the District “would make wine of the finest quality”. Bragato identified the presence of Phylloxera in New Zealand. He was subsequently appointed Government Viticulturist in 1902 where he started a vine grafting program based from the Te Kauwhata Research Station using Phylloxera resistant root stocks.

By the mid 1980’s a significant wine industry had developed in Hawke’s Bay, but not in its present form. In 1986 nearly 48,000 tonnes of white variety grapes were grown, nearly all of which were sweet, bulk wine varieties, especially Muller Thurgau – 20,740 tonnes. The combined total of classic red varieties was only 5349 tonnes.  Most of this production came from vineyards on fertile silt loam soils and today many of these sites are replanted to apple or stone fruit orchards. In 2004 the transition of the Hawke’s Bay wine industry from fertile growing sites to vineyards having the free draining  soils and low natural fertility considered necessary for consistently high quality wine production, is largely, although not entirely complete. Significant plantings of what can be best described as “bulk”, medium to low quality Chardonnay and Bordeaux style wine grapes, continue  production on relatively fertile soils.  On these sites the natural effect of fertility, organic matter and just as importantly in these soils, closely related soil moisture retention, will, depending on seasonal growing conditions, result in excessive vine vigour, high fruit set and yield. Without compensating management, high crop loading together with excessive canopy growth and shading, inevitably reduces the potential of the grapes to achieve a satisfactory degree of ripeness (or sugar content measured as BRIX). With careful canopy management, controlled irrigation input and other compensating management techniques, good wine makers can and often do produce medium quality and in good vintage years – quite good and even award winning wines from these grapes. These properties have continued to produce and in many instances to expand, principally as a result of the surprising fact that in past years, wine makers have not paid growers a significant premium for very high quality grapes from low yielding sites, or grapes manually thinned in the vineyard and otherwise restricted in yield to achieve the same effect. The most profitable vineyards have in fact usually been those producing the highest yields rather than the highest quality grapes. This situation is changing and there is now concern for the future of medium or average quality wine in an increasingly over supplied domestic market and a highly competitive export market. This fact was very much evident in the bumper 2004 vintage which for the first time tested the vat storage capacity of the Hawkes Bay wine Industry. Not all Hawkes Bay grape growers found buyers of their crop in 2004 and this has been a much awaited wake up call for some sections of the Industry.

By the 1980’s a few pioneers of the present day wine industry had recognised that the future lay in the production of classic – mainly Bordeaux grape varieties, grown on low vigour soils previously considered shallow, drought prone and of little value for any purpose other than sheep and cattle. The earliest recognition for outstanding Bordeaux style wines grown in this type of environment was probably for the first Coleraine and Awatea wines produced in the early 1980’s at Te Mata Estate on the outskirts of Havelock North. Other growers and wine makers such as Chris Pask at Pask Estate, Alwyn Corban at Ngatarawa Wines and Dr Allan Limmer of Stonecroft were not far behind in gaining success and recognition. From these new beginnings developed what was in effect an entirely new phase in the Hawke’s Bay wine industry. Many outstanding vineyards and wineries have been established gaining national and international reputations. By 2003 approximately 3700 hectares of vineyard plantings were established within Hawke’s Bay, up from 1600 hectares in 1995.  By 2006 it is anticipated that these plantings will rise to approximately 4600 hectares.

Over the recent 2004 vintage Hawke’s Bay growers produced a record 30,429 tonnes, 19,597 tonnes more than in 2003 which was critically affected by severe un seasonal early spring frosts. Nationwide the harvest was estimated at 166,000 tonnes. Hawke’s Bay was New Zealand’s second largest producer behind Marlborough which produced 92,581 tonnes.

While vineyards are scattered over a broad area of Hawke’s Bay, a number of distinct growing areas or appellations may be distinguished. The substantial new vineyard plantings over the past eight years are generally concentrated in these areas. Other growing areas with differing soils and microclimates may well develop in the future as small-scale plantings are established, evaluated and in turn have their successes recognised.

The Gimblett Gravel’s – Located immediately west of the city of Hastings. This area is an old riverbed of the nearby Ngaruroro River. Growing vines in the various grades of stone, gravel, silt and sand, is in some respects similar to hydroponic plant production, where irrigation is the vine’s life support and medium for plant food or macro element and microelement transfer. The river stone and gravel absorbs and retains the suns heat. As a result this is a warm growing environment, proven for its ability to ripen and develop full bodied Bordeaux red varieties – Merlot, Cabernet Sauvignon, Malbec and Cabernet Franc. It is capable of producing a fully ripened, intense style of Chardonnay.  More recently this area has dominated New Zealand’s awards for Syrah, pioneered in Hawkes Bay by Dr Allan Limmer at Stonecroft. Syrah is being planted in increased quantity in Hawkes Bay, especially on stony and red metal soil types having early ripening characteristics.  Syrah is a little different in character from the highly intense, powerful, spicy and fruit dominated Australian Syrah (or Shiraz) with which many New Zealand wine drinkers have become familiar. At its best, Hawkes Bay Syrah has been described as similar in character to the French Rhone Valley wine, combining body with a degree of elegance and an attractive balance of tannins and fruit.

The Ngatarawa Triangle – Located south west of Hastings and immediately south of the Gimblett Gravels, this area, sometimes referred to as the “Bridge Pa Triangle”, lies in a triangle formed by Ngatarawa and Maraekakaho Roads and by State Highway 50.  Most vineyards of the vineyards in this area contain one or more of the three basic soil types; Ngatarawa Gravel’s, Takapau silt Loam – a free draining “red metal” type soil of mixed alluvial and volcanic origin, and shallow clay loam soils with underlying deep free draining volcanic ash. The main varieties grown are Merlot, Chardonnay and Sauvignon Blanc. Alwyn Corban and his partners who established Ngatarawa winery were the first to achieve outstanding success in this area.

Highway 50 – An extensive area of “red metal” Takapau silt and sandy loam soils lying South of The Bridge pa Triangle on State Highway 50, but also extending west from the small settlement of Maraekakaho through the adjoining Kereru Road. In recent years substantial plantings have been developed over this area by corporate wine investors and other boutique wineries. In Hawke’s Bay the Takapau soil series have made a unique and outstanding contribution to the Hawke’s Bay wine Industry over the past decade and as a result have become highly sought after as a preferred medium for premium wine grape production. As with the Gimblett gravel soils, the free draining “red metal’ (volcanic scoria) content of these soils results in a warm, early ripening environment and in the Highway 50 area are considered to be highly suitable for a similar range of grape varieties.

Havelock North. – This area was probably the first in Hawke’s Bay to achieve international recognition through Te Mata Estate’s Coleraine, their premium blend of Cabernet Sauvignon, Merlot and Cabernet Franc. Havelock North produces a range of mainly Bordeaux style red wines, Chardonnay and Sauvignon Blanc. The Havelock North vineyards have a warm sheltered growing environment on the eastern outskirts of Havelock North village, on the lowest north facing slopes immediately below the Te Mata Range and Te Mata Peak. These are clay soils and as such a little unique as a proven site for the outstanding Bordeaux style wines they consistently produce. The necessary “low vigour” effect on the vineyards is amply provided by an impervious mineral hard pan (the famous “Havelock Hardpan”) that in its natural state restricts vine root development and moisture uptake through the course of the ripening season.

Te Awanga – Haumoana – A coastal area between the lower reaches of the Tuki Tuki River and the coastal village of Te Awanga. This area has its own distinctively cool microclimate, being strongly influenced by the cooling effect of daily sea breezes.  Within Hawke’s Bay this is a relatively late ripening site, however the constant and reliable sea breeze and air movement through the vineyards tend to minimise the development of vineyard fungal diseases, etc, and results in a healthy grape growing environment. The area is well known for the constantly outstanding wines produced by Tim Turvey’s small boutique winery “Clearview”. More recently Te Awanga Vineyards have achieved considerable recognition producing under the Kim Crawford label. The cool microclimate is particularly suited for classic white varieties. Warm days, cool nights and reliable air movement through the vineyards encourages the growth of relatively small grapes with thick skins, which, in the hands of a capable wine maker produce both white and red wines of considerable flavour, body and intensity of flavour. Because of the coastal climatic influence, this area is considered to have a relatively low early spring frost risk.

Inland Ngaruroro River – Another growing area with a distinctly cooler microclimate can be found 30 km (as the crow flies) west of Hastings, on the high terraces either side of the Ngaruroro River. The climate here is influenced by the proximity of the nearby Kaweka Mountain Range. Substantial plantings were first initiated by Morton Estate Winery (now New Zealand’s largest independent wine producer), in what is now their flagship winery, Riverview. Other major plantings have been made on the north bank of the river by Morton Estate and by Delegates Wines. In 2003 New Zealand’s largest corporate producer Montana Wines acquired 200 hectares on which substantial plantings have now been initiated. Plantings through this area are almost entirely on Takapau silt and sandy loam “red metal” soils. While a variety of grape varieties have been established the area is undoubtedly best suited to cool climate whites – Chardonnay and Sauvignon Blanc and for Pinot Noir, – mainly for Champagne type wines.  It remains to be proven whether or not, with time and as the vines mature, Hawkes Bay’s cooler climate plantings of Pinot Noir can produce premium quality still wines. Well proven however is the totally outstanding Chardonnay consistently produced by Morton Estate. This is evidenced by their trophy awarded for best Chardonnay in the World in 1997 at the London International Wine and Spirits Competition, as well as numerous other international and national gold medals and Industry accolades through to the present time.

Esk Valley – Visitors leaving Taupo and entering Hawkes Bay via Highway 5 will travel through the picturesque Esk Valley which is located about 12 kilometres north from the city of Napier. This is a long established Hawkes Bay grape growing area, perhaps best known for the consistently excellent wines produced by Esk Valley Winery (Villa Maria, Hawkes Bay Vineyards). Most of the Esk Valley grape plantings are established on very free draining sandy and sandy loam soils. This is a warm, sheltered environment and the valley has an early ripening micro climate, well suited to Bordeaux style red wines and for fully ripened Chardonnay.

Purchasing vineyards and viticulture land in Hawke’s Bay.

The Hawke’s Bay District differs from other broad growing areas within New Zealand through the variation in micro climates and soil types within which wine grapes are grown and arguably, the wider range of premium quality wines that might be produced. Given this relatively wide choice careful site appraisal is essential. If the investor has an ambition to make wine of a particular variety and style then special consideration needs to be given to the requirements of that particular grape variety. However a common pre requisite for premium wine grape production is a low vigour site with free draining soils. In addition irrigation for both vine establishment and subsequently for grape production will be an important consideration. In many French vineyards famous for their fine wines, irrigation is not practiced or even permitted. In Hawkes Bay on shingle, red metal and other very free draining soil types, natural soil water retention can be very low.  Without controlled irrigation water, vines will become stressed when ripening fruit over extended dry periods. Contrary to some opinion, fruit from drought stressed vines is unlikely to make good wine and drought stress can in fact result in off flavour characteristics. This being the case, an otherwise ideal vineyard site is of little value without access to adequate irrigation water (and if necessary frost control water). In addition a legal consent will be required to use that water. Within Hawke’s Bay water consents are issued by the Hawkes Bay Regional Council and are very carefully controlled. In some areas, especially where water is drawn from a stream, river, riverbed or a commonly used aquifer, water rights are already fully allocated. Further water rights are not available and new vineyard or horticultural development simply not possible.

An important factor in selecting a vineyard location is the potential of that site for late spring frost. In 2000 and 2003, Hawkes Bay vineyards – even in coastal areas previously thought immune to frost damage, were severely damaged by late spring air frosts. Some of the very best growing areas in Hawke’s Bay are particularly frost prone. Measures to combat frost include spraying water, frost pots, windmills and hiring helicopters (the latter two are used to move layers of higher air which have not reached freezing level down to the vineyard level). A recent innovation has been the use of tractor drawn mobile LPG heaters.

Within recognised growing areas premium vineyard land has commonly sold at prices between $45,000 and $55,000 per hectare. Land prices within the Gimblett Gravel are usually considerably higher, driven largely by the fact that this land area is limited in size, demand and the fact that blocks are not often made available. Other outer-lying areas very suitable for vineyard development but still predominantly in livestock production are often available for sale priced in the region of $20,000 per hectare providing always that adequate irrigation water is available.

Prices paid for producing vineyards are can be quite variable. There are few if any of the early bulk Muller Thurgau (or similar) vineyards remaining within Hawke’s Bay. In reality very old vineyards have only bare land value, minus perhaps the cost of removing their posts and vines.

There remain however substantial plantings on relatively fertile silt loam soils, what can best be described as medium or bulk quality Chardonnay, Merlot, Sauvignon Blanc and a few other varieties dating from the 1980’s. Many of the established vineyards offered for sale in Hawke’s Bay come into this category. Up until the 2004 vintage there has been an under supply of classic grape varieties within Hawkes Bay and   premium high quality well ripened grapes from low yielding vineyards have not received a substantial price premium over average quality grapes. High yielding vineyards have been the most profitable for growers not involved in wine making and sale prices for this type of vineyard have commonly been between $50,000 and $70,000 per hectare. This situation will not continue given the extensive plantings of high quality vineyards currently coming into maturity and production. Never the less any vineyard or orchard located on a heavier and concequently more fertile soil catagory, particually if adequate irrigation water is available,  is likely to maintain a reasonably high land value because of buyer competition from orchardists and cash crop farmers.

 A largest land rural land areas in Hawke’s Bay are utilised as hill country pastoral farms, a substantial proportion of which have substantial areas of limestone derived soils. There is a growing appreciation that where adequate water is available (commonly so in limestone country) warm, sheltered, north facing slopes can be an ideal medium for a number of grape varieties. Vineyards in the Rhone valley of France (home of Syrah) are commonly based on limestone soils. There are of course other important aspects of vineyard site selection to be considered, however prices for this class of land can be very reasonable. An example of the quality of wine made from grapes grown from this class of hillside site can be seen in the Hawkes Bay winery Brookfield’s 2002 Hillside Syrah, which sent shock waves through the Australian wine Industry by winning in the Sydney International Wine Competition both the top award for best red table wine and for the best fuller bodied red table wine. Another recent Hawke’s Bay wine “Bilancia” from a hillside vineyard won the Syrah trophy in the New Zealand Wine Society Royal Easter Show.

Bounded by the mountain ranges to the west that divide New Zealand’s North Island, and to the east by the Pacific Ocean, nature has provided Hawke’s Bay with its own distinctive and superior climate and geography. Early European settlers in the mid 19^th Century recognised that, and established a strong rural based economy and population pattern, which with subsequent agricultural and horticultural development, continues to underpin the economy of the region today.

Climate and Geography

 The North Island’s central mountain ranges impact significantly on New Zealand’s predominantly westerly weather pattern. On the eastern side of the mountain divide Hawke’s Bay experiences a relatively sheltered climate and a comparatively warm and pleasant Mediterranean climate is the result. Most of the Hawke’s Bay region experiences only moderately cold winters, followed by pleasantly warm to moderately hot summers. While the foothills close to the western mountain ranges together with much of Northern and Southern Hawke’s Bay usually experience above average, higher rainfall, most of Hawke’s Bay enjoys an annual average of about 800 mm. This is usually distributed between April (or mid to late autumn), though to the beginning of January (or early summer). Mild, but in exceptional years, more accute drought conditions are often experienced between mid summer through to mid or late autumn.

From Southern through to Northern Hawke’s Bay, the closely linked Ruahine and Kaweka ranges fall away to the rolling hill country and  fertile plains that combine to form most of Hawkes Bay. The mountains and hills are drained by a myriad of streams and rivers that merge to form the Mohaka, the Tutaekuri, the Ngaruroro and the Tuki Tuki Rivers, providing water to the region’s industry and population as well as some of New Zealand’s very best trout fishing. These rivers contribute to an underground acquafer carrying large volumes of pristine filtered water only metres below some of the best horticultural land on the plains of Hawke’s Bay.

Hawke’s Bay can therefore claim an ideal combination of strong soils for pastoral farming, fertile plains laid down by the network of rivers for horticultural crops, and light free draining soils for the grape growing industry. Add rainfall when required, rivers for irrigation and stockwater, and warmth and sunlight hours when needed, the result is an environment supporting a great lifestyle, and highly productive and efficient land based industries.

Economic Development

From the first wave of 19^th century European settlement and up until relatively recent years, pastoral farming dominated the economic, social and political direction of Hawke’s Bay. Serviced early on by Meat Processors exporting frozen lamb through the Port of Napier to the growing United Kingdom Market, and Wool and Hide Processors, the pastoral sector continued to flourish. Following World War II the extensive and fertile Heretaunga plains surrounding the cities of Hastings and Napier became equally well known for it’s rapidly developing orcharding industry. The establishment of J Wattie Canneries (Now Heinz-Wattie) supported and accelerated this development, and now the growing, freezing, canning, dehydrating and export of a vast range of food crops and added value food products has developed and combined to form one of Hawke’s Bay’s most important industries and employers.

More recently Hawke’s Bay became recognised as containing soil types, and over substantial areas an environment considered ideal for the cultivation of cool climate Bordeaux style wine grapes. While wine grapes have been established in the Bay since the 19^th century, it was not until the late 1970’s and 1980’s that the major wine industry in its present form was established. Today Hawke’s Bay is one of New Zealand’s largest grape growing and wine making regions and has achieved considerable international recognition for many of its wine styles and wineries.

Four Districts and Two Cities

Hawke’s Bay is administered by four District Councils, which with the City of Napier and the Hawke’s Bay Regional Council are responsible for providing the services required by urban, rural, and commercial land owners and the general population. Although providing their ratepayers with the localised services required in their districts, they combine their Economic Development and Tourism activities, forming Hawke’s Bay Incorporated to promote the development of the region as a whole.

 Northern Hawke’s Bay – the Wairoa District

Substantially separated from mainstream Hawke’s Bay by the rugged Mangaharuru Ranges and steep coastal foothills, Northern Hawke,s Bay is based around the small coastal rural township of Wairoa. Established originally to service the agricultural industry, Wairoa is approximately one hour and fifty minutes driving distance north from the city of Napier on a sometimes steep and winding, but otherwise high quality State Highway 2.

 The economy of Northern Hawke’s Bay is centred on hill country pastoral farming, and lacking the population, access to the international Port of Napier, and breadth of available soil types, does not enjoy the industrial or economic diversity of other Districts within Hawke’s Bay. The Wairoa District is however justifiably well known for its beautiful unspoilt coastline, beaches, fishing and diving. The most popular beaches are found at Mahia Peninsular and offer some of the best known and most spectacular surfing in New Zealand. Inland from Wairoa, the beautiful Lake Waikaremoana situated in the unspoiled wilderness of the rugged Te Urewera National Park offers spectacular scenery, hunting and fishing. The Wairoa District can also claim some of New Zealand’s most scenic and productive wild trout fishing rivers, many of which are readily accessible to the public.

 Napier and the Hastings District

Although only 18kms apart, the twin cities of Napier and Hastings have developed their own distinctive characters and economic strengths.

The City of Napier, with a population of 53,500 is administered by the Napier City Council, and provides the region’s transport connection to the rest of the country and to the world. Napier Airport has regular flights or connections to and from all key domestic centres, and has been upgraded to manage the increasing traffic and larger aeroplanes accessing the region. Similarly, the Port of Napier continues to grow and develop to accommodate increased export volumes of agricultural, horticultural, forestry based products, and manufactured products directed through the Port from Hawke’s Bay and the surrounding region’s.

 As a result of the rebuilding programme following the devastating 1931 Napier Earthquake the City of Napier has a large number of fine examples of Art Deco Architecture. Now known internationally as the “Art Deco City,” Napier has a full programme of Art Deco events attracting growing numbers of visitors to Hawke’s Bay.

 Hastings City, well known for its outstanding examples of Spanish Mission Architecture, and with a population of 67,000 is the centre of the Hastings District. Although like Napier it has developed a manufacturing base to service it’s land based industries, agriculture and horticulture have traditionally been the mainstay of the economy and are still of major importance. Consequently the centre of the regions livestock industry is Stortford Lodge on the outskirts of Hastings, where the major stock firms or agents and the district’s stock sale yards are located. Similarly, fruit and vegetable export packhouses and coolstores, and food processing companies are established in and around Hastings to service the orchards and vegetable growers located on the surrounding Heretaunga Plains.

 The region’s large number of outstanding wineries, winery restaurants and specialist food producers has encouraged the development of the “Wine Country Food Trail”, with many wineries and winery restaurants open to the public, and proving to be a major attraction and experience in their own right. The District also has a wide range of sporting, recreational and cultural activities available to visitors and residents. These include the Hawke’s Bay Art Trail, some of New Zealand’s better beaches, golf courses, uncrowded trout fishing rivers, as well as access to hunting and tramping through the Ruahine, Kaweka and Kaimanawa mountain ranges.

Central Hawke’s Bay

The Central Hawkes Bay District is based around the thriving rural townships of Waipukurau and Waipawa, which lie about thirty-five kilometres south of the City of Hastings on State Highway 2. With a population of almost 13,000, the district is administered by the Central Hawkes Bay District Council, and as it contains much of Hawke’s Bay’s most productive farmland,  has a largely pastoral, horticultural, and cropping based economy. The Ruahine mountain ranges are a dominating feature on the long western boundary of the District, and the eastern boundary is the largely unspoiled Pacific coastline. There are a number of well known and accessible beaches offering swimming, surfing, boating and fishing, with many kilometres of wide, golden, unspoiled beaches to explore. Inland the Tuki Tuki, Waipawa and a number of smaller streams offer excellent, uncrowded and accessible trout fishing.

Taxation in New Zealand is managed and collected at a national level by the Inland Revenue Department (IRD). Taxes are levied both on company and on individual income. In addition there is a flat 12.5% tax (to be increased October, 2010 to 15%) on the supply of most goods and services (GST, similar to VAT in Great Britain). In New Zealand GST is generally considered to be a fair an equitable tax system that more evenly spreads the tax burden through society than a purely income earning tax system.

Individuals, farmers, companies and businesses who supply taxable goods and services are registered with the Inland Revenue Department and in practical effect collect GST tax on the goods and services they supply on behalf of IRD. GST is claimed back from IRD on legitimate business purchases and expenses and the net difference is paid to – or claimed from IRD through a regular reconciliation (one monthly, two monthly or six monthly).

Privately owned homes (or house rentals) do not attract GST; however land and buildings used for business and income earning purposes are normally registered for GST with Inland Revenue Department and when offered for sale are sold on a plus GST basis. If the purchaser is registered for GST purposes with IRD then the GST is normally refunded by IRD.

There are no capital gains taxes, land taxes (as for example in USA) or death duties in New Zealand. Local District and Regional Councils levy annual rates (as opposed to taxes) on rural and urban land, however these are relatively modest (compared to USA land taxes) and relate to services actually provided.

In the 2010 New Zealand budget it was announced that in October, 2010 the GST tax would be increased to 15% from 12.5% and that personal taxation would be reduced at all levels The new lower tax rates aim to stimulate productivity in the economy and mean that people earning the average wage in New Zealand will soon pay lower effective tax rates than people in Australia and the United Kingdom, easing concerns about economic emigration. ^[8]

In addition it was announced that from the 2011/12 income year, the New Zealand company tax rate will fall to 28%  - encouraging productive investment and lifting competitiveness.

Employees deduct relevant amounts of income tax from salary and wages in a system known as Pay-as –you-earn (PAYE). Banks and other financial institutions deduct a relevant amount of income tax on interest and dividends as these are earned; known as Residents Withholding Tax.

At the end of each tax year individual tax payers who have not paid the correct tax (too much or too little) submit a personal tax summary from which over or under payments are reconciled.

One of the first subjects your advisor will wish to discuss is the entity you will use to purchase and operate a New Zealand property. Income earning properties are commonly operated by individuals, partnerships or through a limited liability company structure. However, if considered appropriate for your personal circumstances, your accountant or lawyer may well suggest that you consider the many very real advantages (tax and otherwise) of a family trust structure to take ownership of your new property or company, whether the property is income earning, or simply a lifestyle or residential.

New Zealand companies currently pay tax at 30% (to be reduced in 2011/2012) in the dollar earned, which is distributed to shareholders as dividends. Individual NZ shareholders receive a credit in their tax returns for the tax the company has already paid which is termed Dividend Imputation and avoids double taxation. Moreover it is possible to register the company with IRD with “Loss Attributing Qualifying Company (L.A.Q.C.) status. If the company experiences tax losses such losses may be distributed to the NZ shareholders to reduce their personal tax liabilities.

New Zealand residents are liable to pay taxation on all income regardless of the country in which such income is generated. However New Zealand does have double taxation agreements with a wide range of countries which set out which country alone will tax specific types of income.

Some agreements protect pension payments as well. The agreement with the United States, for example, prohibits New Zealand from taxing American social security or government pension payments, and the reverse is also true.^[12]

In the year 1840 at Waitangi in the Bay of Islands, a treaty was signed between Maori chiefs and representatives of the British Government. While important aspects and interpretations of the Treaty, as well as subsequent adherence to its principals by colonial officials of the day and successive New Zealand governments is subject to debate and controversy to the present day, the treaty was a hugely significant landmark event in New Zealand history, marking the real beginning of British colonial settlement and development. Whatever the Maori signatories to the document may have believed, from the European perspective the treaty of Waitangi was widely accepted as establishing British authority in New Zealand together with legal rights for British settlers and from that time New Zealand became a destination for migrating British farmers and settlers. Although over the years other minor European ethnic groups also migrated to New Zealand, it was the descendents of British settlers who went on to form the main population basis of the New Zealand farming industry.

Early New Zealand farm settlement schemes, promises and disappointments

For many settlers, migration from Victorian Britain to New Zealand was a consequence of the acute urban overcrowding and deteriorating social and living conditions which followed the agricultural and industrial revolutions within Great Britain. Within Britain notable politicians, radical activists, writers and commentators of the day advocated their own contrasting solutions and reforms to the social and industrial problems of the era, ranging from legislation to create improved social and working conditions, through to violent class revolution. Edward Gibbon Wakefield (1797 – 1862), promoted colonial migration as the answer. Wakefield’s colonial model advocated the creation of colonial settlements which were to be based on transplanting cross section of existing British working, trades and land owning classes from overcrowded England to a new, utopian life in New Zealand. Here, in settlements organised by the New Zealand Company, settlers were to enjoy a greatly improved life amidst an abundance of fertile soils for cultivation in a pleasant and favourable climate. Cheap land on the other hand was not part of the plan. On the contrary, Wakefield advocated that settlers pay high land prices in the new colony, in part to fund ongoing colonial development, but also to discourage emigrant labourers, tradesmen and artisans elevating themselves from their allotted station in the colony. In a publication promoting settlement in New Zealand the Secretary to the New Zealand Company described the colony as “two – thirds cultivatable, blessed with particularly rich forest soils, having few earthquakes, and enjoying one of the most equitable climates on earth” (Ward 1840). The reality was somewhat different. On arriving in New Zealand early British settlers faced survival in a physically challenging environment with mountainous, rugged, densely forest clad hills and coastal plains often dissected by large, braided, flood prone rivers. The development and evolution of rural New Zealand to the countryside we now recognise involved generations of struggle, hardship, perseverance and dedicated physical work. For a variety of reasons the New Zealand Company achieved only limited successes, but their story is taught to every New Zealand school child as the starting point of organised European settlement in New Zealand.

Other prominent early colonialists, notably Sir George Edward Grey (twice British Governor of New Zealand and following his entry into local politics in 1877; New Zealand Premier), advocated the sale of cheap land obtained from Maori land purchases (and in some cases Maori land confiscations) to encourage expanded immigration and farm settlement. Inevitably perhaps given their contrasting views, Wakefield and Grey were to become intractable political enemies.

Not surprisingly the colonial settlement model advocated by Wakefield and the New Zealand Company did not survive their early settlements. Rather, the modern New Zealand rural economy that evolved has its foundation in the policies and reforms affecting farmland ownership and distribution legislated in the late 19th to early 20th century. Early land settlement schemes for migrating British settlers to New Zealand were idealistic in intention, but very limited in scope. They were commonly abused through absentee and “dummy” ownership and created few realistic opportunities for farm settlement relative to increasing numbers of newly arriving migrants. Once in New Zealand the availability and the cost of land and land development made farm ownership unattainable to the majority of early migrants. On the other hand, by mid to late 19th century, substantial tracts of New Zealand pastoral farmland were tied up by a relatively few wealthy land owners in the form of very large sheep stations, in real effect replicating the traditional farm land owning class of the “home country”. It has been estimated that by 1890 through lack of opportunity, British and other new settlers were leaving New Zealand at the rate of 1000 each month for a better future elsewhere.

Progression in New Zealand to an agricultural export economy.

Following early gold rushes New Zealand had little obvious recourse to exploit other than the land and forests and so inevitably, farming and timber became the first significant New Zealand industries. The immense stands of native timber, in retrospect squandered as much as exploited, were New Zealand’s largest industry for much of the second half of the 19th century. Virgin forests were exploited both for export as well as to supply an inevitable building boom within the rapidly expanding colony. At the same time, while early English and Scottish settlers found New Zealand countryside a challenging environment, once broken in the land and temperate climate proved an ideal environment for the traditional British sheep and cattle breeds and farming practices with which they were familiar. From livestock imports and their natural increase stock numbers inevitably increased to the stage where limited local markets for fresh sheep meat and beef became a very real restriction on the New Zealand farming industry.

This situation changed forever in 1882. History was created both for the farming industry and New Zealand economy when the sailing ship Dunedin departed New Zealand’s South Island port of Oamaru for Great Britain, carrying what transpired to be the first successful export of frozen sheep meat and butter. New Zealand mutton and lamb was very well received on the Smithfield market, substantial profits were made by all involved and the direction of New Zealand as an export oriented farming nation firmly cemented. To this day New Zealand farmers continue to export and compete on British and European markets with agricultural commodities broadly similar to those produced by their British farmer counterparts. Over succeeding generations however, significant differences between the British and New Zealand farming industries and their respective economic environments have evolved.

Early Foundations in New Zealand for a modern, agriculture based economy

The legacy of Sir John (Jock) McKenzie

In Scotland an early migration catalyst was the massed clearances and evictions of tenant farmers from the Scottish Highlands by lairds and chieftains who preferred the economic benefits of sheep on their land to the traditional highland occupants; their own kinsfolk. A Scottish migrant to New Zealand; Jock McKenzie (Sir John McKenzie KCMG 1838 – 1901) the son of a poor Ross-Shire tenant farmer, witnessed first hand the Ross-Shire highland clearances and was forever deeply influenced by the experience. In future years this was to have significant consequences for New Zealand. Like many others he migrated to New Zealand searching for a better future however once in New Zealand, motivated by obvious anomalies and abuses of land distribution and tenure, he entered local and ultimately national politics to champion these issues. By the late 19th century McKenzie had progressed to become New Zealand Minister for Lands in which position he continued through successive governments. Jock McKenzie was responsible more than any other of his time, or time since, for determining the ultimate settlement pattern of New Zealand farm lands and as a direct result, the present day social and economic basis of rural New Zealand. His life work which was devoted to his principal “lands for the people” is perhaps best summed up in the closing couplets of a poem he quoted before the crucial division on the Lands for Settlement Bill 1894:

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

His legacy went far beyond equitable farmland distribution and includes creation of the Agriculture Ministry (as it is now known) to encourage scientific agricultural methods, agricultural education and of particular importance at the time, creation of schemes which made loan finance a realistic and affordable option, enabling farmers and settlers purchase and development of agricultural land in New Zealand. It is to him, more than any other individual that in 21st century New Zealand British migrants continue to find a wide range of farming opportunities in a diverse and thriving rural economy. More particularly, an economy based on the enterprise of individual farmers and economically viable and sustainable farming units, rather than a countryside of great land owners and small holder farmers. (Source: Bernard John Foster, M.A., Research Officer, Department of Internal Affairs, Wellington.)

The New Zealand formula: climate, geography, and economic environment

In the 20th century British and New Zealand farmers compete by selling similar agricultural primary products within the European market place. British farmers dependant on financial subsidies often have difficulty understanding why their New Zealand counterparts are able to transport their lamb, beef and dairy products more than 19,000 kilometres, but sell at competitive prices, successfully competing with British farm produce. Answers can be found in a number of fundamental differences between British and New Zealand farming systems, differences driven primarily by a combination of geographic, political and economic factors. New Zealand farming systems reflect production efficiencies made possible in the first instance by the relatively favourable temperate climate and geography common to much of the country. A further significant factor is the average size and scale of operation evident on most New Zealand farms compared to their average British counterpart. Never-the-less, recent history clearly demonstrates that these factors did not on their own result in current levels of efficiency through the New Zealand farming industry. The current economic model formula was not complete until the 1980′s deregulation of the New Zealand economy and the farming industry in particular.

An understanding of the competitive edge demonstrated by New Zealand farmers starts with a basic premise; that current levels of efficiency and productivity demonstrated by the New Zealand agriculture and horticulture industries are a direct impact of the deregulation of economy implemented in 1984. For the New Zealand farming sector deregulation meant withdrawal all existing farm subsidies and support schemes such as concessionary loans, compensation for production costs, and financial support for exports. Free market policies were highly controversial at the time, just as discussions concerning farm subsidies are in Britain and Europe at this time. There is no question that deregulation resulted in short term hardship, not only to New Zealand farmers, but also to other sectors of the economy long cushioned by a highly regulated internal economy and the comforts of tariff protection. Never-the-less, it has been estimated that only about 1% of pastoral farmers (the major beneficiaries of farm subsidies) were forced to leave the land. In most cases these were farmers with large, unsustainable borrowings. For the remaining New Zealand farmers, economic survival and ultimately, ability to achieve satisfactory levels of farm profitability, has been achieved through substantial, and widespread increases in farm efficiency and productivity. Of equal importance, removal of subsidies has encouraged significant levels of farm diversification to better reflect market requirements rather than as in the past; farming to low value, subsidy supported commodities.

Statistics indicate that while sheep numbers declined 35% through the period 1989-90 to 2004-05 – from 69 million to 39 million, actual lamb production increased 15%, up from 364,000 tonnes in 1989/90 to 427,000 tonnes in 2004/05. Over this period a large dairy beef industry has developed together with a major expansion of the New Zealand deer farming industry. It is estimated that while land used in New Zealand for livestock and arable farming declined from 14 million hectares in 1983-84 to 12 million hectares in 2002-03 (a period in which considerable areas were planted to forestry), overall productivity on the remaining land has increased 85% over the same period.

New Zealand farm productivity

Within any farming district of New Zealand, an analysis of the size of an average pastoral farm together with the livestock numbers they carry and their productivity, will demonstrate significant advantages compared to the published livestock statistics of average British sheep and beef farms. Of equal importance in calculating relative farm profitability is a comparison of the labour and management input into British and New Zealand farms, relative to the livestock they carry. Current literature suggests that in many areas of Great Britain a stocking rate of 1000 breeding ewes for each labour unit; shepherd or owner is considered normal. The same ratio might not have been considered unusual in New Zealand in the 1950′s or early 1960′s, however few aspects of the New Zealand pastoral industry have changed more radically. On an average New Zealand pastoral farm one skilled shepherd, or more commonly; one New Zealand farm owner, would normally be considered capable of managing 5000 to 6000 su. (Within New Zealand su is a common farmer’s measure of farm livestock which are calculated in stock units or su. One breeding ewe equates to 1 su. One breeding cow is the equivalent of 6 su, etc. As a basis of fair comparison, a farms su capacity is normally quoted as at mid winter). One individual managing a mixed sheep and cattle hill country farm carrying up to 10,000 su with assistance for seasonal work (e.g., annual shearing muster or lambing), is not considered unusual.

High ratios of livestock to management have not been achieved at the expense of livestock welfare; far from it. Over the past 30 years New Zealand farmers have invested in substantially improved genetic characteristics in their breeding flocks and herds. On many properties substantial advances have been achieved changing from traditional Romney sheep to new and improved breeds such as Perindale and Coopworth, which amongst other desirable characteristics have an inherited ability to deliver their lambs without assistance or intensive shepherding. More commonly however and especially in the New Zealand North Island, farmers have made considerable advances through the substantially improved Romney genetics now freely available.

With the exception of the South Island high country and foot hills where the hardy Merino or Merino crossbred are the dominant sheep breed, the duel purpose (meat and wool) Romney remains the most popular sheep breed in New Zealand. Until relatively recent times hill country farmers relied on intensive low country Romney studs for the supply of flock rams. These stud farms almost inevitably sold flock rams bred from stud rams selected in large part on the aesthetic characteristics required to compete and win trophies in livestock shows, rather than qualities more useful to a hill country farmer. Factors now appreciated as critically affected by genetics, such as fertility, weight gain and of major importance; the ability of a ewe to deliver a lamb without intervention (in part related to pelvis width), were compromised in the search for what stud breeders referred to “conformation”, in their quest for show trophies and ribbons. In the 21st century progressive New Zealand farmers purchase rams and bulls from hill country stud farms which select livestock progeny based on production recording schemes. Stud stock is reared on terrain similar to the farms for which the progeny are intended. Growth rates, fertility levels and other desirable characteristics are recorded and used as the basis for selection, rather than potential for show ring cups and ribbons.

New Zealand farm dogs, bikes and horses

In the early 1970′s some commentators were suggesting that in adopting modern farming methods, future generations of New Zealand farmers would inevitably abandon both the stock horse and sheep dog. In 2008 the farm stock horse which up to the 1960′s almost without exception had been an essential every day part of the operation of New Zealand hill country farms, has very largely been replaced by Japanese ATV’s or quad motor bikes. Conversely, good, well trained sheep dogs far from becoming obsolete, have had a significant role in achieving increased stock to management ratios and are more valuable than ever, a fact reflected by high sale prices achieved for well trained dogs. Nevertheless, once familiar with the larger scale of operation, a capable, traditional British sheep farmer would probably find little difficulty adapting to life on a traditional New Zealand sheep farm or station. Neither would his “strong eye” Collie sheep dogs, although on a larger New Zealand property a British farmer would probably add New Zealand Huntaway breed type dogs to his team. The New Zealand Huntaway is bred and trained to muster flocks from and over substantial distances using “noise” (barking) to good effect.

New Zealand and British farming systems: The climatic factor

The effect of climate on pasture growth patterns in the New Zealand livestock farming industry has a major part in explaining productivity and efficiencies relative to British and European systems. New Zealand has a broadly similar temperate, maritime driven climate to that of the British Isles, with the same range of seasons and a broadly similar rainfall range. Differences as they affect farming practices in each country lie in the relative extremes and length of seasons in each country, but most importantly; the winters. In New Zealand the climate has a dominant westerly pattern. While being the closest country to the Antarctic Continent – from which direction farmers expect cold southerly winter and spring storms, the main weather pattern originates from the moderately warm Central Pacific Ocean. Similarly, the British climate is also maritime based, but with a south-westerly pattern originating from the colder South Atlantic. British climate is also influenced by the nearby European continent. Colder, longer, winters result and critically for farmers, a significantly shorter pasture growing season resulting in the expensive necessity of housing cattle through winter in intensive feedlots. Sheep, especially in upland and moor-land environments, are commonly dependant on purchased or farm produced feed supplements.

Within New Zealand there is a broad climatic range between the sub tropical north of the North Island where grass growth may only slow in winter, through to the substantially colder south of the South Island where grass grows only between spring and autumn. Consequently there are marked differences between and to some extent within different New Zealand farming Districts in respect to pasture growth patterns. The need for farmers to provide supplementary hay, silage or winter forage crops is determined both by local microclimatic as well as individual farm stocking levels. Nevertheless, all classes of livestock in all Districts not only exist, but in winter under good management have potential to thrive and develop without housing or artificial shelter, a major point of difference many visiting British and European farmers find difficult to comprehend.

Financial and personal considerations for British investors in New Zealand farms

A common factor New Zealand farmers share with their British counterparts and farmer’s world wide, is the reality that financial returns are affected by many factors outside of any farmer’s control. Potential farm investors from outside of the farming industry – and as such unfamiliar with the vagrancies of farming as a livelihood, are commonly deterred by relatively low financial returns often demonstrated by New Zealand farms compared to sound commercial property investment or even a secure bank term deposit. In assessing a farm investment, of primary importance is the reality – well understood by generations of New Zealand farmers; that for reasons outside the control of any farmer, farm profitability is inevitably cyclical in nature and financial hardship is occasionally part of that cycle.

Ongoing causes of periodical low or negative farm profitability are low export commodity prices, the effect on farm gate prices of the free floating and frequently over valued New Zealand dollar and from time to time the effects of natural disaster such as drought. To illustrate; pastoral farmers experienced extremely difficult conditions for an extended period between 1983 through to about 1998 with low commodity prices, further aggravated on New Zealand’s east coast (Hawke’s Bay and Wairarapa) by two extended periods of severe drought. Conversely, from 1998 increased levels of farm productivity coincided with significant increases in commodity prices and a favourable New Zealand dollar exchange rate (trading as low as 39 cents to the US dollar in 2002). This combination triggered an extended period of prosperity in the farming sector lasting to about 2005. From around this time however, high internal interest rates relative to other countries resulted in New Zealand becoming a favoured destination for overseas bond investors and currency speculators. As a consequence the NZ dollar rose rapidly in value, peaking at 81 cents to the US dollar in 2007, substantially lowering farm gate lamb, wool and beef prices. Lamb prices to farmers fell to levels little or no more than the cost of production in most areas. Prospects for the 2008 -2008 season (and hopefully beyond) look very much better. Decreased world lamb production coupled with increased demand in Europe look set to combine with decreased New Zealand production (strongly linked to the increasing trend for dairy conversion of sheep farms in the more fertile higher rainfall or irrigated areas) and a weakening New Zealand dollar to result in much better farm gate prices. The prospects for wool look significantly brighter following amongst other things, New Zealand becoming the first nation to sign a free trade agreement with China. New Zealand’s naturally reared, disease free beef continues to attract more markets and better prices.

The large majority of New Zealand farms are family units which very often pass from generation to generation. New Zealand farmers have learnt to be resilient in character, accepting good times with lean. For most New Zealand farmers the incentive to remain on the land includes, but goes well beyond the need for a commercially viable return on capital. Lifestyle and work satisfaction factors while difficult to define, especially by a pragmatic New Zealand farmer, are nearly always of importance. The “lifestyle” factor has a major bearing on the sustainability of farm and farmland prices and overall stability within the New Zealand farming industry.

New Zealand farmers: Sustainable agricultural exporters to Britain and the world

A common motivating factor equally as important as short term profitability to many modern British migrant farmers considering the viability of New Zealand as a destination, are prospects of investment and a life within a genuinely sustainable industry, compared to European counterparts. The long term sustainability of British and European agricultural commodity production systems which remain dependant to any significant degree on financial subsidies and inefficient, air polluting energy sources, is more doubtful.

The international debate on global warming, its causes and remedies, is only about one decade old but now gaining the momentum it deserves. Not before time, as long term implications of unchecked global warming have extraordinary implications for all nations, as was suggested in a widely circulated report by British government chief economist Sir Nicholas Sterne, who concluded that a failure to act now on climate change and cut green house emissions would result in global economic and environmental catastrophe. The British Government, influenced perhaps as much by political factors as much as real science, have considered a range of “green taxes” including a proposal for a global warming “food miles” tax on food and produce which has travelled thousands of kilometres across the world. Inevitably perhaps, European competitors of New Zealand primary export produce have been quick to exploit the food miles argument as a tool or leaver for further protection against New Zealand primary produce imports. In a cynical attempt to exploit “green” sentiment and gain commercial mileage, to promote its own Country Life brand butter British dairy group Dairy Crest UK commissioned advertisements showing Anchor butter traveling 11,000 miles on a rusty old ship from New Zealand.

Fortunately for New Zealand farmers the nonsense typified by the Dairy Crest UK advertisement is not necessarily typical of sentiment in the United Kingdom. British Trade Minister Ian McCartney commented “It would be better for Britain to receive more goods from countries like New Zealand”. Global warming and the “food miles debate” in particular has triggered scientific studies of primary food production, distribution and their associated carbon emissions between New Zealand farmer and European consumer. A 2006 Lincoln University study demonstrated that “food miles” have considerably less affect on global carbon emissions than do the actual farming systems within which they are produced. Much more relevant to the carbon emissions debate was shown to be the overall “carbon foot print” created by a combination of the effects of production together with delivery to retail point by any one food commodity.

The Lincoln University study demonstrated New Zealand primary produce; milk solids, lamb, apples and onions (as examples) to be twice as efficient measured in energy input and carbon dioxide emissions as their European competitors. New Zealand lamb was demonstrated to be four times more efficient. In 2007 a further study compared the carbon emissions of the New Zealand dairy industry with that of the United Kingdom and found United Kingdom farms to produce 35% more emissions per kilogram of milk fats than New Zealand dairy farms. Of equal significance is the fact that produce shipment by sea, even over long distances between New Zealand and Britain or Europe, is relatively efficient measured in carbon emissions compared to long haul road produce transport within Europe and the United Kingdom.

The sad truth is of course, that if the “food miles” theory were to be successfully promoted ahead of genuine science, the real looser would be the environment. Using “food miles” as an argument to protect (for example) the European dairy industry is as logical as an argument would be to protect local pineapple and banana production in heated tunnel houses supplied by inefficient European coal fired power stations. Without reasonable doubt global warming is a problem that will only ever be resolved through global solutions and international cooperation. A rational, sustainable approach to the problem would include encouragement for international carbon efficient food producers and transport systems in preference to quotas and tariff barriers to protect inefficient production systems and purely national interests.

Potential for Joint New Zealand and British farmer produce marketing

In the long term it could be logically argued that real long term interests of British and New Zealand farmers would be better served through cooperation in areas of common interest than through trade barriers and tariffs. The obvious interest common to both is that the British and European market for quality beef and lamb be further developed and grown, and that farmers receive their fair share of retail prices. Sadly, at present there is little effective marketing cooperation even within these nations, let alone between them. New Zealand farmers are adversely affected by an inefficient, competitive export system dominated by two major farmer cooperatives. British farmers have a very fragmented marketing system dominated by five major retail supermarket chains. A joint New Zealand and British farmer trade organization combining marketing expertise and funding to promote quality beef and lamb consumption within Britain and Europe might well have exciting prospects (if it were not to become bogged down and suffocated with the bureaucracy that often afflicts trade boards and organizations). New Zealand farmers do not begrudge British farmers a deserved price premium for high quality fresh regional produce at a price premium over New Zealand imported frozen or chilled product. Prime Scottish Aberdeen Angus beef and Welsh Salt Marsh or Carmarthenshire lamb (for example) is certain to achieve the highest prices for British farmers when overall British consumer demand for quality beef and lamb is at its highest. What is most needed in the interest of both parties is intelligent joint promotion aimed at increasing consumer demand in a market with excellent potential for both.