Farm Forestry New ZealandTo sell or not to sell?
Stuart Orme, New Zealand Tree Grower May 2011.
We would like to think that members of the NZFFA must be some of the better informed forest owners in New Zealand. Undoubtable the allocation of credits for owners of pre 1990 forest land is payback time for many farm foresters who have established trees on their properties over the generations.
At the recent annual conference I proposed a simple but real target for our members −
- All members registered for the pre 1990 FAP by this November and be aware of post 1989 opportunities
- Convince all eligible neighbours it is a good idea to register for pre 1990 FAP and be aware of post 1989 opportunities
I predict that as long as you invite them to join, the NZFFA will see a surge in new members from grateful neighbours now receiving regular Tree Grower magazines, with log market and carbon updates and attending enjoyable field days and conferences.
Register now
Those who were there heard my message – simply put it is to register. Once registered, you can bank your post 1989 credits safely in your NZEUR account. As long as the credits are in your account they are always available for surrender if you require. If you have pre 1990 forest you are captured by the legislation anyway, so claim your compensation credits and benefit from the tax free value on offer.
Using an example of 100 hectares of 1993 forest we addressed the burning question of whether to sell or not to sell your post 1989 credits. In deciding on whether to sell the credits from this forest the owners went through the following discussions. How much can they afford to buy them back at harvest?
| Credits to 2017 - the next 10 years | 35,100 |
|---|---|
| Log revenue per hectare | $ 15,000 |
| Total log revenue | $1,500,000 |
| Money available or credit for repurchase | $42.74 |
They expect to net $15,000 a hectare of logging revenue after costs amounting to $1,500,000 net revenue. Between 2008 and clear fell at age 30 years they can expect to receive 25,100 NZUs from their 100 hectares. By dividing one number into the other you come up with a potential pay back ability of $42.74 per NZU.
Now that they were comfortable that the money now was an opportunity that eventual logging revenues can sustain, we then looked at potential uses of the money. With a mortgage of $2,000,000 at seven per cent, the next 10 years of carbon and revenue flow have the following effect based on a $20 per NZU.
| Profile for a 100 hectare 1993 forest in the lower North Island | |||||
|---|---|---|---|---|---|
| Carbon price feasibility | |||||
| Year | Carbon units | Enduring carbon units | $18.00 | $20.00 | $22.50 |
| 2008 | 3,700 | 0 | $66,600 | $74,000 | $83,250 |
| 2009 | 3,800 | 0 | $68,400 | $76,000 | $85,500 |
| 2010 | 3,700 | 0 | $66,600 | $74,000 | $83,250 |
| 2011 | 3,700 | 0 | $66,600 | $74,000 | $83,250 |
| 2012 | 3,700 | 0 | $66,600 | $74,000 | $83,250 |
| 2013 | 3,500 | 0 | $63,000 | $70,000 | $78,750 |
| 2014 | 3,500 | 0 | $63,000 | $70,000 | $78,750 |
| 2015 | 3,300 | 0 | $59,400 | $66,000 | $74,250 |
| 2016 | 3,100 | 0 | $55,800 | $62,000 | $69,750 |
| 2017 | 3,100 | 0 | $55,800 | $62,000 | $69,750 |
| 2018 | 2,900 | 0 | $52,200 | $58,000 | $65,250 |
| 2019 | 2,800 | 0 | $50,400 | $56,000 | $63,000 |
| 2020 | 2,800 | 0 | $50,400 | $56,000 | $63,000 |
| 2021 | 2,800 | 0 | $50,400 | $56,000 | $63,000 |
| 2022 | 2,700 | 0 | $48,600 | $54,000 | $60,750 |
| 2023 | 2,600 | $46,800 | $52,000 | $58,500 | |
| 2024 | 2,500 | $45,000 | $50,000 | $56,250 | |
| 2025 | 2,600 | $46,800 | $52,000 | $58,500 | |
| 2026 | 2,400 | $43,200 | $48,000 | $54,000 | |
| 2027 | 2,500 | $45,000 | $50,000 | $56,250 | |
| 2028 | 2,400 | $43,200 | $48,000 | $54,000 | |
| 2029 | 2,400 | $43,200 | $48,000 | $54,000 | |
The total cumulative value of the $702,000 principle reduction and $279,440 interest not requiring to be paid reduction comes to $981,440. When we divide this amount by the number of credits received over this 10 year period we get a non-adjusted value of $27.96 per NZU as opposed to the initial $20 per NZU received.
Another scenario still working with the carbon cash flow from the 100 hectare of 1993 forest is more immediate. The sale of the 2008 to 2010 credits netted the owner $224,000 − 11,200 NZUs at $20 a unit. This was enough to plant an additional 200 hectares of land suitable for trees.
Again, based on $20 for each NZU, this generates $426,000 cash flow in the first 10 years from sale of credits not required to be surrendered, as long as the trees are replanted. An internal rate of return calculation including the required replanting costs indicates a figure of 20 per cent – well up on the traditional seven per cent the same forest would show without carbon revenues accounted for.
Additional cash flow will be available from selling carbon from year 11 onwards. However for this example we have chosen not to model that. The message is that if you have forest land or trees, this is real, but the clock is ticking, so register.
| Year | Mortgage | Interest at 7 per cent | Principle reduction | Mortgage amount | Interest at 7 per cent |
|---|---|---|---|---|---|
| $2,000,000 | $140,000 | ||||
| 2008 | $2,000,000 | $140,000 | $74,000 | $1,926,000 | $134,820 |
| 2009 | $2,000,000 | $140,000 | $76,000 | $1,850,000 | $129,500 |
| 2010 | $2,000,000 | $140,000 | $74,000 | $1,776,000 | $124,320 |
| 2011 | $2,000,000 | $140,000 | $74,000 | $1,702,000 | $119,140 |
| 2012 | $2,000,000 | $140,000 | $74,000 | $1,628,000 | $113,960 |
| 2013 | $2,000,000 | $140,000 | $70,000 | $1,558,000 | $109,060 |
| 2014 | $2,000,000 | $140,000 | $70,000 | $1,488,000 | $104,160 |
| 2015 | $2,000,000 | $140,000 | $66,000 | $1,422,000 | $99,540 |
| 2016 | $2,000,000 | $140,000 | $62,000 | $1,360,000 | $95,200 |
| 2017 | $2,000,000 | $140,000 | $62,000 | $1,298,000 | $90,860 |
| $1,400,000 | Principle reduction | $702,000 | |||
| 10 years | Interest saved | $279,440 | |||
| Cumulative benefit | $981,440 | ||||
| Credit value | $27.96 |
NZFFA on facebook