Phil Edmonds

A year ago the term ‘carbon farmer’ would have barely registered with the farming community, let alone most New Zealanders. But following the unveiling of some lucrative Government tree-planting incentives, a well-signposted Emissions Trading Scheme revamp and cautious anticipation of a cross-party agreement on climate change legislation, carbon farming is on track to sit ‘uncomfortably’ alongside dairy and sheep and beef.

Indeed, depending on the shape and speed of the Government’s commitment to reduce carbon emissions, land dedicated to carbon farming may well overtake sheep and beef inside 30 years.

How has this happened?

The emerging sense of a ‘tree-rush’ is not new. When the ETS was introduced in 2008 a wave of interest in planting emerged when landowners were given the opportunity to generate economic benefit from the sequestration of carbon. That didn’t last however as the price of carbon quickly became too volatile to offer the level of confidence needed to make an investment in trees for the purpose of capitalising on carbon credits.

When the scheme was first introduced emissions units were priced at $17/tonne but collapsed in 2011 after the supply of units escalated with cheap (‘junk’) international units available to companies to buy and stockpile for later use. The flood of foreign units meant New Zealand emitters didn’t have to rely on those locally produced and the price fell to as low as $1.50/t.

Since 2015 when the Government banned cheap international units the price has steadily risen and is now around $25/t – the imposed price ceiling, which emitters can buy from the Government.

‘Prices that forestry companies are looking at paying for land varies regionally but in different parts of the country foresters are definitely outbidding sheep and beef farmers for different classes of land.’

Back to the fresh explosion in interest. The One Billion Trees programme launched by the coalition Government soon after it was elected in 2017 has been the catalyst, with a fund subsequently created to support individuals and groups across NZ to plant trees. The $240 million fund launched at the end of last year includes two types of grants – direct to landowner, which will contribute to the cost of planting and establishing trees and fostering indigenous regeneration, and partnerships with organisations and groups with a minimum of 200 hectares that would allow to them to obtain rental and a proportion of harvest revenue.

Increasing confidence in steadier prices has however become a bigger factor in the surging interest. The potential for cross-party support for the Zero Carbon bill currently before parliament, which would create an independent climate commission and place binding targets of emissions reduction on future governments, would be a clear signal of commitment to the ETS and an indicator of upside potential to carbon prices.

Additionally, at the end of March the Government announced changes to the ETS that will enable landowners to get credits based on the average amount of carbon their block of forestry would take out of the atmosphere over the longer-term.

For a pine forest on a 27–28-year rotation, landowners would receive credits up to year 18, but would not be obliged to pay those back after harvesting providing the land is planted for a second and third rotation. For the second and third rotation there would be no credits.

Farm Forestry Association Chair Neil Cullen says this would further encourage farmers to plant out land in forests, without a concern that it would result in a cash-flow problem while Forestry Minister Shane Jones boldly asserts changes would contribute to the planting of another 89 million trees.

Late last year, Jones reaffirmed the Government’s view on the benefits that would accrue for farmers from the policy direction. “We’re making good on our promise to make better use of land, especially on erosion-prone land. And by establishing a permanent forest, with indigenous or exotic species, land owners will be able to better optimise their non-productive agricultural land and enjoy income from the sale of New Zealand units,” Jones said.

Farmers – what’s not to like?

There are plenty of indications that farmers are heeding the economic opportunity – which Rabobank animal proteins and sustainability analyst Blake Holgate refers to as a “one-time shot”. Holgate says at $25/t, the collective incentives offered by the Government makes planting on unproductive land, and potentially on productive land as well, worthy of serious consideration.

Te Awamutu-based forestry consultant John-Paul Praat shares that view.

“At prices north of $20/t, and if agriculture comes into the ETS, it may be worthwhile for livestock farmers with suitable land to establish new forest blocks on existing pastoral land as an alternative income and a hedge against high carbon prices.

“At prices above $30/t and evidence of a stable market the options for being a carbon farmer could be well worth considering, especially when you factor in other external benefits such as reducing nitrogen, phosphate and soil losses, increasing biodiversity, and improving landscape aesthetics.”

Meanwhile, the planting incentives have also brightened the eyes of forestry companies, who, like farmers, appear increasingly convinced by the prospect of a more stable market for carbon.

“Prices that forestry companies are looking at paying for land varies regionally but in different parts of the country foresters are definitely outbidding sheep and beef farmers for different classes of land, and they are definitely lifting the floor for sheep and beef properties,” Holgate says.

Colliers International forestry sales specialist Warwick Searle agrees.

“We’ve seen a real increase in demand, which hasn’t necessarily transferred into a whole lot of land sales to forestry companies yet, but they are definitely far more active at looking and enquiring into sheep and beef property that could be suited to planting.

Searle says companies have identified the East Coast, Wairarapa and North Otago regions for potential afforestation, but that is not exclusive.

“They are really just trying to chase the cheapest bare land in the country, and that’s where it currently is.”

Land is probably selling for a premium over what foresters have paid in the past, and the incentives are making foresters more competitive with sheep and beef.

“At the moment I would probably say that sheep and beef is a node ahead but if the economics in sheep and beef turn a little bit then forestry will be right there. We are seeing some companies paying up to $9000/ha which is a lot more than has previously been offered.”

 

Should dairy farmers be alert to the opportunities?

The incentives as they stand have more or less exclusive appeal to the sheep and beef sector, but dairy farmers should also be thinking about how they might capitalise on the opportunities. John-Paul Praat says.

“Dairy farmers could be interested if they have run-off blocks, and there are potentially 20%-30% of farms that do have this. If dairy farmers do want exposure to carbon, all they need to do is get together and buy a sheep and beef farm.”

Dairy farmers will also be keeping an eye on the forestry proposition in conjunction with any Government move to bring agriculture into the ETS.

Praat says if the agricultural emissions liability is set at 5% it wouldn’t be worth dairy farmers doing anything while the price of carbon is at $25/t. Only when an emissions liability rises to 10%-15% and the carbon price reaches $35/t acting to mitigate the costs of emissions could emerge as an opportunity.

‘If it was me, I’d be thinking forestry could be a component that gives a bit of diversified income. If forestry drops off you’ve still got some pasture. The key thing is they still have options.’

“A 5% emissions liability is going to cost a dairy farmer $12/ha, or 1cent/kg MS and at that point farmers won’t even know it. But if you go to 10% and $50/t that’s $50/ha which might be worth thinking about.”

While the increase in land value may well be welcomed by those with an eye on exiting the industry, the fact it is driven by the incentives to plant trees rather than more optimism for the sheep and beef industry is causing tensions.

Blake Holgate says the bank’s message at the moment is about looking at the parts of your farm that aren’t producing much, and therefore wouldn’t have a fundamental impact on your farming system. That means planting the right trees in the right place at the right time. This, he says, is where planting makes sense.

But stopping farmers thinking beyond planting on unproductive or at least near-unproductive land is difficult when the economic opportunities from planting are put in front of them. Holgate says there is a tension emerging around whether the incentives are encouraging landowners to put trees into places where pasture is still productive. Some farmers have sensed they would make better returns from forestry than livestock even if it is relatively short-term – a 15-20-year, one-tree lifecycle.

The Government’s immediate rejection of the Environment Commissioner’s recommendation that forests should be exclusively used to offset biological emissions is only likely to further encourage tree planting. In his report Farms, forests and fossil fuels: The next great landscape transformation released at the end of March Commissioner Simon Upton recognised that NZ’s reliance on forest sinks to soak up fossil carbon dioxide emissions would have a profound effect on many rural communities.

Farmers’ response

The response to the threat of forestry’s potential to break up communities depends on which side of the fence you sit on.

“If you are a farmer trying to sell, you’re not really going to mind who wants to pay,” Warwick Searle says. “But if it’s your neighbour then there may well be concern.” Searle acknowledges the friction. “As agents we are there to do the best for our clients, but you do see some deals that forestry companies are chasing and realise it’s for pretty good land that probably shouldn’t be going into forestry.”

Federated Farmers climate change spokesperson Andrew Hoggard acknowledged it is difficult to speak for all. “If the economics of forestry is telling some farmers they should plant then we would be hypocrites to suggest that farmers shouldn’t change their land to the best-value use.” However, he does warn that any decision has lasting consequences.

“If farms are shifted into trees then there is probably no call for shepherds’ quarters and wool sheds to be maintained. It is not like switching a dairy farm to a sheep and beef farm or vice versa. It takes a big effort to change back from trees.

“If it was me, I’d be thinking forestry could be a component that gives a bit of diversified income. If forestry drops off you’ve still got some pasture. The key thing is they still have options.”

There have been murmurs that some farmers looking to exit are considering selling to sheep and beef farmers rather than foresters for a lower price to try and ensure farming communities remain viable. Meanwhile concern for farming communities is not restricted to those directly in the line of fire.

“I don’t want to see farms bought and planted fence-to-fence because that’s putting land that should remain in pasture into forest,” John-Paul Praat says. “If the price for carbon shifts towards $30-$35/t then land use change will really start to happen. You are going to get perhaps 50-60-year-old farmers that have no one to carry on the farm. If someone dangles $2m in front of them they’re going to take it and walk away, and an investment company will plant it in pine trees.

“We need farmers to be proactive and focused on integrated forestry.”

Fears around the loss of communities is not something the Government will be wanting to accept. When revealing the suite of initiatives last year, Forestry Minister Shane Jones said the funding would “support tree planting in areas where wider social, environmental and regional development goals can be achieved”.

It is difficult to see how communities can mobilise against the current forces.

Some have suggested the Government needs to acknowledge that placing productive pasture land in trees would have a materially negative impact on NZ’s export receipts.

This argument is however doubted by those with a sense of history. John-Paul Praat says an overall loss of sheep and beef production would be too much of an assumption to make.

“If you look at what happened in the 1990s when there was a huge amount of planting that went on, did we export less? I don’t think so. We are talking about low-productivity land.

“If you are considering planting the 10%-15% of the worst part of the farm in trees and focusing on the best 85% then productivity is actually likely to increase. You are no longer wasting the cost of fertiliser for example on the least-productive land.”

Other concerns have emerged over the impact on farm succession. Any decision to change land use from pasture to trees now would be difficult to reverse. With the ETS accounting average approach where farmers would not have to repay credits at harvest – presuming the land is re-planted – then the next generation will not see any income from the carbon sequestration.

Holgate says this is certainly one factor farmers will need to consider when thinking about how afforestation would impact their personal rather than economic objectives.

But could tree planting contribute rather than take away from sheep and beef farm profitability?

There is some chance that afforestation could play a positive role in lifting rather than reducing NZ’s influence in the international red meat market.

Rabobank’s global animal protein strategist Justin Sherrard spoke in NZ recently and told farming audiences red meat producers need to understand the emerging global trend towards sustainability and consider this in the development of their individual business strategies.

Sherrard said NZ farmers would be best served to view sustainability in the context of their broader business planning.

“I don’t think industry participants are going to be successful addressing sustainability challenges if they view it as something that’s bolted onto the business or as something to focus on in isolation.”

Blake Holgate doesn’t think there is a direct link between generating higher premiums for sheep and beef products and planting trees. He says the sustainability attribute is more about underpinning a more general holistic NZ story. However, where planting could help generate premiums is in the emissions space.

“There would be benefits if we can link a product story around net zero carbon emissions – either at farm level or nationally – and demonstrate the actions we are taking as a sector to offset the footprint. I’m not sure one initiative can drive a premium, but it is part of the bigger picture.”