Growing tomorrow’s Australian forest plantations

Can stalled investment be restarted?

Rod Keenan

Environment & energy, Trade and industry | Australia

27 September 2016

Existing plantation areas are shrinking and new investment has stalled. Rod Keenan examines the economic, environmental and social drivers behind the need for better plantation policy in Australia and the innovative investment models required.

Forest plantations have been part of the Australian landscape since the early 1900s. Australia’s two million hectares of softwood and hardwood plantations provide more than 80 per cent of the country’s wood for forest products industries. Wood demand is continuing to grow with our increasing population and will potentially rise further in a carbon-constrained economy. Some argue that plantation timber should completely replace native forest harvesting. But plantation investment has stalled and there have been few new plantings in Australia since 2008, raising the question of whether plantations in Australia can meet a growing local and global demand for wood? And if so, how?

In 2002, I chaired a national conference on plantations. At that time, plantation policy was driven by the 2020 Vision to treble the area of plantations from one million to three million hectares. We felt that most technical issues for plantations had been addressed and that the challenges had moved on to other dimensions, including improving biodiversity and environmental outcomes and addressing community needs and concerns.

It’s timely therefore, to take stock of how we have fared.

Plantations expanded rapidly from the 1950s onwards. One million hectares of pine plantations were established, largely on converted public native forests, by state forest agencies with financial support from the Federal Government. In the 1990s in Victoria, and later in Queensland, the public pine estates were sold off to international investment firms and pension funds.

In 2002 we were at the peak of a wave of private investment in hardwood plantations on agricultural land that began in the early 1990s, primarily through companies operating managed investment schemes (MIS). The global financial crisis that began in 2007 saw the demise of these MIS companies, which became highly dependent on cheap debt and the tax advantages of this investment.

International investors acquired many of these MIS estates and most of Australia’s plantations are therefore now largely under private ownership by larger international and national investors. With strong local housing markets and high international demand, plantations in the right location and growing conditions are generally making good returns for their owners.

However, investment in new plantations is at a standstill and there has been little new planting since the demise of the MIS companies. Many of these plantations were established on lower rainfall sites or on poor soils and the productivity does not justify re-planting. Others are too far from mills or processing plants. Tens of thousands of hectares of hardwood plantations are being harvested and converted back to farmland. This has implications for our national carbon budget and for future wood supply.

While we produce most of our sawn timber for housing locally, Australia has a significant trade deficit in terms of the value of wood products. We export a large amount of unprocessed wood as chips and import processed paper and board products. We also export an increasing quantity of raw softwood logs. Most of our pine-based processors are operating older mills and would like to re-invest and expand. There is also the opportunity for more regional investment in pulp and paper plants like the Visy mill in Tumut, New South Wales.

If we want to increase plantation timber production, what are the options? We can either increase the plantation area, or increase the growth rate from the existing estate, or both.

Speaking at a recent industry conference, Dr David Brand, CEO of Australia’s large hardwood plantation company, Newforests, suggested that with the high capital cost of land and the time required to produce a sellable product (at least 10 years for pulpwood and 25 years for a pine sawlog), investment in new plantations is of limited interest to most investors. Increased demand for plantation land would further push up the capital cost through competition. He argued that focusing on getting maximum production out of the existing estate is the best option.

Others, like Tony Price from woodchip exporters Midway Ltd, suggest that with the right investment arrangements, farmers may be willing to allocate a portion of their land to tree growing. From 10 to 20 per cent of most farms could be planted with trees with little impact on farm output. In fact, trees may actually enhance crop or livestock production, while also providing water quality or biodiversity benefits.

Who might put up the capital and what kinds of investment or partnership models might be attractive to farmers? Financial institutions with longer time horizons, such as superannuation funds or the Future Fund, may be interested but farmers would also need the right incentives through annuities, lease payments or a share of the timber returns to allocated land and participation at sufficient scale.

A payment for the carbon sequestered in forest plantations would increase the investment attractiveness. However, current policies do not allow for Emissions Reduction Fund payments in more productive higher rainfall areas that are close to existing processing plants. This is a distinct difference to the New Zealand Emissions Trading Scheme, which allows carbon credits for all tree growers. It has been suggested that between 14.6 and 21.3 million hectares will need to be converted to woody tree cover if Australia is to meet ‘deep decarbonisation’ and long-term climate policy objectives.

Models that provide integrated investment in timber production, carbon and biodiversity conservation are being promoted globally through initiatives such as the Global Partnership for Forest Landscape Restoration and the Global Landscapes Forum.

If plantations in Australia are to make a substantial contribution to meeting future demand for wood products both globally and locally, new investment models and approaches to plantation establishment and investment are needed. These could potentially involve partnerships with local farming families through joint ventures, land leases and other arrangements. There is also the opportunity to explore different species, processing approaches, products and markets for plantation hardwoods.

Plantations in Australia have undergone rapid change in ownership, markets and planting rates in the last 15 years. We said in 2002 that plantation policy needs to be dynamic and institutions need to be in regular dialogue with stakeholders to remain effective. This has not happened. Policy and institutional arrangements need to take account of the changing investment environment to ensure that plantations deliver economic, environmental and social benefits for the entire Australian community.

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Citation

Keenan, Rod. 2016. "Growing Tomorrow’S Australian Forest Plantations - Policy Forum". Policy Forum. http://www.policyforum.net/growing-tomorrows-australian-forest-plantations/.

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