Managing the risks to health, safety, property and profit
Matt Hanna, New Zealand Tree Grower May 2012.
Risk management in farming and forestry immediately focuses landowners on compliance. Technicians enjoy compliance, but creative people often struggle to accommodate it. By nature farmers and foresters are often individualistic. In the New Zealand tradition of taking individual responsibility, they have in the past, been prepared to take risks and then individually mitigate the effect of those risks.
Mitigating risks related to damage to person and property in New Zealand has undergone a change over one generation or crop rotation. The transition from individual responsibility to acceptance of state-imposed compliance in the areas of resource management, health and safety, employees and business management has happened, but it has been slow.
Health and safety on your quad bike
The agriculture sector has been a slow adapter to change in the area of statutory compliance. As a result of the individualistic approach to safety, farming still holds a high ranking as a sector for occupational accidents, in spite of the awareness programmes sponsored by ACC.
By far the greatest risk to health and safety in the farming sector is quad bikes. ACC data shows that there have been 17,000 quad bike injuries in the last decade and 45 fatalities in the same period. I have had to deal with the results for employers and families involved with such fatalities, some of them horrific incidents. These accidents have left the farming family members deeply affected because the workplace is also the home. A recent incident involving a Wairarapa farmer who collided with and killed his own son on a quad bike is an example of just how lethal these vehicles can be.
Wear a helmet
The message still seems to be slow in getting through. Although there is no specific law covering helmets, training, under-age use and carrying capacity on quads, there are settings in employment health and safety laws to protect employees against their own stupidity. Employers are required to take all reasonable steps to prevent harm to employees. Hooning or over-confident riding on quad bikes not on legal roads is where the problem lies.
Manufacturers warn owners to wear a helmet, not to allow riders under 16 years of age to ride, and to carry loads within limits. Practical steps include sufficient training and safety precautions which are enforced. A health and safety policy or sensible precautions which are openly ignored encourage dangerous riding. It is pointless having a health and safety policy that is paid no attention to by the employer or simply not enforced.
In many instances, forest owners will employ contractors who use quad bikes for planting as they are a useful mule. While it may seem over the top to expect minimum standards such as wearing a helmet, the statistics suggest that not requiring compliance with basic safety is well over the top.
Corporate foresters safer
There are some good news stories. ACC reports that there are a steady declining number of forest industry injuries, with the annual tally running at approximately 300 per annum. The statistics demonstrate a significant difference in the injury rate in the two sectors when you consider that there are over 800 quad bike accidents a year on farms. Tree felling and all the forest industry activities together are substantially less than quad bike accidents alone.
While this may be explained by the sheer number of bikes, there is another element. The forest industry is dominated by corporate foresters who have enforced safety standards on their contractors. The codes of practice and training have increased awareness. These awareness programmes are supported by drug and alcohol testing which lessens the risk of workers with reduced cognitive skills hurting themselves or others. There is not the same degree of enforced discipline in individual farming businesses.
Acts of nature
While the risk to people in forests is an important and controllable factor, risks associated with acts of nature are far more difficult to manage. Risks to the forest include wind- throw, fire and disease. From a risk liability perspective, civil and statutory liability is significant in respect of fire. Forest owners often carry fire insurance, the premiums for which are no doubt rising as all insurance costs are rising.
The risk of starting a fire which causes a substantial loss is a physical risk that can easily be avoided by simply not lighting or causing fires near a forest. The Forest and Rural Fires Act 1977 enables the New Zealand Fire Service Commissioner to recover any costs associated with preventing or putting out a fire from the person who caused the fire.
Fires are started by a range of events, including sparks from vehicles, arcing downed power lines, those set to clear rubbish and scrub, or simply live wires chewed by wandering stock near shedding. Insurance may protect the forest owner against the loss from an adjoining owner’s negligence, but the Fire Commissioner and the insurance company may have a common interest in recovering their loss against that same negligent neighbour.
Carrying public liability insurance with an extension of cover for statutory liability is an obvious baseline protection for landowners. The insurance is comparatively inexpensive.
It is hard to avoid the simple reality that most landowners plant forests because they are making a long-term investment from which they expect to make a profit. The most fundamental risk management tool is sound long-term profitability, because it is inevitable that during a long-term investment cycle such as forestry that there will be unfavourable events. Over the last 28 years there has been the floating of the New Zealand dollar, the 1987 financial crash, a recession that lasted into the 1990s, the late 1990s Asian crisis, the dotcom meltdown, a boom in 2005, and the 2007 crash.
While forestry is an illiquid investment, it is reassuring for owners that not every rise and dip in the market is keeping them awake at night. Forest owners need not be insomniacs. However, in every business sector there are fundamental rules which drive profitability under the accepted or existing business models. In forestry investing in a well-located, easy-contoured and high-value forest is a business decision that is likely to bring financial returns and reduce your risk.
Predicting the future
As with every generalisation there are some obvious exceptions. If any forest owner in the 1980s with valuable land had been able to foresee the Climate Change Response Act 2002 in the future, they would probably have avoided planting that land in trees. This is because the Act removed a considerable value in their real estate for the overall benefit of other New Zealanders so that they could emit carbon.
The ETS was touted as a great opportunity to receive a cash flow, to borrow against the value of your forest, to open an NZEUR account and trade, and to buy a forest and offset your emissions. In the past 12 months emitters and speculators have done quite well as the New Zealand Unit (NZU) prices dropped from $20 to $5 and risen to $8. This volatility provided opportunities for some very healthy gains for those who bought at $5.
Investing in NZUs at $5 would have provided the buyer with a 60 per cent gain at $8 or a 75 per cent loss if you bought at $20 and sold at $5. No doubt heavy emitters tanked up on cheap European units before a slow-to-react government put a brake on the oversupply of cheap units. Of course, when the price dropped, well-funded forest owners could have also tanked up on cheap units and then still had a forest full of units to claim and hold as well.
The ETS did excite quite a number of players in the market who argued that the value of post-1989 forests had a second tier value, the carbon. Buyers of these carbon forests must have had a few sleepless nights after they paid for the forest on the usual discounted cash flow basis and then for the carbon on top. As they watched the price of units collapse from $20 to $5 a unit, and the underlying value of their asset continue to increase at a modest rate of between seven and eight per cent, the carbon price they paid might have been a cause for concern.
Landowners considering leasing their land, or granting forestry rights for carbon farming or simply a hybrid forestry carbon arrangement, must recognise the risks associated with leases and forestry rights if the lessee or forestry right- holder is the participant. The liability for the emissions, that is harvested trees and surrender of units for post-1989 forests in the ETS, lies with the landowner.
The deforestation liability is transferred to the landowner on the expiry of any lease or forestry right. If the lessee or forestry right-holder defaults, the landowner is liable at expiry. A default would include insolvency during the term, which would terminate the lease or forestry right, crystallising the landowner as the participant.
Landowners must treat participants on their land as if they were borrowers against the equity in their land. Appropriate documentation and rules have to be established to protect the landowner from either ending up owning a forest sink or having to buy their way back to an alternative land use.
For buyers of post-1989 forest land which is in the ETS, it is critical that they understand and perhaps neutralise the ETS liability at the time of purchase. Because of the volatility in the NZU price, the risks are too great to accept an unknown ongoing liability. Until pricing achieves a degree of stability, buyers should either require that the forest be withdrawn from the ETS, or the seller to transfer the same number of units that have been issued as shown in the accounting record.
The ETS is a trading platform responding to demand and supply, industrial output and exchange rates in a way which is completely unrelated to the underlying underwritten asset, a New Zealand forest. Reconciling these two business models will be a significant challenge for forest owners, and contrary to any other suggestion, full of risk and high reward for some.
Forestry is fundamentally a sound long-term low risk investment which has rewarded farmers and foresters for generations. For many farm forest owners there is more than the economic return which induces them to plant trees. They have a genuine interest in growing trees, caring for the environment and owning something that is valuable and tangible.
Matt Hanna is a commercial lawyer with 20 years of experience in the forestry sector.