Those who own the logs set the price
Wednesday 25 Oct 2017
The major discussion around forestry has been the idea of forcing forest owners to supply domestic mills. This idea has been discussed on both TV1 and TV3 as well as on Radio National and various written publications.
Whilst I am sure there are some who think this is good idea I struggle with it. Presumably being forced to sell to the domestic mills means ‘at a discount’ and this, I am afraid, is very short sighted. Almost all of New Zealand understands we need new and increased planting to meet many of our environmental objectives, yet this one idea would do more to stop new planting than almost anything else the Government could suggest. I know no other investment where the Government legislates the investor must sell to a processor. Where this has partially occurred (e.g Fonterra) it has occurred with the growers agreement and with the goal of improving returns to the grower, not reducing them.
It has been suggested he Government could start investing in planting in its own right. At a limited scale, on Crown lands and in conjunction with iwi, this makes sense. But as we know new planting ties capital up for a long time. Any direct Government investment into new planting must compete for the tax dollar with infrastructure, health, education and social welfare. Current investment in New Zealand forestry is around $30 billion. It is totally unrealistic for the Government to be able to replace this investment. Private investment is required to ensure we have a vibrant forest sector.
I am a strong supporter of the need for a vibrant and strong domestic processing sector. As a sector we need this, and most forest owners recognise the need. Many large forest owners ensure they are meeting their commitments to the domestic sector before they export, and the produce they do export is mostly the grades our domestic sector do not want. What will happen to these grades, is the suggestion we force the domestic processors to take them, even if they know they will struggle to process and on sell profitably?
Let us also consider our NZ Super Fund. It has a pretty significant investment in a CNI forest which has been giving them some impressive returns, partially on the back of the ability to export grades which the domestic mills don’t want. It would be a pity for all New Zealanders if this particular golden goose was strangled. What this particular forest manager does is ask the domestic consumers what logs they want, then they supply them what they ask for and the left over (approximately 35% of total volume) is exported. The export volume allows this forest to be flexible with their domestic customers. Without this flexibility then I am sure this forest manager would be asking their domestic customers for a take or pay obligation, which potentially means they could be worse off with no ability to reduce input when the local markets are performing poorly.
But let us consider the many Mum and Dads, iwi and farmers who have a small block of trees ready for harvest. As the large owners already have their commitments to the domestic processors sorted and they are long term, these poor small owners will be disproportionally effected by the requirement to supply the domestic processor as the processor will see this supply as ‘additional’ and therefore will not pay full price.
I wonder if the New Zealand public would support regulating apple orchards so they can’t export their apples and have to sell them to the cider brewery down the road and should Watties really stop harvesting those baby peas and grow them on to full size for the good of the nation? We need to start turning our collective minds to how to encourage people to plant trees, not disincentivise!
If New Zealand feels strongly the wood domestic processing sector needs support, then this support should come from the tax payer in general, rather than from one part of the economy (the forest owners). There are other options to help these processors including accelerating the depreciation on machinery, the removal of overseas tariffs on sawn lumber and some of the non-trade barriers our wood processors face when exporting processed wood products.
A strong domestic processing sector is imperative for all of us. However this should not be at the expense of the grower. As a sector we need to work together to ensure a strong processing industry exists and, in general, we do. Is it perfect? Of course not; but forcing growers to supply processors at a discount by regulating or taxing log exports will not solve the problem. In fact if this happens, in 25 years there may be very little forest to supply to any mills.
James Treadwell (pictured)
President - NZ Institute of Forestry (NZIF)
Source: NZIF Newsletter
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