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Government incentives need to be better aligned if we are to process more wood

Hamish Levack, New Zealand Tree Grower August 2019.

In 1960, Lindsay Poole, the then Director General of the Forest Service and also a thoughtful member of the NZFFA, said – ‘If exotic forest utilisation is allowed to develop haphazardly… it will seriously limit the high potential for exotic forestry which exists in this country’. He added that wood-processing plants have to be very large if they are to compete on world markets and large sustained yields of wood are a vital pre-requisite. This advice is just as valid in 2019 as it was then.

Te Uru Rakau’s incentives of $4,000 a hectare to plant native trees and $1,500 a hectare to plant exotic trees are unconcerned about whether those trees will eventually yield commercial timber. In addition, $4,000 a hectare is not sufficient to successfully establish the required number of native trees in each hectare. Even then, such forest will probably take two or three times as long to yield the same volume of wood as a radiata pine forest and may not be marketable.

No incentive is offered to ensure that the current regional walls of wood are converted to higher levels of sustainable wood supplies which is necessary before any significant increase in the processing of wood can be contemplated. The increasingly fragmented patterns of forest ownership which will result from the current incentives have been ignored. In some cases, land as small as one hectare can receive a grant, although for exotic trees the minimum is five hectares. This will make it much more difficult for any future wood processing plant to secure a sustainable log supply.

Maximising the socio-economic benefits

Regional studies, which spell out the opportunities for adding value from more domestic processing of timber, need to be prepared to help set desirable local afforestation targets. The plans could be implemented by the government modifying its grants to encourage more private planting in these target locations and by adjusting the investment criteria used to target the locations where the Crown rents, leases or enters into joint ventures on land for more planting.

On its own, clarity about the factors which affect the profitability of individual forest investments would help channel private new planting into the priority locations. This means that Te Uru Rakau should put more resources into the provision of advice on how to maximise the nett return from afforestation projects.

Information gaps

Currently Te Uru Rakau has a good introductory section on its website with the title − Getting started in farm forestry. It then refers the reader to the NZFFA and other forestry organisations for further advice, but this is where the problems start. Much of the information which the NZFFA and others has is often written for knowledgeable growers, not beginners. There are gaps and some information is outdated. All would benefit if it was catalogued better.

For investors interested in commercial profitability the biggest gap is probably the lack of continually updated schedules of forestry costs and revenues for common regimes. Over and above website information, it is important to offer land owners and investors someone to talk to. Neighbours who are knowledgeable about forestry, such as members of the NZFFA, are more likely to influence farmers to plant trees than government publicity or professional forestry consultants.

Forestry profitability

New Zealand needs a service which provides free forestry advice, or nearly so, and the NZFFA has the potential to facilitate this. There are about 40,000 livestock farms in New Zealand and the obvious way to get more trees grown is to explain the probable profitability of forestry to the respective farmers via their service organisations. Beef and Lamb, Dairy NZ and Deer Industry NZ all run extension services funded by industry levies. They are looking for ways to help their members with information on trees.

The NZFFA is currently asking for government funding to set up a joint advisory service to work with such organisations, as well as small-scale forest owners, forest industry organisations and regional councils, to develop and make available relevant information about growing trees easier. This will help with an increase in the level of afforestation and best forest practice on farms.

Aggregation needs encouragement

It would also help if the government took a more active role in encouraging the aggregation of small-scale forests to provide processors with more certainty of supply. Aggregation is the best way to provide an orderly response to the planting spike of the mid-1990s. It would create forest estates which would be managed to reduce risk and to optimise collective profit. This would result in some forests being harvested early and some late, reducing the pressure on contractors, infrastructure and markets, smoothing the wood supply and encouraging domestic processing. If that orderly response was combined with new forest planting in the right places, a higher sustainable cut would result which is the first requirement of new investment in domestic processing.

The NZFFA has argued for several years that the greatest impediment to such small-scale forest aggregation is the lack of an amendment to the Income Tax Act to remove an anomaly which discourages the sale of immature forests. Specifically, the ‘cost of standing timber’ provision of the Act treats the sale of standing trees as immediate income to the seller. However, the buyer must wait years to claim their deduction against the forest’s eventual revenue. It is disappointing that the Cullen Tax Working Group has been silent on the need for such reform, even though, after overtures from the forestry sector, the Ministry for Primary Industries and the Inland Revenue Department indicated that they supported the proposed amendment.

A forestry model providing scale economies that would be well worth emulation by New Zealand small scale forest owners is Södra which grew out of a co-operative of Swedish forest farmers in 1938. It has become that country’s largest forest-owner association with 51,000 members owning two million hectares of forest as well as three pulp and paper mills. In 2019 Södra will also begin production of cross-laminated timber. It would help if our government encouraged the creation of such an organisation here.

Previously the controlled aggregation of a large wood supply in specific regions by the Forest Service gave rise to greater economic and social returns than would otherwise have been the case. The internationally competitive sawmill at Rotorua, the pulp and paper mills at Kawerau and Napier, and the MDF plant in Canterbury, are all examples of this.

Possible future processing options

Pulp and paper mills may not be as good an investment today as they were 30 years ago, but many other possibilities exist including the production of bioenergy, biopolymers, bio-plastics, composite materials. However, without a big-enough sustainable yield of logs close enough to potential wood processing plants, the result will only be more exports of raw logs. Without good planning, many of the trees that would have been planted under the billion tree programme may not even be worth harvesting.

The 1969, 1975 and 1981 Forestry Development Conferences, which the Forest Service convened, had a major influence on good forest policy and forward strategy. It would be helpful if Te Uru Rakau organised another one soon.


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