3 Analysis of factors influencing investment in NSW long rotation eucalypt plantations

The principal technical, economic and policy factors influencing investment in long rotation (20 to 40 years) eucalypt plantations in NSW are discussed below. Factors that apply Australia wide are also discussed.

3.1 Technical factors

Technical factors are principally biological factors that influence the scale, risks and returns of the plantation investment. The most significant technical limiting factors are those preventing large planting areas of uniform tree size and species. This is a combination of the varying soil types and widespread occurrence of native vegetation even on sites that have been cleared in the past. Many native species can re-establish vigorously after burning, clearing and grazing and the decline of dairying and beef cattle grazing. Large areas on the north coast start to regenerate to native species as well as weeds. Despite this there are very stringent laws regarding the clearing of native species on these areas and this has significantly reduced the planting area, raised growing costs and potentially reduced yields (suppression by remnant trees).

Variation in soil types results in a change of species and thus potentially regimes and productivity. With the exception of E. grandis there is little in the way of genetically improved material available for planting and no species which can be planted on a broad range of soil types. For example, E pilularis will only succeed on well drained soils that are not subject to frost. State Forests has undertaken a major genetic improvement program for its four main species but it will still be several years before large quantities of improved genetic material are available. Aside from overseas genetic improvement programs of E. grandis there has been very little genetic improvement to the other species.

As native species, the plantations are vulnerable to a range of native pests and diseases. Generally there is sufficient natural control of the pests without the need for broadscale artificial control. However, significant yield loss can occur during times of growth stress such as drought and this has resulted in more resilient but slower growing species such as Corymbia maculata being planted.

The genetic improvement program aims to incorporate the genetic values of pest and disease tolerant individuals and this may allow a reduction in the number of species planted. Fewer species will make introducing improved material easier and enhance economies of scale in production and marketing.

Although genetic improved planting material is likely to provide large gains to investors, the selection of non standard species such as E. pilularis (as against standards such as E. grandis) is a deterrent to investors until the growth potential has been proven. State Forests has been able to provide a significant amount of confidence to investors with E. pilularis because of the large areas planted 20 to 30 years ago even though it is sourced from unimproved seed. Where older stands are lacking, such as with Corymbia maculata, the ability to provide important information for investors such as a robust growth model is much harder.

3.2 Economic factors

The economic factors that influence investment are those that impact on costs and returns in a direct way. Other factors that indirectly influence costs and returns are dealt with as technical, policy or social factors.

The pre tax real return on investment in long rotation eucalypt plantations on the north coast of NSW has typically been in the order of 1 to 4%/year. This is the result of a multitude of factors including low yields, low log prices and high costs. In the last few years a number of these factors have improved plantation internal rates of return to between 3 and 7% and rising. Whilst substantial investment is likely above 10% (benchmarking survey), significant interest is now being shown. The generally low yields have been discussed under growth rates, but have been exacerbated by the lack of processors set up to recover higher value products from smaller (<40 cm) logs and the lack of pulpwood markets in some areas.

Table 5. The main biological factors that influence the scale, risks and returns of eucalypt plantation investment

The consequent postponement of thinning resulted in some stands ”locking up” and an increase in insect attack on stressed trees. The impact on growth is significant with thinned stands of E. pilularis peaking in current annual increment at age 12 whilst an unthinned stand peaks at a significantly lower level some 6 to 10 years later. Timely thinning may reduce rotation length by up to a third. The low intensive management applied to the stands established in the 1960s and 1970s has also reduced merchantable yields.

3.3 Log prices

State Forests’ dominating position in the log supply market makes it difficult for investors to “feel” the market. Prices are not generally published and are often contained within complex price matrices. Prices are rarely based purely on current market factors, and this is seen sometimes in the discrepancy between private wood sales and the State Forests’ “quota” log prices. The fact that both supply and log price are determined by government decree, rather than market forces, has been a deterrent to investment.

In addition to the “lack of transparency” issue, a perception by private investors is that log prices may be kept low for political or social reasons. There is little doubt that some native forest log prices are well below the growing costs for comparable size material, although log price increases in the last few years have reduced this discrepancy.

Where there have been private plantation growers (such as softwood growers) in NSW these growers have sometimes been excluded from the market in State Forests’ wood supply that deals with industry. There is scope for more of these smaller growers to be part of larger wood supply arrangements.

3.4 Production costs

Australia has relatively high plantation growing costs associated with land acquisition, establishment and maintenance compared to many competing countries, reflecting higher input costs. Actual indicative costs including roading, harvesting and transport for the north coast of NSW are shown in Appendix 3.

Land prices have risen sharply where there has been large scale plantings by a number of competing players. For example, in south west Western Australia land values have tripled in seven years and (pulpwood) investors are now looking elsewhere to expand.

Establishment costs for eucalypt plantations tend to be high because of their sensitivity to weed competition and the lack of cost effective residual herbicides that can be legally used. State Forests has undertaken a major herbicide screening program and the long term benefits of this will see weed control costs fall significantly. In response to community concern State Forests has demonstrated that herbicide usage is essential for successful plantation establishment and that they can be applied with no off-site impact.

Maintenance costs are also high because of the fire protection costs but as the plantations of more fire tolerant species such as E pilularis and Corymbia maculata mature so these costs will fall. Major cost savings are also expected as the area of joint venture increases with the landowner partner often living on site and providing surveillance.

High roading costs are the result of strict environmental standards on steeper and more erodable sites and will be higher per tonne for thinnings under integrated regimes than the clearfall under a pulpwood regime.

Harvesting integrated eucalypt plantations has been a little more expensive than other species because the open crown allows a substantial understorey to develop. The variation in tree size because of wild seed with its varying growth rate (even within a seedlot) also increases harvesting costs.

Transport costs have sometimes been increased by local government discriminating between log haulage and say livestock haulage. This has mainly been imposed on plantation wood because high volumes are carried on the one route in a short time.

Despite the relatively high cost environment, Australia is perceived as one of the most attractive countries for overseas plantation investment. A history of political certainty, stable exchange rates and low inflation are significant attractive features to investors.

3.5 Social factors

Community support for native species plantations is generally high in Australia. With an educated and potentially vocal population this support is essential for any large scale investment program. Current factors favouring plantations are an upsurge of (largely urban) environmental concern about the clearing of native forests in the past and the relatively low economic return from alternative land uses. These are summarised below.

Table 6. Social factors influencing eucalypt plantation investment

3.6 Carbon trading

Recent widespread discussion about the potential of plantations to capture greenhouse gases has also put plantations in a positive public light. There has also been a surge of interest from landowners in the possibility of receiving income from carbon credits from plantations on their land. Whilst the market mechanisms remain to be worked out, it is likely there will be a positive result leading to an increase in plantings.

State Forests has already made a carbon trade with a greenhouse gas emitter and there is the prospect of this trading increasing rapidly. Of note is the entry into the investment field of non traditional plantation investors, such as the energy sector. State Forests’ position is that if it can facilitate the development of the carbon credit trading system, there is a large potential investment base, and particularly for solid wood regimes that store carbon for a long time.

3.7 Policy factors

Policy factors have had an important influence over the investment history of eucalypt plantations in NSW. This is largely because of the dominant role of government as a forest owner and grower, and the lack of forest ownership by industry. For many years State Forests was obliged to supply (native forest) wood to industry under a “quota” system that was based more on historical rights than market forces. Until recently, there has been little incentive for industry to invest in its own plantation resource, as the privately owned native forests were viewed as a buffer to any government supply shortfall. However, the declining availability of easily accessible large logs from private land and greater environmental constraints on harvesting and roading, have resulted in some processors retooling to handle smaller logs or exiting the industry. At the same time traditional hardwood products such as house framing have been largely replaced by plantation softwood because of its consistency and ease of use. As a result the silvicultural regimes are designed to favour the recovery of high value wood products such as flooring and plywood, the implication being that State Forests will receive a higher log return.

However it has largely been a political motivation to provide a future resource for the sawmilling industry that has driven the State Forests eucalypt plantation program. It has been the additional environmental and social benefits from the program that have satisfied the State Government that the program was worth funding. These benefits include carbon sequestration, reduced stream turbidity, reduced stormflow, reductions in water tables and weed infestations, improved biodiversity compared to pastures and increased rural employment compared to beef cattle grazing. The costs which include a reduction in total water yield were deemed to have been outweighed by the benefits by an estimated 11 to 1.

Table 7. Legislation that impacts on plantation investment in northern NSW