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ANZ’s latest Agri-Focus report focused on the forestry industry which was experiencing a period of strong returns.
That was fuelled by a combination of steady Chinese demand, further restrictions in export markets on harvesting of native forests, low shipping costs, a local market building boom and the US dollar’s value relative to the kiwi.
Many of those trends looked as if they could extend for years, supporting demand for forestry products and returns.
Radiata pine’s versatility meant novel applications were emerging in the likes of housing fit-outs, wood remanufacturing, furniture end-uses and cellulose fibre, that could open opportunities.
However, the forestry sector seemed to remain an "unloved" investment class among many landowners, which was reflected in the low level of new planting in recent years, the report said.
The 5% decline over the past decade meant many in the industry were worried about the long-term supply of wood, the report said.
That was restricting investment further along the supply chain in new wood-processing facilities that produced higher-margin products, such as panels, laminated products, glulam beams, mouldings and furniture, and other important supply-chain functions.
Recent returns should encourage replanting.
Prices received during the past 12 months suggested forests that were good-to-excellent in quality/yield and located within 200km of a port and/or mill would have shown an average pre-tax real rate of return (excluding carbon revenue) of 6.3%, with a range from 4.4% to 7.9%.
If carbon revenue was included, the average pre-tax real rate of return lifted to 9.9% with a range of 8.3% to 11.25%.
In addition to being competitive with drystock farming, forestry was a solid diversification strategy and could also help farmers meet new environmental regulations coming into force, the report said.
The vast majority of New Zealand’s wood supply came from plantation forests, of which 90% was Pinus radiata. Otago and Southland has 12% of New Zealand’s total plantation.
Total harvest volumes had been hovering a touch under 30million cubic metres since 2013, up from about 20million cubic metres in 2009-10.A flurry of smaller woodlot plantings in the 1990s meant harvestable volumes were set to increase towards 32.5million to 35million cubic metres over the next 10 years or so.
In 2012, exactly half the supply was directly exported as logs and the other half processed within New Zealand.
As supply had increased since 2012, the proportion directly exported as logs had shifted towards 55% of the total harvest. The remaining 45% has been further processed in New Zealand, into a range of products, for both domestic use and export.
The other potential revenue stream from forestry was carbon with the introduction of the Emissions Trading Scheme in 2008.
Several recent regulatory changes to the scheme’s settings had lifted carbon unit prices from $6/tonne to $18/tonne.
The ETS was under review which could result in further changes to the likes of the carbon price the Government was willing to be paid directly for, or even auctioning units under certain conditions. Given the market was heavily regulated, there was a lot of political risk and things could easily change with each election cycle.
The real long-term prospects crucially depended on how the international carbon market developed, the report said.
Despite the United States looking less committed under its new administration, globally there was an increasing number of schemes, suggesting continuity and possible new opportunities.