Cheap logs from Russia and Scandinavia are flooding into China, leaving New Zealand logs piling up on Chinese wharves.
In just a few months, "A" grade log prices have gone from US$138/140 a tonne to US$110 a tonne, and could sink as low as US$100 to US$105/tonne.
With the Government'scurrent push for Kiwi farmers to convert land to tree planting and farms being sold into forestry, The Country's Jamie Mackay asks one of New Zealand's leading agribusiness academics, Professor Keith Woodford, if New Zealand is putting all its logs in one basket.
Mackay: New Zealand logs are piling up on Chinese wharves as cheap, sawn timber from Russia and Scandinavia floods the market. The log prices have dropped by something like about 30 per cent. Does this show the folly and the danger of putting too many eggs in a forestry basket?
Woodford: I think there's two separate issues here. One's what's happening short term and the other is long term.
The way forestry works is that it's actually really expensive to get your logs harvested and all the way across to China and so [a] 25 per cent drop in the price has a huge effect when you look at what the landowner gets paid.
Now whether this is going to be short term or whether this is long term, I haven't any idea at the moment. I know some people are saying it's a strategic reset. We've just got to wait a little bit longer before we know that.
Totally independent of this - some of the things that are going on with putting land into forestry just have huge implications for our rural communities going forward.
Mackay: There is a danger in planting a crop that won't be harvested for 25 to 30 years ... your fate is in the lap of the gods to a degree.
Woodford: Yes but of course the carbon trading has changed that. Once again, the carbon trading is all at the whim of various governments as to how they set the regulations. But this carbon trading has really changed things, because of the cashflow it can provide all the way along.
Now, the problem from my perspective is that what's in our national interest long term doesn't necessarily align anymore with what's in the interests with some of these overseas groups, who really are beating to a different drum.
I think it's a bit strange that with farming, we have very big restrictions on overseas investors - I don't have any problem with that at all - but for forestry these overseas companies can come in and buy up big swathes of land, and gosh - suddenly this has really changed the equation.
Professor Keith Woodford. Photo / Supplied
Mackay: It's like happy hour for foreign investors.
Woodford: Well here's little old New Zealand, and here are these overseas companies. If you're going to invest from overseas into New Zealand then forestry is a brilliant way to do it, because you don't actually have to do much - you just plant the trees and then let nature take its course and in comes the cashflow.
When you look at what's happening internationally and the way interest rates have dropped, which for forestry investors comes through as the discount rate ... they're looking at what they can get from forestry versus other things in their international portfolios, and suddenly it's just a different ball game.
Listen to the full interview below:
So I'm really happy with the idea of farmers putting in 10 and 20 and 30 hectares of their land - typically the difficult land to farm - putting that in to forestry, and the carbon trading options now give them cashflow.
But by gosh, when we see these very big farms totally taken out of production and put into forestry, gosh that's a bit of a cold breeze. We've got to think again on that one.
Also in today's interview: Woodford talks about the sale of Westland Milk Products to China's Yili and ponders whether this could affect Fonterra.
