Integrating carbon farming into the farming business

On the back of escalating prices for New Zealand Units (NZUs) under the Emission Trading Scheme (ETS), and with funding assistance from central and local government for afforestation programmes, there has been a steady increase in the amount of (mostly sheep and beef) farms going into forests.

An analysis by Beef + Lamb NZ shows that since 2019 approximately 70,000 ha of sheep and beef farmland has been targeted for conversion into forestry. While this represents less than 1% of sheep and beef farmland, this is approximately 13 times more than the average annual amount of afforestation in New Zealand over the past five years.

Although the new Minister of Forestry, the Hon. Stuart Nash, indicated in June that resource consents would be required for forests on productive land (LUC 1-5) above 50 ha per farm, the amount of land being planted in forestry shows no sign of slowing down as the Government pushes onward for the country to be carbon neutral by 2050. To meet this target, the Parliamentary Commissioner for the Environment estimates that 5.4 million ha of land would need to be converted into forestry for New Zealand to be carbon neutral, which is about 60% of sheep and beef farmland.

With strong policy drivers in place for more forestry plantings, and large corporates seeking to offset their carbon dioxide emissions without necessarily needing to improve their efficiency in reducing carbon emissions, we can expect to see increasing levels of sheep and beef land converted into forestry.

Against this backdrop we have also seen a sharp increase in the carbon price with NZUs reaching new highs of $35/NZU during November (up from around $25/NZU in May) increasing the income potential from forest carbon. A recent economic analysis on a case study hill country farm (6.8SU/ha) completed by AgFirst compares the Internal Rate of Return (IRR) from sheep and beef production compared to timber and carbon returns (Table 1).

Table 1

Potential returns from carbon farming IRR Carbon return only
Sheep & beef 4.0%
Forestry (timber* only and not part of ETS) 7.5% 0.0%
Forestry (timber + carbon @$25/NZU**) 13.7% 8.7%
Forestry (timber + carbon @$35/NZU) 16.9% 14.3%
Forestry (timber + carbon @$50/NZU) 22.3% 21.3%

*Assumes 28 year harvest
**Assumes using the new averaging scheme

The returns from forestry over an investment period of 28 years do look considerably more attractive in the case study hill country farm, particularly if the price of carbon continues to rise (although timing of cashflows should also be considered).

Regrettably, this may lead to more sheep and beef farms going into forestry. This will also inevitably have a flow-on effect on the social fabric of rural communities in the regions as fewer employment opportunities become available through lower meat processing capacity and less service providers (e.g. shearers, vets, farm supply, etc) being needed.

While the forestry sector is still touted as providing employment opportunities in the regions, this may not necessarily be the case as some forests may never be harvested. Instead, it may be more economic for forestry blocks to be used for 'carbon farming', with the sole purpose of drawing down carbon dioxide emissions from the atmosphere and 'farmed' for NZUs over the life of the trees. In the case of Pinus radiata, this could be up to 80-100 years, or several hundred years for other exotic and indigenous species.

As the price of NZUs continues to climb, carbon farming could also become more profitable than milling the trees for export or further processing, more so if it is impractical to harvest the trees due to long distances from ports and/or significant on-farm infrastructure spend required in roading and environmental protection measures to access the trees for harvest is very high. As Table 1 indicates, the higher the carbon price, the lower the relative benefit from timber returns.

Even the hastily passed Forests (Regulation of Log Traders and Forestry Advisers) Amendment Act 2020 during the COVID-19 lockdown could have little effect in meeting its objectives of reducing the number of logs being exported raw and directing more logs towards local sawmill production, particularly if carbon farming proves more profitable than harvesting the trees.

The contention with carbon farming is that once the land is planted in trees it will most probably remain in trees locking out future land use options, unless of course the landowner is prepared to pay the market price for offsetting the carbon claimed over the life of the trees. There would likely need to be strong economic drivers from some other lucrative farming enterprise to significantly alter the land use change out of carbon farming.

From a personal perspective, I am uncomfortable seeing vast tracks of land planted in monoculture plantation pines, as I am sure many other rural professionals and farmers are as well. But, as we have seen many times in the rural sector before, farmers will also look to adapt and change their farming systems to better optimise the profitability and value from their land within regulatory constraints. We only need to look at the impact of irrigation in changing land use from mainly dryland sheep production to dairy farming in Canterbury and Central Otago as an example of this.

Forestry is regarded as a key lever in achieving Government's goal to be carbon neutral by 2050. In view of this we should be more actively scrutinising the place of carbon farming as an alternative and ongoing income source within the farming business.

Integrating forestry into the farming business is an area that rural professionals should be thinking about (if you aren't already). In looking at the metrics contained in Table 1, and assuming ETS policy settings remain relatively unchanged, forestry, including carbon farming, does represent a valid option particularly in less productive and inaccessible areas on the farm.

In many respects, integrating forestry into existing farming operations can readily be achieved by planting a small percentage of hill country blocks into forestry without significantly impacting the sheep and beef farming enterprises, as illustrated in an article by Parker and Dowling in the December 2020 issue of The Journal albeit on a dairy farm. This, coupled with a more open-minded approach by government policy-makers about how carbon can be captured and claimed for on-farm (through such areas as existing and regenerating indigenous vegetation, inclusion of shelter belts and riparian plantings, and acceptance of a wider range of tree types, e.g. nut and fruit trees), gives farmers and their advisors the opportunity to more actively explore how forestry and carbon farming fits within the farming business.