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President's comment

Hamish Levack, New Zealand Tree Grower May 2020.

Forestry should survive Covid-19 well

We do not know how long or how often the economy can be anaesthetised before causing serious hardship. Covid-19 has caused a bear market, widespread business closures, bankruptcies and prolonged unemployment.

Even if New Zealand manages to get Covid-19 under control soon, it will still suffer economic reverberations due to its dependence on other countries. There have been heartening reports that wood processing plants in China are once again opening up and will need New Zealand logs once more, but what if Covid-19 returns to China, or China’s customers cannot afford to buy their processed timber? Even so, there are good arguments why farm foresters will come through the Covid-19 disruption better than most investors.

Inflation will probably increase substantially over the next few years because the domestic money supply will be expanded to spur economic activity, but happily forests are an inflation hedge. Furthermore, forest investments have a low correlation with other asset classes, which is why so many large-scale forests in New Zealand were purchased by pension funds. Since the 2008 global financial crisis, forests have
been in particular demand because they are prime assets to have during an economic downturn. American Timber Investment Management Organisations and Real Estate Investment Trusts specialise in facilitating such purchases.

Indeed, the majority of New Zealand’s large-scale forests have been purchased by foreign entities in order to achieve investment diversification. Those forests which had been owned by the State were bought by way of Crown Forest Licences, and most of the others by way of forestry rights. The foreign entities would probably have preferred to buy the land as well, but were prevented from doing so by the Overseas Investment
Act. Conversely, the proprietors of most New Zealand’s small-scale forests are locals, who also own the land under their woodlots, and land is an excellent asset to have during an economic downturn. Land is an appreciating asset because supply is limited and demand continues to grow as the population expands and the economy eventually rights itself.

Will there be changes which affect forestry as an investment once the international economy picks up again? Well, Covid-19 is unlikely to significantly slow the rate that the world population is increasing. The population may increase faster because of a baby boom caused by couples lacking other diversions during the lock-down. More people mean an increased demand for wood, more greenhouse gas emissions and
therefore higher carbon prices.

A possible response to the Covid-19 pandemic might be an undermining of neo-liberal policies. Many countries, including New Zealand, may in future prefer to be governed in a way that better insulates them from international shocks, and protects them from deteriorating external social conditions. Even though it could be more expensive to make many essential goods within New Zealand, the electorate may feel
much more comfortable if local self-reliance was encouraged.

This attitude, sometimes known as Fortress Aotearoa, would not necessarily be to our overall advantage, but it may well benefit the forestry sector more than most because wood can substitute for so many other commodities. Converting waste wood to biogas or liquid fuel, something that was already nearly profitable in pre Covid-19 days, is an example. Another could be the manufacture of furniture in New Zealand again. As a prelude to this perhaps, Forestry Minister Shane Jones instructed officials to explore law changes which would ensure that wood is prioritised for New Zealand-based projects after the Covid-19 lockdown, instead of it being shipped overseas.


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