As we bid farewell to summer the foot is still firmly on the production throttle with March log pricing generally flat with February.
Average A grade prices are around $145/m3 at wharf gate which is historically a short-lived price point before things turn to custard due to supply and demand imbalances.
This year appears to be different thanks to the Chinese import bans on Australian logs, low inventory levels in China and subdued supply from other log producing countries. The expected influx of volume from Europe has not manifested due to a large snowfall in January and issues with container freight.
The key head wind at the moment is the significant increase in ocean freight costs which will likely keep the lid on any further price increases. Global commodity demand and a resumption of a large grain export programme from Australia have vessel owners rubbing their hands together.
To add to the vessel supply issue, the ban on Aussie grain into China has resulted in sales being diverted to Europe and the Middle East which is a considerably longer journey and effectively lessens the number of available vessels.
This is not likely to correct itself in the short term unfortunately. However, to put it into perspective, shipping rates are around half of what they were pre-GFC in 2007 when global commodities were in hot demand – then along came Fanny Mae and Freddy Mac which sorted that problem out.
What is becoming increasingly evident is the potential effect on NZ log supply with increased carbon returns. Carbon prices have skyrocketed in the past 12 months and now sit at around $39/NZU (carbon tonne) which is comparative with harvest returns on many forests.
While carbon can only be sold once (ie you can't sell carbon from successive rotations without paying back most of it at harvest) it does give forest owners a viable alternative to harvesting.
Considering many forest owners will only experience one forest rotation in their investment life, carbon will give consistent revenues throughout the growth cycle of the forest.
As an example, if you had a forest planted in 1995 in the Southern North Island that had been registered in the NZETS since 2008, you would be sitting on $18,000 of carbon per hectare as of today. Over the next 28 years this forest will continue to grow and you will receive another $32,000 based on today's prices. Obviously you would end up with a 54-year-old forest which may have marginal crop value but by that time most investors would be in their 90s and probably not too concerned.
Where carbon prices will head to in the next few years is anyone's guess but it would be fair to say a reduction is extremely unlikely. A report by the Productivity Commission in 2018 stated that "All evidence points to the prospect that emissions prices may need to rise to at least $75 a tonne, and possibly, if new emissions-reducing technologies are slow to emerge, to more than $200 a tonne, over the next three decades".
So let's assume we get really good, really quickly at reducing emissions and carbon is at $75/tonne, that's $62,000 per hectare over the next 28 years in the above example – not too bad really and very unlikely that harvest returns on forests a reasonable distance from the port will be able to match or even come close to.
If we are actually not that good at reducing emissions (more likely) then at $200 per carbon tonne that figure is $164,000/ha – we may as well pack up the logging toys and go home.
Currently, around 30 per cent of NZ's forests are planted post-1989 so this has the potential to have a huge effect on our harvest availability.
As the government has pledged NZ to be carbon-neutral by 2050, the theory is that carbon demand, and hence values, would decrease significantly as we will all be driving Nissan Leafs (heaven forbid) and cows will be farting oxygen.
If this is the case, then the cost of surrendering (buying back) our carbon that we have sold and converted into boats and holiday homes will justify harvesting our 54-year-old forest.
What is likely is that carbon prices will continue to rise which will put pressure on bare land values and see more conversion from farmland into forestry.
The cost of the carbon will be passed on to consumers (which is the whole idea to stop us from buying things that emit carbon) which will in-turn have a large impact on inflation.
Sometimes you have to watch what you wish for.